IMF Staff Country Reports

The 2023 Article IV Consultation discusses that Palau has emerged from the pandemic with significant output loss, elevated public debt and historically high inflation. Adverse demographic trends, high dependence on tourism and external support, and vulnerability to climate change risks raise vulnerabilities. The authorities successfully enacted a fiscal responsibility framework and modernized the tax system. Baseline projections assume the approval of Compact Agreement in FY2024. A gradual rebound in tourism is expected to support the recovery. Fiscal policy should remain prudent over the near-term in view of the uncertain economic recovery and higher debt and create fiscal space over the medium-term. Financial sector policies should focus on improving financial sector supervision to preserve financial stability while addressing payment system challenges. Structural policies should aim to diversify the economy and the tourism sector, enable private sector investment, and attract foreign direct investment, including by streamlining processes, improving the regulatory framework, and land-use planning. Climate change policies need to be integrated into development planning, with significant adaptation costs projected over the medium-term.