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Republic of Palau: Staff Report for the 2008 Article IV Consultation—Informational Annex

Author(s):
International Monetary Fund
Published Date:
May 2008
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Annex I. Republic of Palau: Fund Relations

(As of March 25, 2008)

I. Membership Status: Joined December 16, 1997; Article VIII

II. General Resources Account:

SDR Million%Quota
Quota3.10100.0
Fund Holdings of Currency3.10100.0
Reserve position in Fund0.000.03

III. SDR Department: None

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements: None

VI. Projected Obligations to Fund: None

VII. Exchange Arrangement:

The U.S. dollar is legal tender and the official currency. Palau maintains an exchange system that is free of restrictions on international payments and transfers for current and capital transactions.

VIII. Article IV Consultation:

The first Article IV consultation discussions took place during June 24–July 6, 1999 and the Article IV consultation procedure was completed on November 10, 1999. The last Article IV consultation discussions were held during November 2005. The Executive Board discussed the staff report (SM/06/39) and concluded the consultation on February 15, 2006. Palau is on a 24–month consultation cycle.

IX. Current Financial Arrangement: None

X. Technical Assistance:

FAD/PFTACPreparation of a new tax code, tax and customs administrationOctober 1998–March 1999
Modernization of customs administrationFebruary 2004
Strengthening tax administrationJuly 2005, June 2006
Tax reform and strengthening tax administrationNovember 2007
Public expenditure managementJanuary 2007, February 2007
Fiscal managementMarch 2007
Budget process and formulationJanuary 2007, March 2008
LEGPreparation of a new tax codeOctober 1998
Banking legislation (together with MFD)April 2002
Anti-money laundering legislationFebruary 2004
Joint AML/CFT assessmentMarch 2008
MFD/MCMEstablishment of bank supervision functionsOctober 2000
Banking law and regulations (supported by PFTAC)January 2001
Assessing compliance with international supervisory standards and effectiveness of anti-money laundering arrangements in the banking sectorApril 2002, August 2004
Peripatetic advisor to the Financial Institutions Commission (seven short-term visits to advise on implementation of the Financial Institutions Act)February 2002–March 2004
Bank supervision advisor to review Financial Institutions ActApril 2005
Bank supervision: issues related to failure of Pacific Savings BankMay 2006, November 2006
Financial sector supervisionApril 2007
Banking supervision advisor to aid with on-site examinationOctober 2007–November 2007
Banking supervision advisor to aid in drafting new banking regulationsFebruary 2008–March 2008
STA/PFTACNational accounts estimation and GDDSDecember 2003, April 2004, October 2005, June 2006, April 2007
XI.Resident Representative: None
Annex II. Republic Of Palau: Support from the Pacific Financial Technical Assistance Centre1

The Centre’s assistance since Palau joined the Fund in 1997 has included 27 advisory missions, the participation of officials in seminars (26) and secondments mostly in the tax administration area (10).

Public Financial Management

Palau did not request explicit TA in this area from 2003 to 2006. Representatives from the Ministry of Finance were invited by PFTAC to join the newly-organized Pacific Financial Managers’ Association (PIFMA) in 2006. PFTAC provided assistance in revenue estimation and in developing the Financial Instructions (FIs) in 2007. This was followed by training on the newly developed FIs in early 2008. Discussions are underway now to assist the government in taking forward the medium term budgeting project being discussed with the ADB. Palau has been actively participating in all PIFMA meetings and workshops and hosted the Third PIFMA meeting at Koror in March 2008.

Tax Administration and Policy

In response to a request received in July 2003, PFTAC reviewed and provided extensive comments on the draft “Registration Corporation Act” and the draft “Reinvestment Incentive Act”. In early 2004, a customs administration mission visited Palau to design a strategy and an action plan to modernize the Customs Division. In mid-2005, a tax administration mission visited Palau to review the organizational structure of the Division of Revenue and Taxation, and its operations. In mid-2006, a tax administration mission visited Palau to review the organizational structure of the Division of Revenue and Taxation, and its operations. In 2007, a tax reform and administration mission visited Palau.

Financial Sector Regulation and Supervision

PFTAC’s advisor was involved in two follow-up missions for implementing the Financial Institutions Act (passed in June 2001), as well as to organize the Financial Institutions Commission and the drafting of licensing guidelines. Subsequently, assistance has been provided through the use of peripatetic advisors who have paid a number of visits to Palau. As a result of recommendations by the peripatetic advisors, and likely in response to the recent failure of Pacific Savings Bank, needed amendments to the FIA were approved in February 2008. During 2006 and 2007, the PFTAC advisor was involved in three missions primarily to give guidance and recommendations on receivership supervision matters relating to the failure of Pacific Savings Bank.

Economic and Financial Statistics

The post of Government Statistician has been vacant since late 2002, and two graduate level statisticians are in post at present. A PFTAC mission visited Koror in December 2003 and in April 2004 to assist the authorities in documenting and improving the system of national accounts and with finalization of the GDDS metadata. Subsequently in October 2005, the PFTAC statistics advisor assisted the authorities in revising national accounts for 2001-05. Follow-up missions are expected in the near future, including a PFTAC mission on national accounts statistics being planned for June 2008.

Annex III. Republic of Palau: Relations with the World Bank Group2
Total commitments:None
IFC investments:None
Recent reports:Pacific Regional Strategy FY2006-09, May 2005.
Embarking on a Global Voyage: Trade Liberalization and Complementary Reforms in the Pacific, September 2002.
  • Palau became a World Bank Group member in December 1997. Since then, the Bank has provided technical assistance in a number of areas, namely oil and gas and natural resource management, and in the health sector.
  • In early-1999, South Pacific Project Facility (SPPF), a small- and medium-enterprise (SME) development initiative of the International Finance Corporation (IFC) provided advisory services to the National Development Bank of Palau, as well as to a number of SME projects in the tourism sector. A diagnostic review of the investment climate was conducted by the Bank Group’s Foreign Investment Advisory Services (FIAS) in 1999, and has since undertaken two separate reviews of the new draft foreign investment legislation.
  • The Bank’s fifth biennial Regional Economic Report for its Pacific Island member countries, including Palau, was issued in September 2002. The report focused on the efforts of Pacific Island Countries (PICs) to integrate more closely with the global economy. It evaluated the strategy of PICs to enter into a regional trade agreement and analyzed the interaction of trade liberalization with complementary reforms in taxation and the public sector.
  • The Pacific Regional Strategy directs the Bank’s work in Palau. It focuses on creating an environment conducive to generating sustainable economic growth and employment, while recognizing that small populations and marked remoteness of the Pacific island countries pose significant development challenges to the region. The country includes technical assistance to the Government to build its capacity in the economic valuation of natural resources and following on from earlier work to aid Palau develop an oil and gas sector, the World Bank is providing assistance to help implement the Road Map for the sector including support for the national Oil and Gas Task force. The World Bank has also been asked to support the development of the National Development Plan alongside the ADB.
  • Palau is an IBRD-eligible country.
Annex IV. Republic of Palau: Relations with the Asian Development Bank3

Total Commitments: None.

The Republic of Palau joined the Asian Development Bank on 29 December 2003, as its sixty-third member. While admitted as a regional country, its country classification was to be determined. AsDB prepared a Country Economic Report for Palau and the Development Status and Country Classification of the Republic of Palau which served as the basis for a determination of Palau’s development status. On 16 December 2005, the Republic of Palau was re-classified as a Pacific developing member country. A more recent report prepared by AsDB in 2007, Republic of Palau: Achieving Sustainable Development, provided a more detailed overview on Palau’s economy.

In order to scope and plan the future programming, a pre-Country Programming Mission was undertaken in November 2005. As one of the Pacific Island economies, Palau is participating in four ongoing Racific Regional Technical Assistance Activities (RETAs) supported by AsDB.

  • RETA 6245: Strengthening Pro-Poor Policy in the Pacific.
  • RETA 6202: Diagnostic Studies for Secured Transactions Reforms in the Pacific Region.
  • RETA 6204: Mainstreaming Environmental Considerations in Economic and Development Planning Processes in Selected Pacific Developing Member Countries.
  • RETA 6157: Strengthening Poverty Analysis and Strategies in the Pacific.

There has been no bilateral technical assistance to Palau since they became a member in 2003. Two bilateral technical assistance projects to Palau are scheduled to be delivered:

  • TA 4929: Economic and Infrastructure Management ($1.4 million USD). This TA will assist the government of Palau in its development planning and economic policy and budget management in agreed areas.
  • TA 4977: Preparing the Babeldaob Water Supply Project ($0.875 million USD). This TA will assist the government of Palau to develop a least cost water sector investment plan.
Annex V. Republic of Palau: Statistical Issues

Economic and financial data are limited but adequate for surveillance. There are serious shortcomings in the areas of national accounts and balance of payments, which stem mainly from capacity constraints. The Office of Planning and Statistics is responsible for the compilation of national statistics. There are presently no official statistical publications at the aggregate level. PFTAC advisors provided assistance during 2003–2007 in improving the national accounts statistics, and with compiling the GDDS metadata. The long awaited passage of the Statistics Law would further help formalize data collection and reporting.

A. Real sector

Estimates of the national accounts have only been compiled on a sporadic basis since 1984, and have been unavailable since late 2002. GDP data by economic activity at current prices were compiled by a UNDP consultant, the United Nations Economic and Social Commission for Asia and the Pacific, and under a joint project by the University of Oregon and the U.S. Department of Interior. A UNDP consultant produced a comparable set of GDP estimates for 1992–1999 based on available sector indicators for these years.

The authorities’ capacity to produce consistent official estimates of the national accounts is very weak. GDP growth rates reported in the staff report are based on preliminary estimates from sector indicators. A PFTAC advisor who visited Palau in October 2005 pointed to serious deficiencies in source data which the authorities cannot address without more handon technical assistance. Follow-up visits were carried out in 2006 and 2007, but reliable series have not yet been compiled. A new PFTAC Advisor will be providing advice and visiting Palau in the coming months.

A consumer price index has been compiled since 2000 on a quarterly basis.

B. Government finance

Fiscal data are compiled at both the national and state level as part of their respective annual budgetary processes. The authorities provide fiscal data to APD in a standard Fund-format usable for analysis, however with increasing reporting delays and frequent revisions. Only one person is trained to prepare the data in standard Fund-format. Palau does not report government finance statistics for publication in the Government Finance Statistics Yearbook or in International Financial Statistics.

C. Monetary accounts

Audited balance sheet data are not regularly provided by banks to the authorities as they were not legally required to do so in the past, and hence there is no official compilation of a depository corporations survey. At present, the banks only file quarterly tax forms to the Ministry of Finance. Although most banks have been reporting to the Financial Institutions Commission since 2003, reports are often incomplete and the lack of standardized format and classification guidelines prevent aggregation and meaningful analysis. Lack of data prevents preparation of most financial soundness indicators. An MCM expert is assisting with this task. No monetary data are currently reported to STA for publication in the International Financial Statistics.

D. Balance of payments

Balance of payments data compilation remains weak. Estimates have been prepared by the staff based on data provided by the authorities on imports, interest income, official grants, debt service, financial holdings of the government, and rough estimates of exports, services, private transfers and foreign direct investment. Because of Customs’ difficulties with a new database, import data starting 2006 has been impaired. Compilation of the balance of payments is further complicated by a lack of commercial banking data due both to the absence of a reporting system for international financial transactions of bank clients, as well as the lack of legal reporting requirement for commercial banks.

Republic of Palau: Table of Common Indicators Required for Surveillance(As of March 31, 2008)
Date of latest observationDate receivedFrequency of Data6Frequency of Reporting6Frequency of publication6
Exchange Rates (U.S. dollar is official currency)NANANANANA
International Reserve Assets and Reserve Liabilities of the Monetary Authorities1NANANANANA
Reserve/Base MoneyNANANANANA
Broad MoneyNANANANANA
Central Bank Balance SheetNANANANANA
Consolidated Balance Sheet of the Banking SystemNANANANANA
Interest Rates25/073/08AINA
Consumer Price Index9/0712/07QINA
Revenue, Expenditure, Balance and Composition of Financing3 - General Government4FY99 (State) FY07 (Funds)3/08AINA
Revenue, Expenditure, Balance and Composition of Financing3 - Central GovernmentFY2007 (Prel)11/07AINA
Stocks of Central Government and Central Government-Guaranteed Debt5FY200711/07AINA
External Current Account BalanceFY2007 (Prel)11/07AINA
Exports and Imports of Goods and ServicesFY2007 (Prel)11/07MINA
GDP/GNPFY2001NANANANA
Gross External DebtFY2007 (Prel)11/07AINA

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA)

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA)

1The Pacific Financial Technical Assistance Centre (PFTAC) in Suva, Fiji is a regional technical assistance institution operated by the IMF with financial support of the Asian Development Bank, Australia, Japan, Korea and New Zealand. The Centre’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national and regional level. Member countries are Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.
2Prepared by World Bank staff (as of March 2008).
3Prepared by Fund staff based on information provided by AsDB (as of March 2008).

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