Country Briefs: Better Investment Climate would Help Palau Achieve Sustained Growth

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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After several years of slow or negative growth, economic activity has picked up in the Republic of Palau, while inflation has remained low, according to the IMF’s latest economic review. Real GDP, driven by higher visitor arrivals and externally funded government projects, grew by 5 percent in FY2004 and 5½ percent in FY2005. Palau, a small island economy in the Pacific, relies heavily on tourism and on external assistance from its 50-year Compact of Free Association with the United States and grants from Japan and Taiwan Province of China to finance budget expenditure and infrastructure projects.

Better economic management has encouraged private sector activity. Fiscal performance was improved by capping nonwage current expenditure while strengthening revenue collections, allowing public debt to remain low. Although investment impediments remain, Palau ranks high on several indicators of the cost of doing business, and local private firms are undertaking a growing share of foreign-financed projects.

(percent change)
Real GDP growth–
Consumer prices (period average)–
(million dollars)
Compact Trust Fund balance136.3141.6152.5155.8
Tourism receipts75.696.997.297.5
(percent of GDP)
External public debt115.914.013.211.3
Current account balance (including grants)7.99.610.62.5

Does not include public enterprise debt, which is not guaranteed by the government.

Data: Palauan authorities and IMF staff estimates and projections.

Does not include public enterprise debt, which is not guaranteed by the government.

Data: Palauan authorities and IMF staff estimates and projections.

Near-term economic prospects are upbeat, with tourism and infrastructure projects playing major roles. In the longer term, however, Palau’s prospects are more uncertain and will depend on the direction of economic policies and whether U.S. Compact assistance is renewed beyond 2009.

IMF Executive Directors welcomed Palau’s improved economic performance. They commended the authorities for managing foreign aid judiciously and for reducing public sector spending, while noting that further efforts are needed to meet the long-run goal of covering current spending from domestic revenue generation.

Noting that Palau has a large banking sector relative to its size, the Directors stressed the importance of passing pending financial regulations and enhancing the capacity and resources of the new supervisory agency.

To establish a sound foundation for sustained growth, the Directors underscored the need to improve the investment climate and labor and land policies. They were encouraged by the ongoing domestic debate over reducing foreign investment restrictions and welcomed progress made on land titling and leasing, but warned against raising the minimum wage so as to safeguard job opportunities for Palauans.

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