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Palau’s Economic Outlook: Challenges and Opportunities

Fiscal Policy and Inflation

• The fiscal deficit has decreased significantly from 13.1% of GDP in FY2020 to 3.2% in FY2022, largely due to the expiration of pandemic support measures.
• A small surplus is expected in FY2023.

External Position and Private Sector Credit

• Palau’s external position is assessed to be weaker than implied by fundamentals and desirable policies.
• The current account deficit peaked at 55% of GDP in FY2022 but is expected to narrow to 26.2% of GDP in FY2024.
• Private sector credit growth remained steady during the pandemic, with total credit growing at an average rate of 3% between FY2019 and FY2022.

Outlook and Risks

• The economic outlook remains challenging despite anticipated support from the CRA-23 and positive tourism trends.
• Risks include high inflation, potential second-round effects of tariffs, and public sector wage hikes.

Conclusion

Palau’s economy faces challenges related to fiscal policy, inflation, and its external position. However, with the implementation of the CRA-23 and positive tourism trends, there are opportunities for growth and improvement in the medium term.