Financial Crime World

Palau’s Economy Suffers from Record Deficit

Fiscal Year 2020 Sees Significant Deterioration

A deficit of 10.9 percent of GDP was recorded in Fiscal Year (FY) 2020, according to data released by the International Monetary Fund (IMF). This represents a significant deterioration in Palau’s fiscal position, reflecting the challenges posed by the COVID-19 pandemic.

Banking System Remains Sound

  • Commercial banks enjoy ample liquidity
  • Private sector credit growth has softened, declining by 4.8 percent in FY2020 compared to the previous year
  • Ratio of non-performing loans to total loans increased from 0.7 percent before the crisis to 1.7 percent in 2021Q1

External Position Weaker than Expected

  • Current account (CA) gap estimated at around -19.7 percent of GDP in FY2020
  • Sharp decline in tourist arrivals and exports, as well as increased imports, contributed to the CA deficit
  • Expected to narrow in the medium term as tourism activities resume, but will likely remain elevated

Government Response

  • Implemented various policy measures to address economic fallout from the pandemic, including:
    • Public health measures
    • Unemployment benefits
    • Temporary jobs programs
  • Concessional financing from the Asian Development Bank (AsDB) helped finance non-crisis related spending as part of public sector reform programs

Challenging Recovery Path Ahead

  • Real GDP estimated to have contracted by 17.1 percent in FY2021, and is expected to rebound slowly over the medium term
  • Tourism arrivals expected to take time to recover, with output remaining on a lower trajectory until FY2024
  • Inflation expected to pick up in the short term due to elevated international commodity prices, but projected to subside over the medium term

Uncertainty Remains High

  • Main risk to the economy’s recovery is a protracted COVID-19 pandemic or domestic outbreak
  • Large foreign assets and access to long-term concessional loans and grants reduce the risk of external financing distress

Conclusion

Palau’s economy faces a difficult and uncertain recovery path, requiring continued policy support and structural reforms to address imbalances in the public pension system and public utility company.