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Palau’s Economy Slumps Amid 13.2% Inflation Surge

The Republic of Palau has reported a significant contraction in its economy, despite the tourism sector showing signs of recovery. The country’s GDP contracted by 1.5 percent in FY23, due to a combination of factors including persistent global inflation and the introduction of a new tax reform package.

Economic Challenges

  • Consumer prices surged by 13.2 percent in FY23, driven primarily by the implementation of a 10% value-added tax (VAT) in January.
  • The year-end figure reached 12.4 percent, keeping inflation high.
  • The private sector, which bore the brunt of the COVID-19 pandemic, continued to struggle in FY23, with a contraction of 32 percent between FY19 and FY23, resulting in losses totaling $40 million.

Tourism Sector

  • Despite being a significant contributor to Palau’s economy, the tourism sector grew modestly due to the slow recovery of the East Asia region, Palau’s major tourist market.
  • Outbound travel did not resume until early 2023, affecting consumer demand and offsetting the growth in the tourism sector.

Labor Market

  • Employment levels declined by 15 percent compared to FY19, with employers retaining workers on reduced hours and government programs supporting wage levels and reducing the impact of layoffs.

Recovery and Growth Initiatives

  • Palau’s economy is expected to recover in the long term, driven by its growing tourism industry and efforts to diversify its economy.
  • The country has implemented several initiatives aimed at boosting economic growth, including:
    • Development of a new national strategy for sustainable tourism
    • Promotion of small businesses and entrepreneurship

Gross National Income (GNI) Per Capita

  • GNI per capita fell from $16,030 in FY19 to $14,698 in FY22, reflecting the impact of the pandemic and the reclassification of Palau as a middle-income country by the World Bank.

Overall, while Palau’s economy has faced significant challenges, the country is expected to recover and grow through its diversification efforts and initiatives aimed at boosting economic growth.