Palau’s Economic Outlook Remains Challenging Amid Uncertainty

Palau’s external position has weakened significantly in recent years, driven by a collapse in tourism and widening fiscal deficits, according to the International Monetary Fund (IMF). The current account deficit peaked at 55% of GDP in FY2022, but is expected to decline to around 41% of GDP in FY2023.

Private Sector Credit Growth Steady

Despite the pandemic, private sector credit growth remained steady, driven by expansionary lending by the National Development Bank of Palau (NDBP). Total credit to the private sector grew at an average rate of 3% between FY2019 and FY2022, with NDBP’s lending expanding by:

• 9% in FY2020
• 16% in FY2021

Housing Loans Fuel Credit Growth

NDBP’s expansionary lending was facilitated by a concessional lending scheme and an increase in housing loans under the Housing Development Loan Program. As a result, NDBP now accounts for around half of overall credit, up from 10% pre-pandemic.

Economic Outlook Remains Challenging

The economic outlook remains challenging due to uncertainty surrounding:

• The timing and speed of tourism recovery
• The impact of high inflation on household spending

The IMF expects output to accelerate to 12.4% in FY2024, driven by positive trends in tourism and infrastructure projects.

Inflation Expected to Moderate

Inflation is projected to moderate to 5.9% in FY2024, as base effects from PGST-related price increases subside and global commodity prices decline. Over the medium term, inflation is expected to return to a range of:

• 2.0%
• 2.5%

External Sector Outlook

The current account deficit is projected to narrow to 26.2% of GDP in FY2024 and continue to decline over the medium term, supported by:

• Higher grants
• Lower import prices

Overall, Palau’s economic outlook remains challenging due to uncertainty surrounding tourism recovery and inflationary pressures. However, the IMF expects output growth to accelerate and inflation to moderate over the medium term.