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Palau’s Economy Faces Challenges Amid Weaker External Position

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Ngerulmud, Palau - December 21, 2022: The International Monetary Fund (IMF) has assessed Palau’s external position as substantially weaker than desirable fundamentals and policies in FY2022. The current account deficit peaked at around 55% of GDP last year, driven by a collapse in tourism and widening fiscal deficits.

Outlook

The IMF estimates that the current account deficit will decline to about 41% of GDP this year (FY2023). The Real Effective Exchange Rate (REER) has appreciated by 13% in 2022, mainly due to US dollar strength and Palau’s relatively high inflation rate.

Private Sector Credit Growth

According to the IMF, private sector credit growth remained steady during the pandemic, with total credit to the private sector growing at an average rate of 3% between FY2019 and FY2022. The National Development Bank of Palau (NDBP) expanded its lending by 9% in FY2020 and 16% in FY2021, facilitated by a concessional lending scheme and an increase in housing loans under the Housing Development Loan Program.

Outlook and Risks

The economic outlook for Palau remains challenging, despite anticipated support from the new Compact Residual Agreement (CRA-23) and positive tourism trends. The IMF projects that output will accelerate to 12.4% in FY2024, driven by recent positive trends in tourism and infrastructure projects.

Inflation

Inflation is expected to moderate to 5.9% in FY2024 as base effects from the Pacific Games Sports Training (PGST) subside, supported by a decline in global commodity prices. However, inflationary pressures and risks remain sizeable due to potential second-round effects of tariffs and public sector wage hikes.

Key Indicators

  • Current account deficit: 55% of GDP in FY2022, projected to decline to 26.2% of GDP in FY2024
  • REER appreciation: 13% in 2022
  • Private sector credit growth: 3% average annual growth rate between FY2019 and FY2022
  • Inflation rate: 5.9% projected for FY2024

Advice from the IMF

The IMF advises that the new CRA-23 will take effect in late FY2024, and while additional fiscal grants are expected to support growth and external balance, their timing and speed of tourism recovery remain uncertain. Household spending is also vulnerable to high inflation.

Source: International Monetary Fund (IMF), Palau Office of Planning and Statistics, Ministry of Finance