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Palau’s Fiscal Discipline Shines Amidst COVID-19 Challenges

As Palau emerges from the pandemic, its fiscal discipline has been put to the test, with borrowing increasing due to the economic impact of COVID-19. However, despite this challenge, the country’s debt-to-GDP ratio is expected to decrease in the medium term.

Strengthening Public Financial Management (PFM)

The Ministry of Finance (MoF) has played a crucial role in strengthening Palau’s public financial management (PFM) system. The implementation of the Financial Management Information System (FMIS) in 2020 has improved budgetary commitment controls, ensuring that no ministry or agency overspends its budget.

Economic and Fiscal Update FY2022

The MoF recently published the Economic and Fiscal Update FY2022, which outlines the country’s economic framework over the medium term. This report is a result of the Fiscal Responsibility and Debt Management Act (FRDMA), which requires the government to publish an annual update.

Principles of Fiscal Responsibility

Palau’s principles of fiscal responsibility are defined in the FRDMA, focusing on seven core principles:

  • Managing operating expenses, debt, and revenue
  • Managing reserves
  • Mitigating fiscal risks

The government has demonstrated its commitment to fiscal discipline by implementing prudent measures during the pandemic, such as spending cuts to maintain fiscal balance.

Budget Process

Palau’s budget process is well-defined, with a medium-term orientation that aligns with national priorities. Budget proposals must be clearly costed and aligned with sector strategic plans. The FY22 Fiscal Update provides economic and fiscal forecasts in the Government Finance Statistics (GFS) format.

Room for Improvement

However, there is room for improvement in terms of performance reporting, which currently focuses on output rather than outcomes. Most ministries comply with reporting requirements, but there is a lack of performance audits and evaluation of major investment projects.

Progress in PFM Reform Program

Despite these challenges, Palau has made significant progress in its PFM reform program. The enactment of the FRDMA has contributed to improvements in many areas, including:

  • Implementation of the Public Governance and Strategic Transaction (PGST) system, which aims to promote a more transparent and equitable tax regime
  • Piloting the Automated System for Customs Data (ASYCUDA), which will streamline import processes once rolled out

Conclusion

The country’s debt-to-GDP ratio may have increased due to COVID-19, but with its commitment to fiscal discipline and ongoing PFM reforms, Palau is well-positioned for a strong economic recovery in the medium term.

Key Highlights:

  • Debt-to-GDP ratio has risen to almost 92% due to COVID-19, but expected to decrease in the medium term.
  • MoF’s FMIS has improved budgetary commitment controls and ensured no overspending by ministries or agencies.
  • FRDMA defines seven core principles of fiscal responsibility, including managing debt and revenue.
  • Budget process is well-defined, with a medium-term orientation that aligns with national priorities.
  • Performance reporting focuses on output rather than outcomes, with room for improvement in terms of performance audits and evaluation of major investment projects.
  • PGST system aims to promote a more transparent and equitable tax regime, while ASYCUDA will streamline import processes once rolled out.