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Pandemic Response Measures Help Cushion Palau’s Economic Impact

Palau’s authorities took swift action to mitigate the economic and social effects of the COVID-19 pandemic, implementing measures that have helped cushion its impact.

Swift Action by the Government

The government introduced a stimulus package worth $20 million (7.8% of GDP) under the Coronavirus One Stop Shop Relief Act (CROSS Act), which included:

  • Unemployment benefits
  • Temporary subsidies for utility bills
  • A lending scheme for the private sector

Additionally, Palau received support from the US CARES Act, with up to $19 million (7.4% of GDP) available.

Measures Help Reduce Economic Downturn

The measures helped reduce the economic downturn, with tourist arrivals dropping by 53% in FY2020. However, robust tourist inflows between October 2019 and January 2020 partially offset the decline.

Government’s Response

The government’s response also included:

  • Setting up domestic testing capabilities
  • Quarantine facilities
  • Implementing a new unemployment benefit scheme
  • Temporary job creation scheme for public works

Fiscal Implications

As a result of these measures, Palau’s fiscal deficit widened from a surplus of 0.4% of GDP in FY2019 to a deficit of 10.9% of GDP in FY2020. However, the banking system remains sound overall, with commercial banks having ample liquidity and private sector credit growth softening.

Medium-Term Outlook

Despite the challenges, Palau’s external position is expected to improve in the medium term as tourism activities resume and structural reforms are implemented to diversify the economy and fiscal adjustment takes place.

Economic Outlook

The economic outlook for Palau is challenging, with real GDP projected to contract further by 17.1% (year-on-year) in FY2021 due to a significant drop in tourist arrivals. However, the recovery is expected to be slow and modest, with real GDP projected to rebound by 9.4% in FY2022 and 18.3% in FY2023.

Risks and Uncertainty

Uncertainty around the outlook remains high, with risks tilted to the downside. The main risk is a protracted COVID-19 pandemic and a domestic outbreak, which could further impact the economy.

Conclusion

Overall, Palau’s response to the pandemic has helped mitigate its economic impact, but the road to recovery will be long and challenging.