KOROR, Palau – Palau’s economy is expected to expand in fiscal years 2024 and 2025, fueled by a rebound in tourism and construction activity, according to a recent Asian Development Bank (ADB) report. The Pacific Economic Outlook report forecasts the country’s growth to surpass that of its fellow Freely Associated States, the Federated States of Micronesia and the Marshall Islands.
The report projects a 6.5% growth in GDP for FY 2024 and an 8% increase in FY 2025. This growth is attributed to a continued rise in tourist arrivals, which are anticipated to reach pre-pandemic levels. Additionally, the ADB report suggests that election-related spending will stimulate economic activity during the upcoming election season.
Public infrastructure projects are also poised to contribute to economic expansion. The ADB report highlights the potential return of a fiscal surplus, contingent on maintaining robust tax collection and curbing expenditures.
“The implementation of the renewed Compact of Free Association (COFA) with the United States will provide a significant boost in grant funding once it comes into effect,” the report states. “This, coupled with higher growth and a return to fiscal surplus, will ensure a sustainable decline in the debt-to-GDP ratio.”
However, the ADB cautions against potential risks. The report warns that increasing subsidies to state-owned enterprises and government entities, including the social security system, “could become a significant fiscal burden if critical reforms are not undertaken.”
Palau’s economy contracted in 2023 despite a resurgence in tourism. The year was also marked by rising debt levels and historically high inflation.
The report predicts continued economic growth across the North Pacific region, with inflation moderating in line with global price trends. “Stronger public sector management and long-term fiscal planning are crucial to capitalizing on the benefits of the renewed COFAs and building resilience against future economic shocks,” the ADB concludes.