Palau’s fiscal deficit is expected to continue due to the end of grant inflow and higher price spending growth.

According to the April 2023 Asian Development Outlook of Economies, Palau’s fiscal deficits will likely equal the GDP in FY2023 and FY2024.

The country’s economy has also contracted for the seventh consecutive year  due to the pandemic and tourism downturn. Palau’s construction also fell by 20 percent as projects are already completed while tourism is slowly recovering, it has not fully recovered from its pre-pandemic days.

The report said Palau’s tax revenue remained low equal to  16.8 percent of GDP in FY2022 and down from an average of  20.4 percent in FY2015- 2019.

“ However, expenditure fell as COVID- assistance declined, and capital projects wound down. Consequently, the fiscal deficit narrowed.

It added that Fiscal accounts are likely to remain in deficit. “Anticipated gradual economic recovery should mean recovery in tax collection.”

“However, comprehensive tax reform may entail temporary adjustment costs that could constrain revenue in FY2023.”

The report stated that as spending normalizes while pandemic-related grants fade, the gradual revenue recovery is seen to translate into fiscal deficits remaining at the equivalent of about 10 percent of GDP in FY2023  and FY2024. 

While recent developments suggest expanded financial assistance from the US, the projected near-term fiscal gap will likely necessitate further borrowing.

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