Palau’s economic growth is expected to pick up in 2019 and 2020, with a projected boost from a recovery in tourism and increase in capital expenditures through the Compact funds from the United States, according to newly released Asian Development Bank (ADB) Economic Outlook Report.

Palau’s economic growth is expected to accelerate to 3.0% in the fiscal year 2019 and FY2020. Due to a slump in tourism, Palau’s economy has a steep growth of 0.5%, and 3.7% decline in FY2017.

“Growth in Palau is similarly projected to increase with expectations of some recovery in tourism and further increases in capital expenditure thanks to greater financial assistance from the US,” the report stated.

In 2018, Palau has the lowest visitor arrivals since FY 2012. This was attributed to the termination of Delta Airlines flights from Tokyo in May and the indefinite suspension of Palau Pacific Airways charter flights from Hong Kong.

The two airlines, which serviced two of the key tourism markets-China and Japan-, put a dent to the visitor arrivals affecting the economic growth.

The country’s visitor arrivals grew by 6.6% in the first half of FY2018 following a cumulative 29.9% drop in tourist numbers since 2016.

The report also said that 2018 tourist arrivals from Japan dropped by 5.4% and from the People’s Republic of China (PRC) by 9.5% after the government restricted charter flights through Hong Kong, China.

But despite the tourism downturn, strong construction activities supported economic growth.

“Public infrastructure projects funded by development partners proceeded in earnest, and some private hotel projects were completed, “ it added.

The prospect however of new airlines servicing Palau would boost tourism. Skymark, a low budget airline from Japan is said to be flying directly to Palau this year. Last month, during the visit of Taiwan President Tsai Ing-wen, it was also announced that China Airlines will be adding another flight to the island nation.

According to the latest Pacific Asia Travel Association Asia Pacific Visitors Forecasts 2019-2023 which was released on March 19, tourism arrivals are expected to grow in the next five years.

Palau will still get most of its tourists from China until 2023 but would see an increase in arrivals from other source countries like Taiwan and the United States.

The report said it’s expected that there will be a decrease in the total volume of Chinese visitors to Palau until 2023, but it will still remain a key source market.

Although visitors from Taiwan have experienced a significant decrease, numbers are expected to increase dramatically, with an average annual growth rate of 7.88 percent over the next five years, the PATA report stated.

Compact Funding

The Compact fund will also stimulate economic growth in 2019 and 2020, the ADB report said.

After years of delay, in September 2018, Palau and the US amended their Compact of Free Association with $20 million to be made available to finance agreed infrastructure projects that could boost annual capital spending by a quarter—plus $2 million annually for infrastructure maintenance.

Under the agreement, a further $22 million in direct economic assistance promises further economic stimulus.

The ADB report also noted that Palau’s fiscal surplus narrowed from 4.8% of GDP in FY2017 to 4.3% as expenditure increased to fund transfers including to the civil service pension fund.

It recommended that Palau can have a better fiscal position if it implements much-needed tax reform that would facilitate increase revenues.

Economists have earlier advocated that Palau passed legislation on Value-added Tax (VAT). (Bernadette H. Carreon)