On June 22, the US Department of the Interior published a report examining COVID’s financial impact on Palau, the FSM, and the Marshall Islands.

While Palau’s private sector is heavily reliant on tourism, the government, by far the largest employer of native Palauans, is dependent on US aid from the Compact of Free Association. Talks to renegotiate the terms set forth in Palau’s COFA are set to be held in 2023. But in light of the worldwide pandemic and the halt in global travel, which is expected to have a staggering effect on Palau’s tourism-based economy, the US has suggested that negotiations occur this year instead.

The economic reports, which focus on Palau as well as the other two Freely Associated States, the Federated States of Micronesia and the Republic of the Marshall Islands, were compiled by the Graduate School USA’s Economic Monitoring and Analysis Program.

“While each of the three Freely Associated States continues to remain free of COVID-19 cases, the slow down and near termination of transportation across the region has had strong repercussions on their economies,” said DOI Assistant Secretary Douglas W. Domenech.

Projections made in the reports estimate that Palau will experience a GPD reduction of 22.3% in the next two years, with predicted job losses numbering 3,128. With tourism expected to remain limited to the end of 2021 for all three FAS’s, Palau, with 20% of its workers employed in the tourism industry, is expected to be the hardest hit. The reports predict a 51% reduction of tourists in 2020 and an additional 89% reduction in 2021.

Many of those employed in the private sector are foreign workers residing in Palau. But the reports illustrate how the mass reduction in tourism could filter through the economy, eventually hurting government revenue. The fiscal deficit for Palau, resulting from the loss of tax revenues such as payroll tax, gross revenues tax, hotel room tax, and import taxes, is expected to be about $40 million.

The DOI expressed hope that the report would help government leaders draft mitigation strategies to maintain economic stability, as well as offer insight as Palau and the US plan to renegotiate terms of the COFA. Construction and infrastructure projects already planned for Palau could serve as important sources of revenue as the country waits out the long-lasting effects of COVID.

The US is already in the midst of renegotiating compacts with the FSM and the Marshall Islands. The two other Freely Associated States, although not as heavily-reliant on tourism as Palau, are still expected to suffer economically from the pandemic, with the FSM facing “the most severe decline in FSM economy since the start of the amended Compact period in 2004”, and the RMI faced with “a fiscal shock in the range of $14 to $20 million” resulting from reduction of tax and fisheries revenues.  

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