Following up on a previous request to the national government for a loan to help weather the economic crisis caused by the COVID pandemic, Governor Eyos Rudimch of Koror State relayed to Minister of Finance Kaleb Udui Koror State’s urgent need.
Tourism revenue represented more than half of Koror State’s income pre-covid. Loss of tourism revenue pushed Koror State to dip into its financial reserves to subsidize its annual budget.
“As you are aware, the economic impact of the COVId-19 pandemic and the subsequent slow recovery of tourism has had a very serious effect on Palau’s economy and public finances. In the case of Koror State, our direct dependence on tourism-related revenues has meant that Koror State has been running sustained and large budget deficits for some years, even though the current administration, in particular, has made significant reductions in State expenditure,” stated Governor Rudimch in his letter to Minister Udui.
As early as 2021, Koror State had applied to the national government for a loan to supplement its budget. Through the national government, it had sought to obtain a loan from the $30 million Asian Development Bank policy-based loan extended to the Republic.
Governor Rudimch reported that Koror State had obtained assistance from ADB’s technical assistance program developing a four-year projection of the State’s budget position covering FY 2023 to 2026 to understand better their position and measures to take.
According to Governor Rudimch, the projections showed that Koror State will continue to run “significant but declining budget deficits through FY 2026”. Despite austerity measures and expected tourism recovery, the projections still show that improvements do not eliminate deficits by FY 2026 and that Koror State’s cash reserves will be depleted by FY 2026.
The report provided by Koror State shows projected budget deficits at -$4.4 million in FY 2023, -$3.9 million in FY 2024, -$3.6 million in FY 2025, and -$3.2 million in FY 2026. Drawdown from the State’s reserves shows a declining amount each year, and by FY 2026, the State cash reserves will be zero. In fact, for FY 2025, the remaining cash reserve will be $1.58 million while the budget deficit will be -$3.6 million, leaving Koror State short of -$2.02 million to meet its operating expense.
Based on Koror State’s financial projections, it will need a little over $5 million to cover the projected budget shortfalls in FY 2025 and FY 2026. And without financial assistance now, it will surely deplete its financial reserve by FY 2026.
Meanwhile, the national financial report for FY 2023 showed $15 million of the $30 million ADB Loan to Palau already obligated as a source of funds for the FY 2023 Unified Budget. The current national supplemental budget bill taps into National Cyclical Reserve Fund as its source of funds.