Leaving House in Order

Last week, President Remengesau handed over to the new President of the Republic Surangel Whipps Jr., the responsibilities and authorities of the Office of the President symbolized by Palau flag, an adze, Palau’s Constitution in a carved wooden tray.
The transition to new government comes in the midst of a pandemic that have laid siege to the world for nearly eleven (11) months, wreaking havoc on global health, economy and life in general. Palau is not spared from the impact but outgoing President Remengesau noted that Palau has much to be grateful for, foremost being the COVID-free status of Palau.
“Biggest cause for gratitude is a healthy, Covid-free nation…we haven’t lost one life to covid-19,” expressed President Remengesau during his final press conference before the transition to the new government. This success he attributes to front-liners, Palau’s friends and allies, and the community as a whole working together to keep the virus at bay.
In addition to peaceful and orderly transition, the 10th government leaves with no deficit, collecting $18 million in the first quarter of 2021 and spending $17 million, staying below the 25% expenditure limit for the first quarter budget.
Despite borrowing $20 million from ADB to help balance the budget for FY 2020, the 10th government only spent about $8 million for CROSS Act leaving a balance of $12 million for the new government.
$10 million of Palau’s Reserve Fund wasn’t touch and $48.3 million cash was in the bank at end of December.
Compact Trust Fund was valued at $303 million as of January 15, 2021. During FY 2020, it achieved a total return of 8%. Furthermore, according to last report from Minister of Finance Elbuchel Sadang, Defense Fund was valued at over $5 million and Energy Fund was over $5 million as of January 15, both funds are Palau’s investments outside of the COFA Trust Fund. He further reported that Palau’s share in the Micronesia Trust stood at $11 million. Palau receives over $500,000 each year from the interest of the investment in Micronesia Challenge Trust Fund for the Protected Areas Network program (PAN).
In the final press conference, Remengesau said they promised they won’t consume all the resources for the incoming government and they didn’t. “No deficit or over expenditures, we lived within our means and spent within the law.”
Despite restrained spending and prudent investments by the 10th government, Palau still expects fiscal deficits in 2021 and 2022 as well as rising debt to GDP ratio as result of acquiring loans to address COVID impacts. More loans and aggressive recovery are solutions expected by the 11th Government.
As of January 15, ADB has approved $10 million for Palau Public Utilities Corporation but it requires government guarantee and is pending Senate approval. Another $10 million loan for Pension Plan has been approved but also requires congress approval. 10th OEK took no actions on these loans and therefore 11th OEK which is set to hold its first session day today, Thursday, January 26th will need to address them.
$40 million of the $60 million loan from ADB that 10th government sought to balance budget shortfalls of FY 2021 and FY 2022 is pending this new government’s action. The remaining balance of the loan require tax reforms and other fiscal policies in place before it can be disbursed.
Asian Development Bank Economic Monitor states that Palau has sound macro-fiscal policy that can “help generate additional fiscal space that, in turn, can support stronger recovery and more sustainable growth.” Options like “tax reform that improves efficiency and equity of the tax system; (ii) reforming state-owned enterprises and social security funds to minimize the need for fiscal transfers; and (iii) prioritizing capital spending, both on timely infrastructure upgrades and regular maintenance of assets” can boost productivity and growth.