(PGST and increase in utility rates contribute to output losses)

Coming out of the pandemic, “high inflation driven by import prices of food and fuel, the introduction of PGST (Palau Goods & Services Tax) and the one-time very high increase in power cost contributed to Palau’s significant economic decline compared to previous years, according to the IMF (International Monetary Fund) 2023 Report.

This means less money and goods going around.

The report says that “Palau is at the onset of a gradual recovery front the pandemic that left significant scarring, as output fell by a fifth of its pre-pandemic level.  Economic activity is expected to have stalled in FY 2023, growing by .08 percent, reflecting weaknesses in the construction sector and a slow pick-up in tourism,” stated the head of the IMF Team, Ms. Elif Arbatli Saxegaard.
In other words, this year, Palau will continue to reflect negative growth due to slow tourism recovery and fewer construction projects.  The report predicts inflation at 13% this year.

The outlook for 2024 by the IMF is favorable, considering the implementation of the Compact Review Agreement (CRA), which brings grants and transfers to the Compact Trust Funds.  With this outlook, the IMF projected 12.4% percent growth if tourism growth stays positive and construction rebounds.  The report also projects inflation to drop to 5.4% in 2024.

The report also cautions Palauan leaders, noting short-term risks such as the delay in the US Congress approval of the new CRA, continued weakness in tourism recovery, and potential climate risks such as droughts. 

The IMF recommends a medium-term fiscal strategy, monitoring the national development bank and establishing a stronger financial system and “advancing structural reforms that will help diversify the economy and boost private investment.”

However, the IMF team recommends a cautious and gradual approach to digital initiatives.  “The authorities should close existing gaps in the regulatory and governance frameworks and strengthen the country’s AML/CFT framework, before exposing the financial system to new risks.”

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