Republic of Palau: 2014 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Palau
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Summary:
KEY ISSUES Context. After two years of strong performance, growth slowed down in FY2013 due to declines in construction and tourism, while inflation moderated thanks to stable international food and fuel prices. The outlook points to a modest recovery, but Palau’s heavy reliance on tourism, grants, and food and fuel imports carries downside risks. Without substantial fiscal consolidation over the medium term, Palau’s fiscal position will be unsustainable when the Compact grants expire in 2024. Discussions focused on: Managing fiscal adjustments to ensure fiscal and debt sustainability. • In the near term, replenish the fiscal buffers that were allocated for typhoon-related expenses by containing current spending and saving any additional revenue gains that are expected from recent revenue efforts. • Strengthen fiscal consolidation over the medium term through comprehensive tax reform and expenditure reform to achieve fiscal self sufficiency when the Compact grants expire. • Improve public finance management to strengthen the budget framework and ensure debt sustainability. Continue reforming public entities to contain fiscal risks and reduce government subsidies. Promoting private sector development and financial stability to sustain growth. • Intensify efforts to diversify the economy, improve the investment climate, and address infrastructure bottlenecks in order to enhance economic resilience and growth potential. • Preserve financial stability by strengthening and broadening financial regulation and supervision.
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