Better investment climate would help Palau achieve sustained growth

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Page 230

After several years of slow or negative growth, economic activity has picked up in the Republic of Palau, while inflation has remained low, according to the IMF's latest economic review. Real GDP, driven by higher visitor arrivals and externally funded government projects, grew by 5 percent in FY2004 and 5½ percent in FY2005. Palau, a small island economy in the Pacific, relies heavily on tourism and on external assistance from its 50-year Compact of Free Association with the United States and grants from Japan and Taiwan Province of China to finance budget expenditure and infrastructure projects.

Better economic management has encouraged private sector activity. Fiscal performance was improved by capping nonwage current expenditure while strengthening revenue collections, allowing public debt to remain low. Although investment impediments remain, Palau ranks high on several indicators of the cost of doing business, and local private firms are undertaking a growing share of foreign-financed projects.

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Near-term economic prospects are upbeat, with tourism and infrastructure projects playing major roles. In the longer term, however, Palau's prospects are more uncertain and will depend on the direction of economic policies and whether U.S. Compact assistance is renewed beyond 2009.

IMF...