Weak performance of the gross domestic product (GDP) prevailed across the North Pacific, including contraction in Palau. However, growth is seen recovering in the near term as tourism recovers. Along with current fiscal adjustments, stimulating the private sector through improved trade will be crucial in the North Pacific over the longer term.

Economic performance

Palau’s economy is estimated to have contracted by 1.0% in Fiscal Year 2013 (ended 30 September 2013), a sharp reversal from 4.8% growth the year before.

In FY2012, Palau posted a record 116,856 visitor arrivals, but arrivals declined by 7.1% to 108,522 in FY2013, falling steeply in the second half. This was partly because Palau Airways suspended operations to Taipei,China (the largest source market in FY2012) from late April 2013 amid issues affecting the airline’s aircraft leases. Limited accommodation capacity and base effects stemming from 3 consecutive years of rapid growth appear to have contributed to the poorer tourism performance.

Aside from the sharp fall in tourist arrivals from Taipei,China, Palau recorded fewer visitors from Japan and the Republic of Korea, both important markets. Despite the sharp decline, FY2013 ranks second after FY2012 in the number of tourist arrivals.

Selected Economic Indicators (%) - Palau 2014 2015
GDP Growth 3.0 2.0
Inflation 2.5 2.0
Current Account Balance (share of GDP) -9.3 -7.4

Source: ADB estimates.

Economic prospects

Palau’s economy is seen to rebound from contraction. New tourism facilities, which could increase accommodation capacity by about 6%, are seen to drive GDP growth at 3.0% in FY2014. Reconstruction to repair damage from Cyclone Haiyan in November 2013 will likely contribute to output. Growth is expected to fall back to 2.0% in FY2015 as the effects of the capacity upgrade dissipate, but this will be somewhat offset by fiscal stimulus tied to the start of at least one large infrastructure project funded by development partners.

Source: ADB. 2014. Asian Development Outlook 2014. Manila.