Palau: Economy

Higher growth is now expected for Palau because tourist arrivals have outpaced expectations, although there are rising concerns about the environmental sustainability of recent increases in visitor numbers.

Selected economic indicators (%) 2015 2016
  ADO 2015 Update ADO 2015 Update
GDP Growth 8.0 10.0 6.0 9.0
Inflation 3.4 3.0 3.4 3.0
Current Account Balance (share of GDP) -6.4 -6.1 -8.1 -7.6

Source: ADB estimates.

Economic performance

Palau’s economy expanded by 8.0% in financial year (FY) 2014, well above the previous estimate of 6.9%. This reflects links between tourism growth and related industries such as communications, wholesale and retail trade, and financial intermediation.

Visitor arrivals in Palau in the first three quarters of FY2015, numbering around 126,000, already exceed arrivals in the whole of the previous fiscal year. The upsurge is driven by higher arrivals from the People’s Republic of China. Responding to concerns of sustainability, the government restricted the number of charter flights to 32 per month (from 48 per month) beginning on 15 April 2015.

A second of two planned hikes in the tobacco tax rate was implemented in January 2015 and helped nudge inflation to an average annual rate of 4.1% in the first half of FY2015. Prices rose despite the appreciation of the US dollar and consequent reduction in international commodity prices and import costs. Inflation in the third quarter of FY2015 dropped, however, to 0.4% as household costs and transport fell sharply.

The value of mineral imports—mainly petroleum products— dropped by 33.8% in FY2015 to July from the same period a year earlier, reflecting lower international oil prices. The value of food imports also declined slightly. The consequent 13.3% decline in the import bill and strong tourism growth prompt a downward revision to the forecast for the current account deficit in FY2015. As these trends are seen to continue, the forecast for FY2016 is also revised down.

Economic prospects

Palau’s Gross Domestic Product (GDP) growth forecast for FY2015 and FY2016 is raised substantially upward because of strong tourist arrivals and revised GDP figures for FY2014.

With fuel prices expected to remain low, inflation forecasts for FY2015 and FY2016 are trimmed from those in Asian Development Outlook (ADO) 2015. Food inflation has remained high—at an average of 4.4% in the first 3 quarters of FY2015—reflecting rising demand from tourists.

Excerpted from the Asian Development Outlook 2015 Update.