Palau: Economy

Growth in Palau this year is expected to be slower than forecast because construction has fallen short of expectations and the completion of major tourist infrastructure is delayed. As North Pacific economies are small and dominated by the public sector, economic performance generally tracks public capital expenditure.

Selected Economic Indicators (%) - Palau 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 3.0 2.0 2.0 2.0
Inflation 2.5 3.5 2.0 2.0
Current Account Balance (share of GDP) -9.3 -5.5 -7.4 -5.3

Source: ADB estimates.

The growth forecast for Fiscal Year 2014 is revised down by 1.0 percentage point as construction and tourism were both weaker than expected. In the aftermath of Cyclone Haiyan, which struck Palau in November 2013, the government reallocated intended budget savings of $1.5 million to reconstruction. However, reconstruction projects have suffered implementation delays. One indicator of this is the issuance of earthmoving permits in the first 3 quarters of FY2014. Although 42.5% more permits were issued, roughly half came only in the third quarter. A 21.7% drop in building permits issued in the first 3 quarters of FY2014 similarly reflects reconstruction delays.

Palau reports some improvement in the tourism sector, which plays a dominant role in the economy. Visitor arrivals rose by 7.6% year on year in the first 3 quarters of FY2014 as flights from Hong Kong, China and Taipei,China increased. However, growth remained below the double-digit expansion seen from FY2010 to FY2012.

The inflation forecast for Palau is now 1.0 percentage point higher than previously forecast for FY2014, as consumer prices rose by 4.0% in the first 3 quarters of FY2014, partly driven by higher tobacco taxes, medical costs, and school fees. Inflation is still expected to ease to 2.0% in FY2015.

Increased imports of machinery, vehicles, and steel needed for reconstruction pushed Palau’s imports up by 23.4% year on year in the first 3 quarters of FY2014. The bulk of these imports came in the first quarter of the fiscal year, particularly in December 2013. Imports of food and related products also increased over the same period.

Palau’s current account deficit is now seen to narrow more quickly in FY2014 on rising tourism receipts.

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