ASIATODAY.ID, WASHINGTON — Palau’s economy is rebounding faster than expected, but the International Monetary Fund (IMF) warns that high public debt and unfinished structural reforms could undermine long-term stability. The assessment follows the conclusion of the IMF’s 2025 Article IV Mission, conducted from November 6–19, 2025.
Fast Recovery: Strong Growth and Low Inflation
IMF staff report that Palau posted an impressive 12% economic expansion in FY2024, with growth expected to remain strong at 6.7% in FY2025 thanks to a solid rebound in tourism and rising construction activity. Inflation has stabilized at low levels, while wage increases have restored real incomes to pre-pandemic levels.
Despite the strong numbers, IMF notes that real GDP has not yet returned to pre-COVID levels, signaling the need for deeper resilience-building efforts.
Fiscal Position Strengthens, But Debt Stays Elevated
The IMF acknowledges Palau’s success in restoring fiscal discipline through tax reform, higher grant inflows, and prudent spending. These measures have helped shift fiscal deficits into surpluses.
Key findings include:
Public debt fell from a peak of 81% to 67% of GDP by end-FY2024.
Despite the decline, debt remains “high and vulnerable to shocks.”
The IMF urges Palau to fully implement its FY2026–29 medium-term fiscal strategy to further reduce debt and better align fiscal policy with long-term development goals.
Tax and Pension Reforms Remain Critical
IMF commends the rollout of the Palau Goods and Services Tax (PGST), calling it a major step toward modernizing the tax system. However, the mission stresses the importance of:
Strengthening revenue administration
Upgrading tax IT systems
Building institutional capacity
The IMF also highlights the urgency of reforming the civil service and the ROPSSA pension system, recommending thorough cost-benefit analysis to ensure financial sustainability.
Palau’s heavy reliance on tourism remains a key structural weakness. To boost resilience and broaden growth sources, the IMF recommends:
Implementing a high-value tourism strategy
Attracting foreign investors with strong domestic spillovers
Improving infrastructure and climate resilience
Strengthening food security
Expanding vocational training and financial literacy
Updating the national development plan to integrate these priorities
The IMF also urges caution in exploring digital innovations such as the tokenized dollar, citing regulatory and cybersecurity risks.
Financial System Still Falling Short in Supporting Private Sector Growth
Credit to the private sector remains limited. IMF identifies constraints including restricted access to credit risk data, caps on lending rates, and legal uncertainties over land titles—factors that collectively hinder private investment.
Modernizing the payment system and developing domestic savings channels, including potential mobile money solutions, are viewed as crucial next steps.
Global Risks Loom Large
IMF warns that global geopolitical tensions, weaker donor support, and policy uncertainty could negatively affect tourism and investment flows. Swift parliamentary approval of the FY2026 budget would help strengthen confidence and stabilize the outlook.
The IMF expressed appreciation for the constructive engagements with government officials, financial institutions, development partners, and private-sector representatives in Koror and Airai. (AT Network)
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