Palau

Economic Profile and Performance

Palau is a small developing economy but despite the fact that it is a remote country, it enjoys a relatively high standard of living which, in the main, is a result of support funds drawn down annually from the Compact of Free Association with the United States. The government sector accounts for over one third of total employment and outside the public sector, the economy consists primarily of tourism, retail, subsistence agriculture, and fisheries. The services sector is estimated to account for 83% of GDP, and the agriculture, forestry and fishing sector for 4%. Local manufacturing activity is very small, accounting for about 1.4% of GDP. There is high dependence on imports, with the ratio of imports to GDP ranging from 75% to 115% in recent years. Although there is a large surplus on the services account because of tourism, the very high trade deficit has led to current account deficits in recent years. The economy is also characterized by dependence on external assistance and foreign employment. The Government, relies heavily on financial assistance from the USA, Japan, and Taipei, China. As a percentage of GDP, the fiscal deficit is one of the highest in the Pacific, largely because of high government expenditures on salaries and low tax revenues.

Economic Outlook
The Palauan economy has good potential for sustained growth. While tourism infrastructure development remains a priority of the Government, so too is the need to keep a balance between tourist numbers and the maintenance of Palau’s renowned pristine environment. Promotion has been geared to high-yielding, low-volume tourism. Major infrastructure development projects, including the US-funded Babeldaob circumferential road and the Japan-funded replacement bridge between Koror and Babeldaob will assist Palau’s economy over the years. Growth in small-scale agriculture, originally driven by the expanding tourist trade, is continuing as a result of increased demand from the construction sector. Fisheries are also important to Palau, with Japan a major importer of tuna and mackerel, and Chinese and Taiwanese long line fishing fleets also fishing in Palau’s EEZ.

The main economic challenge confronting Palau is to ensure the long-term viability of its economy by reducing its reliance on foreign assistance.