Fund warns heavy reliance on tourism, imports carries risk
By Bernadette Carreon
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HAGÃ…TÃ‘A, GUAM (Marianas Business Journal, April 8, 2013) – A strong performance by Palau’s tourism sector is being credited with boosting the republic’s economy in a recent International Monetary Fund report.
“Palau’s economic performance has been strong, driven by robust tourism,” the report states, adding that Gross Domestic Product grew by about 6% in fiscal 2012 due to increased tourist arrivals resulting from new Asian flight routes.
Current airlines servicing the Palau route are United, which flies daily from Guam and twice a week from Philippines; Asiana Airlines which flies two charter flights a week from Incheon, Korea; China Airlines with a four time weekly flight; TransAsia Airlines from Taipei, Korean Airlines and Delta Airlines.
The report also noted that current Palau account balance improved, largely due to stable foreign grants and strong tourism receipts, while the real effective exchange rate remained in line with its long-term average. Average inflation increased to 5% (year-on-year) in fiscal 2012 due to higher international food and fuel prices.
Preliminary data indicate that the country’s fiscal position continued to improve. Revenue collection was strong mainly due to economic buoyancy, although spending was also higher than expected with the passage of supplementary budgets. The current fiscal deficit (excluding grants) is estimated to have narrowed further by 2 percentage points of Gross Domestic Product in fiscal 2012, in line with the medium-term fiscal consolidation path. The government cash buffers excluding the Compact Trust Fund increased to about 5% of GDP.
However, the IMF warned, Palau’s heavy reliance on tourism, grants and food and fuel imports all carry substantial risks.
Growth is projected at 3% this year along with a moderation in tourism activities after a strong rebound in fiscal 2012 and limited hotel capacity. Weaker-than-expected global growth could hurt tourism, and an increase in food or fuel prices could raise inflation, depress domestic demand and weaken fiscal and external positions.
The IMF report advised that building the government fiscal buffers is imperative in order to mitigate the potential adverse impact of these risks.