Palau Correspondent

The Palau Royal Resort is among properties hard hit due to the absence of tourists.

Photo from Journal files

KOROR, Palau – The economy in Palau is projected to decline by 25% this year, indicating the impact of COVID-19 on the tourism-reliant nation, according to the U.S. Graduate School’s Economic Brief for fiscal 2021 for Palau, released Aug. 25.

The report said that 2020 was supposed to be a good year for Palau, with the construction activity increasing and the tourism industry expected to grow by 30%.

“Then COVID-19 descended on the world and international travel dried up and no further visitors arrived in Palau,” the report said. 

The economic brief said Palau’s Gross Domestic Product is estimated to have contracted by 8.7% in fiscal 2020 and will further fall by an additional 17.6% in fiscal 2021.

The private sector experienced the biggest impact of COVID-19 in fiscal 2020.“A large reduction of 17% was experienced, reflecting the collapse of the tourist economy after the end of March and indirect effects on secondary industries,” the report said.

By fiscal 2021, the economic brief said a further reduction of 26% is projected due to the reduction in tourism, translating to a projected loss in output of 38% for the private sector.

Lower economic growth also means job losses with a reduction of 1,482 jobs compared with fiscal 2019. Palau’s workforce pre-COVID in fiscal 2019 contained 5,549 Palauan workers and a larger number of 5,943 foreign workers. 

“In normal times the Palauan segment is fully employed with excess demand supplied by foreign workers.” During the years from 2000 to 2019, the Palauan segment grew by an annual average of 0.3%. with the number of foreign workers fluctuating with the demands of the economy, the report said.

Further job losses in 2020 were mitigated by the government’s temporary job programs and by the private sector retaining workers to support recovery.

“The resulting impact of the COVID-19 pandemic on employment thus turned out to be less dire than anticipated due to employers retaining workers on reduced hours to enable recovery and the impact of mitigation programs to offset the impact,” the brief noted. Despite the impact on the economy, the report said Palau’s available financing will be sufficient to keep the government open through the end of fiscal 2022, and a full recovery is expected by fiscal 2023.

Palau was loaned funding from Asian Development Bank to support the nation through the COVID crisis, although this will have to be repaid.  The series of loans are the $15 million facilities loan under the Disaster Resilience Program and $20 million under the COVID-19 Pandemic Relief Option. “Palau generates large fiscal surpluses as tourism industry booms, but runs large fiscal deficits during COVID government revenues and expenditures,” the report said.

Total financing needs arising from COVID-19 will reach 36% of GDP to keep the government open and sustain mitigation programs. With the series of loans, Palau’s external debt/GDP ratio is projected to increase rapidly to nearly 90% of GDP to finance the impact of the COVID-19 global pandemic. 

The report also recommended mitigation measures to cushion Palau’s economic growth drop, including the passage of tax reform legislation. mbj