Economy of Palau
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Economy - overview: The economy of Palau consists primarily of subsistence agriculture and fishing. The government is the major employer of the work force, relying heavily on financial assistance from the United States. The population enjoys a per capita income of more than twice that of the Philippines and much of Micronesia. Long-run prospects for the tourist sector have been greatly bolstered by the expansion of air travel in the Pacific and the rising prosperity of leading East Asian countries.
Palau's per capita GDP of $5 800 makes it one of the wealthier Pacific Island states. Nominal GDP increased by an annual average of nearly 14% from 1983 to 1990, and by an annual rate of over 10% from 1991 to 1997. Growth turned sharply negative in 1998 and 1999 as a result of the Asian financial crisis.
Tourism is Palau's main industry. Activity focuses on scubadiving and snorkeling among the islands' rich marine environment, including the Floating Garden Islands to the west of Koror. The number of visitors--85% of whom come from Japan, Taiwan, and the U.S.--reached nearly 67,000 in 1997, more than quadruple the level of a decade earlier. Tourism earned $67 million in foreign exchange for Palau in 1996, accounting for roughly half of GDP. Arrivals from Asian countries dropped in 1998 and 1999 due to the regional economic downturn and the depreciation of many Asian currencies against the dollar, which made Palau's dollar-denominated prices more expensive.
The service sector dominates the Palauan economy, contributing more than 80% of GDP and employing three-quarters of the work force. The government alone employs nearly 30% of workers. One of the government's main responsibilities is administering external assistance. Under the terms of the Compact of Free Association with the United States, Palau will receive more than $450 million in assistance over 15 years and is eligible to participate in more than 40 federal programs. The first grant of $142 million was made in 1994. Further annual payments in lesser amounts will be made through 2009. U.S. grants in 1999 totaled $24 million.
Construction is the most important industrial activity, contributing over 9% of GDP. Several large infrastructure projects, including the rebuilding of the bridge connecting Koror and Babeldaob Islands after its collapse in 1996 and the construction of a highway around the rim of Babeldaob, boosted activity at the end of 1990s.
Agriculture is mainly on a subsistence level, the principal crops being coconuts, root crops, and bananas. Fishing is a potential source of revenue, but the islands' tuna output dropped by over one-third during the 1990s.
The main economic challenge confronting Palau is to ensure the long-term viability of its economy by reducing its reliance on foreign assistance. Palau has created a trust fund to be drawn upon after the cessation of Compact grants, the value of which had grown to $140 million by the beginning of 2000.
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[edit] Foreign Investment
Direct foreign investment in Palau is regarded with ambivalence. On the one hand, the authorities realize the need for foreign investment on economic grounds and particularly to advance growth. But on the other hand, the preservation of the country's culture and untouched ecology are vital considerations. These include
- Tour guides, fishing guides, diving guides and any other form of water transportation services;
- Travel and tour agencies and;
- Equipment rentals for both land and water within the Republic, including equipment for purpose of tourism.
This competing set of interests is complicated by the fact that although the government seeks foreign investment, the country's foreign investment law is not particularly investor-friendly. Notably, all noncitizens seeking to engage in business in the Republic of Palau are required by the Foreign Investment Act (FIA) to apply for and obtain a license known as the Foreign Investment Approval Certificate (FIAC). A further complication is the fact that locals have complained that the influx of investors from other countries may not include opportunities for Palauan citizens.
[edit] Taxation
Corporations are subject to a 4 percent gross revenue tax.
Essentially, foreign investors are taxed as local businesses. Palau is one of the lowest taxed business environments in the Asia-Pacific region. There is no corporate tax, nor is there any taxation of income for business owners. Palau has enacted a unified tax act that is codified in Division 2 of Title 40 of the PNC. Under the act, the national government levies three general types of taxes.
The principle form of taxation is the gross revenue tax of four percent, effective January 01, 1998, which applies to all businesses operating in the Republic. A 100 percent deduction is permitted for wages and salaries paid to Palauan employees; whereas, a 50 percent deduction is permitted for income in the form of wages and salaries paid to foreign workers. Another form of taxation is the Wage and Salary tax. The current tax rates are six percent on the first USD 8,000.00 and 12 percent on the amounts over USD 8,000.00. No tax is payable where the annual compensation is USD 2,000.00 or less. The third type of tax is the import tax. Every person or business entity importing products into the Republic of Palau for resale, including on-site resale at hotels and restaurants, is required to pay an import tax on that product. The import tax rate varies depending on the product. General merchandises are levied at a three percent as valorem tax rate.
[edit] Commerce
Supermarkets, available only in Koror, carry imported goods and local produce. They are open from 7 a.m. to 10 p.m. Farmers' markets and fish markets are open nearly every day in Koror. Small markets are found in most villages and neighborhoods. Prices are mostly fixed and hours vary.
[edit] Statistics
GDP: purchasing power parity - $174 million (2001 est.)
note: GDP estimate includes US subsidy
GDP - real growth rate: 1% (2001 est.)
GDP - per capita: purchasing power parity - $5 800 (2001 est.)
GDP - composition by sector:
agriculture: NA%
industry: NA%
services: NA%
Population below poverty line: NA%
Household income or consumption by percentage share:
lowest 10%: NA%
highest 10%: NA%
Inflation rate (consumer prices): 3.4% (2000 est.)
Labor force: 10 200 (2000)
Labor force - by occupation: agriculture 20%, industry NA%, services NA% (1990)
Unemployment rate: 4,2% (2000 est.)
Budget:
revenues: $57.7 million
expenditures: $80.8 million, including capital expenditures of $17.1 million (FY 98/99 est.)
Industries: tourism, craft items (from shell, wood, pearls), construction, garment making
Industrial production growth rate: NA%
Electricity - production: 200 GWh (1996)
Electricity - production by source:
fossil fuel: 85%
hydro: 15%
nuclear: 0%
other: 0% (1996)
Electricity - consumption: 200 GWh (1996)
Electricity - exports: 0 kWh (1996)
Electricity - imports: 0 kWh (1996)
Agriculture - products: coconuts, copra, cassava (tapioca), sweet potatoes
Exports: $18 million (f.o.b., 2001)
Exports - commodities: trochus (type of shellfish), tuna, copra, handicrafts
Exports - partners: US, Japan, Singapore (2000)
Imports: $99 million (f.o.b., 2001 est.)
Imports - commodities:
machinery and equipment, fuels, metals; foodstuffs
Imports - partners: US, Guam, Japan, Singapore, Korea (2000)
Debt - external: $0 (FY99/00)
Economic aid - recipient: $155.8 million ; note - the Compact of Free Association with the US, entered into after the end of the UN trusteeship on 1 October 1994, provides Palau with up to $700 million in US aid over 15 years in return for furnishing military facilities
Currency: 1 United States dollar (US$) = 100 cents
Exchange rates: US currency is used
Fiscal year: 1 October - 30 September
- See also : Palau
