Palau
Doing Well, But... Not Good Enough?
Palau’s Economy Is Underperforming
Palau has long been considered the exception in the Western Pacific. Its combination of world-class natural beauty, easy and convenient air access to major Asian nations, and a "can-do" attitude among its people has translated into sustained economic growth the likes of which will not be matched by any Micronesian nation or territory, save Guam in the near-term future.
But as Palau heads into the new year, red flags are being raised about its ability to sustain significant economic growth in the coming years. The warnings are being issued both locally and regionally. They center on Palau's cumbersome foreign investment laws, which put a damper on widespread investor interest, the lack of broad-based economic development outside of its well-known tourism sector, and the looming end of Palau's 15-year financial agreement with the United States in 2009.
 |
| Palau’s stunning Rock Islands draw visitors from around the world, many of whom dive in the crystal-clear waters. [Photo: Tim Rock] |
Influential financial institutions including the International Monetary Fund and Asian Development Bank have given positive reports on the state of play, and the lifeblood of the economy-tourism-is performing steadily if not spectacularly.
- ADVERTISEMENT -
The IMF says Palau's estimated 5 percent economic growth rate puts it ahead of its immediate neighbors. But IMF Senior Economist Wafa Fahmi Abdelati says while a healthy tourism sector, more efficient government spending and foreign donor assistance have all helped economic growth, substandard banking regulations and oversight are of concern. "Long-term economic prospects are less certain and depend on the future level of the grant assistance and future direction of economic policies in the areas of fiscal policy, managing sustainable private sector development and banking oversight," Abdelati says.
That is a sentiment shared by many in Palau, including Alan Seid, a business executive and chairman of the Senate Committee on Ways and Means. He believes that while the economy is stable, there is still much to be done. "We have a good foundation, a good base, in which to expand the economy, but quite frankly we can do better."
"We must not just compare ourselves to other developing countries; we must compare ourselves to our potential," Seid says.
Like the IMF, the Asian Development Bank says Palau's economy remains heavily dependent on U.S. assistance and the government needs to curb public spending. While Palau received about $12.8 million last year in direct assistance under the Compact of Free Association with the U.S., Compact grant disbursements are expected to decline between now and 2009, when the current agreement terminates. The ADB believes the Palau national government needs to adopt "financing options and mutually beneficial partnerships with the private sector."
The government says it is addressing these very issues in its national budget and broader development strategies. In late 2005, President Tommy Remengesau Jr. signed into law the country's US$56 million budget for fiscal year 2006.
Government Financial and Management Adviser Casmir E. Remengesau says the budget "basically continues the economic development strategy framework, which sees the president recognizing the importance of the private sector and taking action to strengthen it." Key areas include tourism, fisheries, aquaculture and agriculture, and continued efforts to "keep a handle on expenditure." Remengesau is the brother of the president.
 |
| Palau’s new national capitol complex on Babeldaob island should be ready in mid-2006. [Photo: Tim Rock] |
Remengesau says the government is outsourcing some services as part of this push, and is making "every effort to collect what's available as a way of expanding the revenue base."
"In our experience it is better to corporatize (than completely privatize)," says Remengesau, pointing to the country's telecommunications company, Palau National Communications Corporation, as a good example of an independent government agency.
"Right now we are conducting a survey to look at others," he says. "We're eyeing water and sewage services, and the food service program for education institutions and the hospital."
There's no doubt tourism continues to be the country's largest industry and a primary driving force of the economy. The number of visitors to Palau reached 90,000 in 2004, more than quadruple the level of a decade earlier. The Palau Visitors Authority's new managing director, Darin de Leon, says 2005 was not as promising as the previous year, and that the slight decline in visitor arrivals was attributable to a number of factors, including a decrease in chartered flights from South Korea.
The vast majority of Palau's visitors come from Taiwan, a situation which concerns Alan Seid. He believes Palau risks becoming too dependent on this market, and that it needs to diversify the base to encourage more visitors from Europe, the U.S., Japan and even Australia. "Good quality smaller numbers will have greater benefit and impact" he says.
Casmir Remengesau agrees there is a legitimate concern about being too reliant on one market. "What is a continuing challenge is to keep a greater and greater percentage of each tourism dollar here," he says.
Remengesau points out that much tourism infrastructure is foreign owned, and many of the dollars that are spent in country by tourists end up leaving Palau. "Much of the food tourists eat is imported, many of the workers are imported, even the souvenirs are often imported."
A commission developed to look at new projects is examining how to get more domestic participation in the tourism and construction industries. "This is a conscious government effort," Remengesau says.
National Development Bank of Palau President Kaleb Udui Jr. believes there is scope for greater local investment in the tourism sector. "Our view, and this has been substantiated in discussions with some investors and consultants, is that there is a need and room for boutique hotels that are suitable for local ownership. We would like to see this sort of development in Palau, some resort style with more natural type of construction, and other local cottages at the moment."
At the moment, the bank's portfolio is heavily weighted towards housing loans. They made up 58 percent of the total loans as of September 30, 2005.
Palau has a challenge not only encouraging local investment, but also keeping international investors interested. The need to improve tax and banking laws has been identified by international agencies as central to this challenge. "I couldn't agree more," Alan Seid says. The Senate was debating changes to the banking code as this issue of Pacific Magazine went to press in a bid to improve accountability and professional oversight.
Seid says Palau's investment system is cumbersome. "They (intending investors) need to provide financial statements; just a whole lot of unnecessary information is required," he says. "What wrong with letting them try? The bureaucracy is too much."
Casmir Remengesau says while there are concerns about the level of bureaucracy, "we believe if the opportunity to make money is there, investment will follow."
Seid supports longer land leases as a way of improving investor confidence.
"At the moment, the lease is for 50 years. It should be for 99 years. These are some of the issues we can take forward."
Remengesau says while (shorter) leases can be a disincentive to investment, "for some there is concern over the loss of access to land. For some a 99-year lease is tantamount to a lifetime… that's two generations where you don't have access to your land."
Despite these challenges, there does seem to be a sense of optimism in Palau. Udui at the Development Bank says "we'll see growth for several years to come.
Because of Palau's natural beauty, biodiversity, proximity to Asia, the policies of the present government--I think these factors really come together to give us the advantage."
The 53-mile two-lane "Compact Road" highway on the island of Babeldaob is also (over)due for completion this year which potentially opens us many opportunities for private sector growth. That's something Seid is putting his money on. He is working to have a golf course and hotel built on Babeldaob.
"It's moving forward. We've secured some very good quality investors and a management company. We have expanded it now to include a 60-room boutique hotel. In (2006), we hope to start construction, we have the permit and I feel very confident."
Seid has learnt some hard lessons about investment in Palau and the region more broadly as he was a pivotal player in an ambitious initiative which faltered last year, Palau Micronesia Air. "It was a very difficult experience to go through," he says of its failure to operate in the longer term. "One good thing is we learned a lot, we know what to do and what not to do. I believe a truly regional airline is the best vision for Palau and the region, and we are hoping we can revive the airline some day in the future.
"The dream is still alive," he says.
It's not a bad analogy for the challenges facing Palau now-the need to match ambition and some big dreams with attention to the fine detail. The country's ability to do that, particularly between now and the end of the current Compact in 2009, will determine its long-term future for decades to come.
