Top Sectors in Palau

Travel and Tourism in Palau

Tourism is Palau's main industry, focusing on scuba diving and snorkeling among the islands' rich marine environment, including the Floating Garden Islands to the west of Koror. Major scuba diving sites include German Channel and Blue Corner. The number of visitorsâ€”85% of whom came from Japan, Taiwan, and the U.S.â€”reached nearly 67,000, more than quadruple the level of a decade earlier. Tourism earned $67 million in foreign exchange for Palau, accounting for roughly half of GDP. However, arrivals from Asian countries dropped 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.

Services in Palau

The service sector dominates the Palauan economy, contributing more than 80% of GDP and employing three-quarters of the workforce. 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, $30 million per year, and is eligible to participate in more than 40 federal programs. The first grant of $142 million was made. Further annual payments in lesser amounts will be made through.

Palau - Key Economic Indicators

Exports and Imports

In 2023, Palau's exports were approximately $12 million, primarily consisting of marine products like tuna. On the other hand, the country imported around $200 million worth of goods, including food, machinery, fuels, and consumer goods. This resulted in a significant trade deficit of approximately $188 million, highlighting Palau's high dependence on imported goods.

Infrastructure

Palau's infrastructure includes around 60 kilometers of paved roads and key structures such as the Koror-Babeldaob Bridge, which is crucial for connectivity. Roman Tmetuchl International Airport serves as the main gateway for international tourists. In 2023, the government allocated about $30 million to improve transportation and public facilities, underscoring its commitment to enhancing infrastructure to support economic growth.

Balance of Trade

With exports totaling $12 million and imports at $200 million in 2023, Palau faces a substantial trade deficit of approximately $188 million. This trade imbalance is partly mitigated by foreign aid and remittances, which amounted to around $50 million. These financial inflows help to cushion the economy against the significant outflow of resources due to imports.

Fiscal Policy

In 2023, the Palauan government spent approximately $150 million on various sectors, including public services, infrastructure projects, social programs, and education. The fiscal deficit stood at around 5% of GDP, roughly $10 million. Tax revenue was estimated at $40 million, with ongoing efforts to enhance tax collection efficiency and broaden the tax base to reduce reliance on foreign aid.

Monetary Policy

Palau uses the US dollar as its currency, which helps maintain price stability and simplifies international trade. The inflation rate was kept low at around 2% in 2023 due to the stability provided by the US dollar. Interest rates in Palau are influenced by US Federal Reserve policies, as the country does not have a central bank to conduct independent monetary policy.

Trade Agreements

Palau actively participates in regional trade agreements such as the Pacific Island Countries Trade Agreement (PICTA) and has bilateral trade agreements with neighboring countries to promote economic cooperation. Additionally, Palau receives substantial financial assistance from the United States under the Compact of Free Association, which provides approximately $70 million annually. This aid is crucial for supporting Palau's economic development and maintaining trade balances.

Environmental Regulations

Environmental conservation is a priority for Palau, with over 20% of its marine and terrestrial areas designated as protected. Strict fishing quotas and licensing regulations are in place to prevent overfishing and protect marine biodiversity. The government promotes sustainable tourism practices to preserve the natural environment. Furthermore, Palau is investing in renewable energy, aiming to generate 45% of its energy from renewable sources by 2025, with current investments totaling $10 million in solar and wind projects.

Tax System in Palau

Capital Gains Tax: Palau does not currently impose a capital gains tax on profits from investments, including the sale of assets such as stocks, bonds, and real estate.
Corporate Tax Rate: The corporate tax rate in Palau is set at 4% on gross revenue for most businesses. This is part of the Gross Revenue Tax (GRT) system rather than a traditional corporate income tax.
Sales Tax: Palau does not have a general sales tax or value-added tax (VAT) on goods and services. However, there are specific taxes on certain goods such as alcohol, tobacco, and sugar-sweetened beverages.
Property Tax: Palau does not impose a property tax on real estate owned by individuals or businesses.
Payroll Tax: Payroll taxes in Palau include contributions to social security and health insurance. The Social Security tax rate is 6% for both employers and employees, totaling 12%.
Tax Deductions and Credits: Palau offers various tax deductions and credits to reduce tax liability for individuals and businesses. These may include deductions for certain business expenses and credits for specific investments.
Tax Compliance: Tax compliance in Palau involves the efficiency of tax collection and enforcement mechanisms. The government has been working to improve tax administration and reduce tax evasion to ensure better compliance.
Tax Burden: The overall tax burden in Palau represents the total amount of taxes paid by individuals and businesses relative to their income or profits. With relatively low tax rates and limited types of taxes, Palau maintains a relatively low tax burden compared to many other countries.

Economy of Palau