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By Nazario Rodriguez Jr.

SAIPAN, CNMI (Mariana Variety, Dec. 13) - Palau’s national economy continues to expand at a healthy pace, according to a team from the International Monetary Fund [IMF] that has just concluded a weeklong regular assessment visit to the country from November 29 to December 6.

Two members of the team, Senior Economist of the Asia and Pacific Department Wafa Fahmi Abdelati and Division 9 Economist Erik Lueth, held a press briefing on Wednesday at the Palau Pacific Resort regarding the result of the IMF visit.

Two others, Wilhelmina Manalac, alternate executive director and representative of Palau to the executive board of the IMF and Andrew Wilford, banking supervision advisor of the Pacific Financial Technical Assistance Center, have earlier left the country after the so-called bilateral discussions with each member country.

The visit is meant to help bridge the two-year gap following the first visit in November 2005 and the next to be held on November 2007.

The IMF officials said that inflationary pressures remain modest but power shortages and fall-out from the failed Pacific Savings Bank (PSB) pose downside risks.

"Most indicators suggest that economic activity expanded by 5 to 6 percent in fiscal year 2006 and that inflation, while slightly elevated at 4.5 percent is on a downward trend," a statement said.

It explained that in principle, this growth momentum should carry over into FY07, aided by robust global growth and large private and public investment projects.

The IMF officials said that the power shortages could constrain growth, particularly in the tourism sector if not addressed properly.

They also said that the fallout of PSB could have a significant impact on economic activity.

"To support growth in the coming years the team saw a need to revise foreign investment legislation and enforcement in a way that prevents special interests from setting up ‘fronts,’ thereby evading taxation," the press statement said.

It said that preliminary data indicate that fiscal consolidation continues but revenue performance could be strengthened.

According, fiscal deficit in 2006 was 1.25 percent of GDP or two percentage points of GDP lower than in 2005.

The IMF officials said, however, that every major tax recorded either declining or stagnant revenues in 2006, despite solid increases in the underlying tax bases and no changes in the tax laws, which they said points the need to strengthen tax administration.

They suggested the introduction of taxpayer identification numbers and improving the audit and penalty system.

Abdelati said that at present, there is no individual TIN but only for businesses.

She said that economic growth could be much lower last year compared to the last three years if proper legislation could be done.

"Some business are to be facilitated and some are to be restricted," she said.

Abdelati said, "you cannot get foreign revenues if local revenue is not improved.

The officials said that the absence of revenue measures in the current FY 2007 budget is hard to reconcile with Palau’s declared goal of financial self-reliance over the medium-term.

Asked regarding the continuing budget resolution that had been for the last three years, Abdelati said this issue was not discussed during their meeting with the public and private sectors.

The team met with Finance Minister Elbuchel Sadang, members of the OEK, private sector representatives and senior government officials, whom they expressed appreciation for the generous hospitality they received and the frank discussions.

The IMF officials said that the amount of bad assets at PSB exceeds deposits by a large margin and unless the government decides to cover the losses of the bank, a significant amount of deposits may not be repaid.

The team reiterated the need to pass financial legislation that would provide the FIC with a mandate to better protect depositors in the future.

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