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$12.8 million deficit calls for reduced spending

By Bernadette Carreon Mariana HAGATNA Guam (Marianas Business Journal, April. 11, 2011) – Palau has accumulated an operating deficit of more than US$12.8 million, according to an independent auditor's latest audit on the government budget covering the period ending Sept. 30, 2009.

The auditing company, Deloitte and Touche, recommended that the government gradually cut expenditures and manage its deficit by reducing the budget ceiling in fiscal years 2010 and 2011.

The U.S. government has agreed to extend assistance to enable Palau to reduce the government and retire arrears in fiscal 2011 and 2012, with grants amounting to US$10 million and US$5 million, respectively, to be available in each year.

Palau is currently negotiating with the Asian Development Bank for a low-interest concession loan to ease the burden of prior year debts. Palau is seeking a manageable payment schedule to be spread over several years. Palau has incurred more than US$10 million in debts.

The audit report also noted that the overall costs of governmental activities decreased in the current year by US$5.1 million, or 5 percent, compared to previous year.

Besides depreciation expense associated with the republic's infrastructure assets, education and health-related expenses accounted for US$21.7 million (or 21.6 percent) of total expenses in the current year as compared with US$24 million (or 22.7 percent) in the prior year, which reflects Palau's highest priorities in terms of expenditure appropriations.

The audit also cited a recent federally funded study showing that Palau's financial health suffered a low score with a rating below most other island jurisdiction islands in the Micronesian region.

Palau scored 3.45, placing it third lowest in the region for fiscal year ending 2009.

Palau did not fare well in the intergenerational equity indicator which measures whether the government lived within its means; level of unrestricted net assets which is an indication of the amount of unexpended and available resources Palau has at a point in time to fund emergencies and shortfall.

The decline in Palau's financial health first occurred in fiscal 2008 due to the economic crisis and the drop in the fair value of investments.

The result also indicated that Palau receives more than half of its revenue from sources beyond its direct control. "For the year ended Sept. 30, 2009, Palau had direct control over 44.9 percent of its revenues. This ratio indicates Palau has some exposure, as do most governments, to financial difficulties due to reliance on non-controlled revenue (55.1 percent)," Crawford & Associates, author of the study, reported.

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