TOURISM SECTOR STUDY
1. ECONOMIC INDICATORS OF TOURISM
1.1 Key Economic Indicators
1999 2000 2001 2002 2003 2004
Population (‘000) a 18.7 19.1 19.5 20.0 20.3 20.7
Population Growth (%)a 2.1 2.2 2.1 2.3 1.6 2.0
GDP (US$mn)b 113.5 117.2 120.8 109.5 123.9 127.0
Real GDP Growth (%)a (5.4) 0.3 4.5 1.1 1.5 2.0
GDP/capita (US$)a 6,064 6,127 6,185 5,482 6,103
Tourism Contribution to GDP (%)c 49.0
Balance of Visible Trade (US$mn) a (92.4) (111.5) (86.7) (77.2)
Inflation Rate (%)b 2.2 3.0 (1.3) 0.4 0.3 0.5
Exchange Rate Palau uses US$
a –Census 2000 and Government statistics 1999, 2001 & 2002; Pacific island projections, SPC, 2003-2004.
b – Market Information & Analysis Section, Australian Department of Foreign Affairs & Trade, using data from the
Australian Bureau of Statistics and various international sources; 2003 subject to revision; 2004 IMF forecast;
data relate to financial years starting 1 October.
c. SPTO Regional Tourism Strategy for the South and Central Pacific
Palau has enjoyed relative steady economic growth since 1993. The fluctuation in Gross
Domestic Product (GDP) experienced after 1998 is a reflection of the susceptibility of the
economy to external shocks like the Asian financial crisis, which constrained the growth in
tourism in those years.
The latest United Nations Development Programme (UNDP) figures indicate that Palau’s
economy in 2002 had dropped to the level of about 1996 when the national output was
$108.2m. Per capita GDP in 2003 saw some recovery reaching US$6,103, considerably in
excess of its regional neighbours, except for Guam and the Marianas.
1.3 Balance of Payments
Exports – mainly in the form of fish, copra and garments – run at between US$10 and 20mn
a year while imports are of the order of US$100mn. Palau’s trade imbalance is adequately
covered by grants from the United States of America (US) under the Compact Agreement
and other countries like Taiwan, plus receipts from tourism and other exports.
After independence in 1994 the country has continued to use the US dollar as its currency.
As part of the US monetary system, its economy is shielded from foreign exchange risk
arising from currency fluctuations.
In 2000 the size of the labour force was 9,607 of which 9,383 or 98% were employed and
224 or 2% were unemployed. Of those employed 47% were born in Palau and 53% were
born elsewhere or foreign workers. Compared to 1990 the proportion of foreign workers had
increased significantly from 34%. The figures show how critical foreign workers have
become to Palau’s labour supply. Most of the foreigners working in Palau in 2000 came from
the Philippines (61.5%) and China (14.9%). In 1995 the tourism sector provided
employment for over 1,000 in 93 tourism-related businesses but the present day figure is
considerably higher, reflecting its significant contribution to Palau’s economy (49%).
1.5 Construction Costs
Most of the building materials are imported resulting in high cost of hotels and resorts. To
offset this government has kept import duties at very levels, mainly 3%. Construction cost
for an up-market resort is estimated at US$100,000 per room
1.6 Operating Costs
Most goods consumed are imported and attract duty generally of 3%. Average annual wage
rate in the tourism services sector was US$7,784 in 2001, a level that is thought not to
have risen significantly in recent years. Palau’s statutory minimum wage for the private
sector is US$2.50 an hour. Fuel prices are in line with the South Pacific regional average at
US$0.59 for motor gasoline and US$0.62 for diesel (end 2003 prices).
1.7 Local Skills Base
Palau has a very small labour force and the skills base is limited. To make up for this
situation Palau has a labour policy that allows for the recruitment of foreign workers to
provide skills not readily available locally. Foreign businesses are required to pay a fee of
US$500 a year for every foreign worker employed by their company. The Palau Community
College provides two-year vocational and tertiary courses including in hospitality.
1.8 Infrastructure and Services
Upon gaining independence the government placed a lot of emphasis on developing the
country’s infrastructure with grants from the US under the Compact Agreement, and from
other countries. The key areas of development that were prioritised were:
• airport development,
• communications and
• general infrastructure.
Consequently, Palau’s infrastructure is quite well developed compared to other Micronesian
States. Apart from the Babeldaob road improvement, noted below, other major
infrastructure projects include a new airport terminal and improved power, water, sewerage
and telecommunication systems.
Palau International Airport on Koror has a runway of up to 2,437metres capable of handling
mid-size passenger jet aircraft such as the Boeing 737 and 757. Most visitors to Palau arrive
through Guam on Continental Airlines, which also operates a service to/from the Philippines.
Other airlines servicing Palau are Far Eastern Air Transport (to/from Taiwan), Palau
Transpacific Airlines and Japan Airlines, which also run charter flights from Osaka. There are
also charter flights to Palau currently from Taiwan, Philippines and South Korea. A group of
local investors are working on establishing a Palau-based airline to service to fly between
Palau and SE Asian destinations like Philippines. There are two unpaved domestic airports
on Angaur and Peleliu.
The main port is Malakal Harbour. It is capable of handling large container vessels. There is
little domestic shipping.
Telecommunication and Postal services
Worldwide telephone, facsimile, telex, IDD, internet services and operator-assisted dialling
services are available. Internet cafes are available in downtown Koror.
Utilities and Medical Facilities
The electricity supply is the standard US voltage simple phase 60 cycles 115/230 volts AC.
It is generated by imported petroleum products at two power plants. Supply is throughout
the country. Palau has three private medical clinics and a public hospital. A modern
decompression chamber is available and staffed by certified operators.
Tourism is however based on Koror where much of the country’s infrastructure and
economic activity are concentrated. This puts huge pressure on the narrow roads that were
not designed for heavy traffic. The completion of the Babeldaob road, slated for 2005 but
likely 2006, will lead to further tourism development and will relieve pressure on the
overcrowded capital, Koror.
2. TOURISM STATUS AND TRENDS
2.1 The Tourism Offer
Palau has more than 200 islands and islets, but only a few are inhabited. Its location in
relation to SE Asia, Japan and Guam make it an accessible destination for these main
markets. The nearest countries are the Philippines (550 miles to the west), Guam (815
miles to the northeast) and Papua New Guinea (PNG) (410 miles to the south). Regular
scheduled flights connect Koror, Palau’s capital to Guam, Tokyo, Taipei, and Manila.
The country is a relatively unknown and untouched tourist destination. It appeals as an
exotic place waiting to be discovered. The island has been controlled by the Spanish,
Germans, Japanese & the US.
Palau is one of the world’s top diving destinations, and Rock Islands is one of the most
pristine marine ecosystems in the Pacific. Lagoons & coral reefs offering snorkelling in some
of the most tranquil waters in the Pacific surround the islands. World War II wreckage
sites that lie just south of Rock Islands are becoming areas of interest to tourists especially
those from Japan.
Palau’s tourism plant and activities are concentrated in Koror the capital. The Palau Visitors
Authority (PVA) has classified the visitor plant into three main types: resorts, hotels and
motels. Most establishments on the outer islands tend to be small all-purpose facilities.
The South Pacific Tourism Organisation (SPTO) states that in 1998 Palau had 38 tourism
accommodation operations with an average of 44.4 rooms producing a total current room
stock of 1,687. Of this total, hotel room inventory accounted for almost two-thirds, having
increased rapidly over the past decade: from 573 in 1993 to 709 in 1996 and 1,049 in
2002. Of total hotel capacity, 425 rooms or 40% are considered world-class and regionally
competitive. This inventory is contained in three hotels: Palau Pacific Resort with 160
rooms, Palasia Hotel with 165 rooms, and the new Papago International Resort with 100
rooms. There is considerable foreign investment and operation in the hotel sector, including
the Japanese Tokyu Group-managed Pan Pacific Resort.
2.2 Market Trends
Blessed by its location relative to expanding SE Asian markets, good access by air, and its
attraction as one of the world’s top diving destination, Palau has experienced a steady
growth of 14% in tourism arrivals in the last 5 years, though it suffered as all destinations
did from the attacks on the US mainland in 2001. Palau has the highest level of visitor
arrivals compared to other states in Micronesia. Most of the tourists come from Taiwan,
Japan and the US. The increase is largely due to a near threefold growth in arrivals from
Taiwan while Japanese arrivals were maintained at above 20,000.
TABLE 1 Tourist Arrivals 1999-2003
1999 2000 2001 2002 2003
Japan 22,087 21,708 22,395 23,748 21,401
Taiwan 10,936 14,122 12,476 15,819 27,857
US 5,587 6,704 5,375 4,774 4,291
Other Asian countries 4,832 5,907 5,764 5,403 1,790
Europe 1,418 974 930 834 856
Australia 402 347 430 403 485
Other 10,231 7,970 6,741 7,579 6,648
Total 55,493 57,732 54,111 58,560 63,328
Visitor arrivals for the first quarter of 2004 increased by 34% compared to 2003 suggesting
that the growth in the last 5 years is continuing. A very strong growth in visitor arrivals
from Taiwan was the main contributing factor.
A visitor survey conducted in 2001 showed the following major findings:
Nearly 70% of visitors to Palau are divers. Other leisure travellers account
for 13.6 %, and only 12% of all visitors were on business.
Over 54% of all visitors stayed 1-4 days, about a quarter stayed 5-6 days,
slightly over 17 percent 7-14 days and just 3.5% 15 days or more.
Nearly 75% of all visitors to Palau were first-time visitors, a little less than
12% were second-time visitors and the remainder had visited three or
There is no major seasonal fluctuation in visitor arrivals to Palau. However, January to June
tend to be the busiest tourist season as this is when most divers come to Palau. These
months are generally the best for weather and fish action.
Estimate of Expenditure
Based on an average spending per visitor of US$1,129 total visitor expenditure in 2002 was
estimated at US$66.1m. This level would have increased to US$71.4m in 2003 given that
visitor arrivals grew by 8% compared to 2002. It makes tourism Palau’s leading private
sector income source and a major contributor to GDP.
3. INVESTMENT OPPORTUNITIES IN TOURISM
In harnessing the tourism potential of the country the government is committed to
preserving the vital elements of the Palauan way of life and its pristine natural environment.
In consequence, the focus is on encouraging the development of high–income, small-
volume tourism. Upmarket, integrated resorts are a favoured form of new development –
these may be totally integrated, incorporating for example restaurants, golf courses and
diving etc activities.
Unlike its northern neighbours, Guam and the Marianas, Palau does not have the capacity
for mass markets. Its comparative advantage lies in strengthening its position as a specialty
market by attracting smaller volumes of higher per capita spenders.
It is also accepted that for tourism to become a greater source of income, an infusion of
new capital and labour is required. Investment opportunities exist in these areas:
World War II Historic tourism
Hotel & resort development
Small commercial cruising
4. OPERATING ENVIRONMENT FOR INVESTMENT
4.1 Investment Framework
The Government of Palau is committed to introducing policies designed to stimulate a free
and vibrant market economy. It recognizes the role of, and encourages, foreign investment,
provided such investment is compatible with the islands’ cultural and environmental
heritage. Foreign investors require a Foreign Investment Approval Certificate (FIAC), and
are subject to one of two key stipulations:
• minimum foreign investment of US$0.5mn, OR
• minimum of 20% Palauans in workforce.
Tourism has played an important role in the development of the economy of Palau since
independence, being the largest earner of foreign exchange. The majority of approved
FIACs in recent years have been for hotels/resorts. Tourism is regarded as the key sector
that will determine the future prosperity and self-sufficiency of this island nation.
Accordingly government’s economic strategy is geared towards promoting the expansion of
tourism to supplement the benefits the country receives under the Compact of Free
Association it has with the US. A number of tourism-related sub-sectors, however, are
reserved for investment by local citizens i.e. all land and water transportation, guides of all
types, travel and tour agencies, while if a foreign investor wishes to invest in operations
such as handicrafts and gift shops, bar services not associated with hotels & restaurants,
and equipment rentals (including equipment for the purpose of tourism) he is required to do
so in joint venture with local citizen(s).
Foreign investors cannot buy land in Palau. Only citizens of Palau and corporations wholly
owned by Palauans may acquire title to land. However foreigners may lease land from
Palauan owners up to 50 years.
4.2 Investment Incentives
Palau prides itself as “one of the lowest taxed business environment in the Asia-Pacific
region.” The primary incentive for investment in the Republic is that there is no corporate
tax, nor is there any taxation of income for business owners. The main taxes are:
Gross revenue tax (GRS) of 4%;
Wages & salary tax of 6% for the first US$8,000 and 12% thereafter; and
Most import items are levied at a 3% ad valorem rate of duty though tax rates vary
depending on the product.
There is no limit on capital/profit transfers.
Palau is a beneficiary of the Compact of Free Association, which allows business access to
Also any foreign investor who constructs a facility in Palau may be entitled to a refund of
taxes paid equal to the costs of off-site roads, water, power or sewer infrastructure
improvements carried out to service such facility. The amount refunded in any single tax
year shall not exceed 50% of the amount paid in that tax year.
4.3 Access to Finance
The banking system in Palau is well established with 12 commercial banks. Many of these
are representative offices of US or Asian banking corporations e.g.
Bank of Hawaii;
Bank of Guam;
Allied Boston Bank;
Asian International Bank of Commerce.
International Financial Institutions
Palau as a signatory to the Cotonou Agreement has access to the facilities of the European
Investment Bank (EIB). As a member of the World Bank, the facilities of the International
Finance Corporation (IFC) would be available for projects in this country.
APPENDIX ONE: TOURIST ACCOMMODATION ON PALAU
NB number of rooms/units given in parentheses where available
The Carolines Resort (7 units)
Carp Island Resort (25 rooms)
North Beach Cottages (5 units)
Palau Pacific Resort (160 rooms)
Storyboard Beach Resort (6 units)
Papago International Resort (100 rooms)
Airai View Hotel (91 rooms).
Cocoro Hotel (48 rooms).
Hotel Nikko Palau
Malakal Central Hotel (18 rooms).
New Koror Hotel
Palasia Hotel (165 rooms).
Palau Hotel (35 rooms).
Palau Marine Clubhouse (12 rooms).
Palau Marina Hotel (20 rooms).
The Penthouse Hotel (12 rooms).
Sunrise Villa Hotel (21 rooms).
VIP Guest Hotel Palau (22 rooms).
Waterfront Villa (22 rooms).
West Plaza Coral Reef Hotel (14 rooms).
APPENDIX TWO: INTERNET RESOURCES ON PALAU
Palau Visitor Authority
Address: P.O. Box 256, Koror, Republic of Palau 96940.
Tel: (680) 488-2793/1930
Fax: (680) 488-1453
Economic policy & performance, Financial infrastructure & regulatory
Key indicators of developing Asian and Pacific countries
National Institutions, General Information, Political Information, Information
from Encyclopaedias, Tourist Information, Information on Human Rights, Other
General information, tourism profile, (March 2003)
Geography, people, government, economy (December 2004)
Communications Policy Statement & Facilities
Tourism attractions, tourism accommodation