Economic Overview

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Palau is among the most performing small insular countries of Pacific, but it remains vulnerable to external economic shocks, the impact of climate change, and other environmental and weather-related risks. After becoming positive again, economic growth slowed down to -0.7% in 2019, due to a slump in tourism and then to -13.4% in 2021 due to the outbreak of the COVID-19. According to the latest updated IMF forecasts, GDP fell an estimated -2.8% in 2022 and should strongly come back in 2023 at +12.3% before standing to a ferm +9.1% in 2024, subject to the post-pandemic global economic recovery and driven by a projected boost from a recovery in tourism and increase in capital expenditures through the Compact funds from the United States.

The overall fiscal balance remained in surplus in 2019 at 5.5% (IMF) primarily owing to low capital expenditure. Nevertheless, with an increase in spending under the Coronavirus Relief One-Stop Shop Program to mitigate the pandemic’s impacts on the private sector, a current account deficit equivalent to 41,7% of GDP was recorded in FY2020. Current account deficits equivalent to 28.5% of GDP in 2021 and 43.2% in 2022 were recorded. 34.1% and 27.6% are also projected in 2023 and 2024 (IMF, 2023). As for inflation, it went from 0.7% in 2020 to 0.5% in 2021 before increasing sharpely to 12.2% in 2022. It is expected to reach 8.1% in 2023 and 4.2% in 2024 (IMF, 2023). Palau's economy consists of tourism and other services such as trade, subsistence agriculture, and fishing. The service sector dominates the economy, contributing to nearly 80% of GDP (World Bank, 2023). One of the government's main responsibilities is administering external assistance. In fact, Palau relies heavily on financial assistance from the US: under the Compact of Free Association with the US that took effect after the end of the UN trusteeship on 1 October 1994, the US provided Palau with roughly USD 700 million in aid for the first 15 years and in return had restricted access to its land and waterways for strategic purposes. The US continues to be the main contributor. In addition, the country relies on aid from the European Union, since Palau belongs to the category of the ACP countries (African, Caribbean and Pacific Group of States), and benefits from European Development Program funds. Recently the government has taken steps to diversify its economic activity in order to reduce its dependence on foreign aid, which represents about 20% of GDP and funds one-half of public expenditure.

The archipelago of Palau has one of the highest living standards in the Pacific. The population enjoys a per capita income roughly double that of the Philippines and much higher than Micronesia (USD 13 785 in 2022). Around 70% of Palau's population resides in Koror, the center of the tourism industry. Unemployment rate is very low (1.7% according to government statistics). The country's main challenges are to strengthen its resilience and ensure its medium-term growth.

Foreign Trade

Palau is open to foreign trade with merchandise trade representing 66% of the GDP in 2020 (World Bank, 2022). One of the characteristics of Palauan economy is the high dependency on imports of good and services. The main imported goods are led by Refined Petroleum (13.3% of all imports), boat propellers (4.25%), Iron structures (4.03%) and cars (3.1%). The country mainly exports computers (37.1% of all exports in 2021), scrapped vessels (15.1%), Recreational Boats (11.7%) and Scrap Iron with 9.32% (OEC, 2023).

Palau's main clients are Japan (34.2% of total exports in 2021), Chinese Taipei (15.8%), Turkey (15.5%) and Italy (11.7%), while the main suppliers are China (33.7%), the USA (21%), South Korea (12%) and Japan with 8.3% (OEC, 2023). Palau is a member of the Pacific Island Countries Trade Agreement (PICTA).

Without natural resources, the archipelago has a large structural trade deficit, which is expected to persist in the coming years. According to 2023 WTO data, Palau exported just 2 million USD in goods and imported 156 million USD of goods in 2021, resulting in a negative trade balance for goods of 132 million USD taken services into account. The country wishes to facilitate international trade. Customs duties are relatively low (with the exception of alcohol and cigarettes) and there are few non-tariff trade barriers in the country. However, the lack of skilled labour force, the absence of financial regulations and bureaucratic delays are limitations to the development of trade in the country.