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. According to the updated IMF forecasts from October 2021, GDP fell an estimated -8.7% in 2020 due to the outbreak of the COVID-19, and should follow a accelerated trend in 2021 (-19.7%) before standing to a ferm +14.9% in 2022 and +14.8% in 2023, 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 fiscal deficit equivalent to 13% of GDP was recorded in FY2020. Fiscal deficits equivalent to 24% of GDP in FY2021 and a further 11% in FY2022 were projected over the near-term (Asian Development Bank, 2021). As for inflation, it declined to 0.6% in 2019 and then to 0.7% in 2020, before reaching 1% in 2021. It is expected to stabilize around 1% in 2022 (IMF, 2022). 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, 2021). 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 12,210 in 2021). 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 boats (7.9% of all imports), Refined Petroleum (7.9%), cars (3.4%), as well as non-fillet Fresh Fish and Broadcasting Accessories. The country mainly exports scrapped vessels (59.3% of all exports in 2020), Computers (28.8%), Broadcasting Accessories and Office Machine Parts (OEC, 2022).

Palau's main clients are Turkey (59.3% of total exports in 2020), Japan (28.6%), Chinese Taipei (3.4%) and South Korea (2.2%), while the main suppliers are China (27.2%), the USA (20.2%), Taiwan (14%), and Japan with 13.9% (OEC, 2022). 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 2022 WTO data, in 2020, Palau exported just 13.1 million USD in goods and imported  89.3 million USD of goods, resulting in a negative trade balance for goods of 76.2 million USD. 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.