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Economic Overview

Palau is among the most performing small insular countries of the Pacific, but it remains vulnerable to external economic shocks, the impact of climate change, and other environmental and weather-related risks. Since gaining independence, Palau has operated under a Compact of Free Association (COFA) with the United States, which expired in 2023. A new COFA agreement was approved by the U.S. on March 9, 2024, and will deliver a total of USD 6.5 billion in assistance to the three North Pacific countries (of which USD 889 million to Palau) over the next 20 years starting in FY24. Palau emerged from the pandemic grappling with significant output loss, high external debt, and inflation. Following a 2% contraction in FY2022, economic activity is estimated to have stagnated, growing by only 0.8% in FY2023. The decline in construction activity, due to delays in new infrastructure projects, offset a modest increase in tourism. Despite fully lifting border restrictions in July 2022, the recovery in the tourism sector has been slow, reflecting limited flights, stricter travel restrictions in Palau's East Asian source markets, and the appreciation of the U.S. dollar. Output is anticipated to pick up pace, reaching 12.4 percent growth in FY2024 (IMF).

After peaking at 13.1% in FY2020, the fiscal deficit declined to 3.2% in FY2022, largely due to the expiration of pandemic support measures. The fiscal deficit was projected to turn into a small surplus (0.3% of GDP) in FY2023, driven by higher tax revenues, partly from the early gains of tax reform, with PGST alone yielding about 6.5% of GDP in its first year. Expenditure is estimated to have significantly decreased (by 17.5% of GDP), primarily due to a 15.4% decline in project grants, including those related to the expiration of support from the US CARES Act. The FY2024 budget, recently passed by the Palau National Congress (OEK), includes conservative tax revenue projections and envisions a broadly flat expenditure envelope (excluding expenditures financed through non-Compact grants). It also accommodates an additional 7% increase in the public sector hourly wage. With the full-year impact of the tax reform and the anticipated recovery in economic activity, tax revenues are projected to rise. Furthermore, higher budgetary grants under CRA-23 are expected to provide a further boost, while expenditure is projected to remain contained. As a result, the fiscal surplus is projected to increase to 2.0% of GDP, up from the 0.3% of GDP projected for FY2023. Meanwhile, inflation surged to historical highs, reaching 13% in both FY2022 and FY2023. This rise was driven by elevated import prices for food and fuel, influenced by Russia's conflict in Ukraine and global disruptions in supply chains. Additionally, the introduction of the Palau Goods and Services Tax (PGST) and one-off adjustments in utility tariffs contributed to this increase. In FY2024, inflation is expected to ease to 5.9% as the effects of one-time price hikes diminish (IMF).

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 15,572 in 2022 as per the World Bank). Around 70% of Palau's population resides in Koror, the center of the tourism industry. The 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.

Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD)
GDP (Constant Prices, Annual % Change) -2.00.812.411.93.5
GDP per Capita (USD) 13,94115,08517,44119,89321,010
General Government Gross Debt (in % of GDP) 68.485.580.067.059.1
Inflation Rate (%)
Current Account (billions USD) -0.14-0.11-0.08-0.08-0.06
Current Account (in % of GDP) -54.7-40.8-26.4-21.3-16.3

Source: IMF – World Economic Outlook Database , October 2021

Country Risk

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Main Sectors of Industry

Breakdown of Economic Activity By Sector Agriculture Industry Services
Value Added (in % of GDP) 3.9 12.1 73.2
Value Added (Annual % Change) -2.3 -3.4 -14.9

Source: World Bank - Latest available data.

Monetary Indicators 20162017201820192020
Euro (EUR) - Average Annual Exchange Rate For 1 USD 0.940.890.850.890.88

Source: World Bank - Latest available data.



Foreign Trade

Palau is open to foreign trade, which represents roughly 66% of the GDP (World Bank, latest data available). Palau's export base and production capacity are limited, rendering it highly susceptible to external shocks. The main imported goods are refined petroleum (21.1%), special-purpose ships (15.1%), recreational boats (6.5%), iron structures (2.5%), and electric batteries (2.2%). The country mainly exports recreational boats (29.5%), computers (24.2%), passenger and cargo ships (15.6%), office machine parts (8.0%), and scrap iron (5.7% - data OEC 2022).

Palau's main suppliers are China (70.2%), the United States (27.3%), South Korea (26.3%), Japan (16.4%), and Italy (11.5%); whereas the main clients are Greece (27.2%), Japan (26.3%), France (17.7%), Chinese Taipei (7.8%), and the United States (7.0% - data OEC 2022). 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. However, the lack of skilled labor force, the absence of financial regulations, and bureaucratic delays are limitations to the development of trade in the country.

Without natural resources, the archipelago has a large structural trade deficit, which is expected to persist in the coming years. According to WTO data, Palau exported just USD 3 million in goods and imported USD 210 million of goods in 2022. Concerning services, exports stood at USD 18 million against 48 million in imports.

Foreign Trade Values 20192020202120222023
Imports of Goods (million USD) 193149156207242
Exports of Goods (million USD) 47232
Imports of Services (million USD) 63554848n/a
Exports of Services (million USD) 98491018n/a

Source: World Trade Organisation (WTO) ; Latest available data

Foreign Trade Indicators 20182019202020212022
Trade Balance (million USD) -138-141-150-127-156
Trade Balance (Including Service) (million USD) -93-107-154-159-192

Source: World Bank ; Latest available data

Foreign Trade Forecasts 20232024 (e)2025 (e)2026 (e)2027 (e)
Volume of exports of goods and services (Annual % change) 87.975.126.714.73.7
Volume of imports of goods and services (Annual % change)

Source: IMF, World Economic Outlook ; Latest available data

Note: (e) Estimated Data