Palau

Key trends and development challenges

The Republic of Palau is an independent Micronesian country comprising 340 islands, eight of which are inhabited. With a GDP of $322 million, Palau is the fourth-smallest economy in the Pacific and one of the smallest sovereign nations in the world. Palau has a population of 17,707, resulting in a GDP per capita of $18,185 — ranking second in the Pacific. At 0.786, Palau’s Human Development Index score ranks 84th out of 193 countries.

Palau has the fifth-highest official development assistance (ODA) to GDP ratio in the Pacific, with aid accounting for 12% of GDP. In a global context, Palau remains among the more aid-reliant countries in the world, with its aid as a share of GDP ranking 22nd among 125 developing countries. The Palau government’s development agenda focuses on the sustainable management of its marine resources. Palau’s tourism-dependent economy was among the hardest hit in the Pacific by the pandemic, with visitor arrivals collapsing from around 100,000 pre-Covid to just 3,412 in 2021. By 2024, arrivals had recovered to only 52,155, with pre-pandemic levels not expected to return until 2028. The government’s debt-to-GDP ratio surged from 30% in 2018 to a peak of 79% in 2023 as it borrowed to fund operations through the pandemic, since easing to an estimated 69% in 2024.

Between 2008 and 2024, annual official development finance (ODF) disbursements to Palau — including grants, loans, and other forms of assistance — averaged $66 million. The share of loans in Palau’s total incoming development assistance has increased dramatically over the past decade. Between 2008 and 2013, loans made up around 7% of incoming funds. From 2014 onwards, loans have accounted for around a third of Palau’s total incoming development assistance. The International Monetary Fund ranks Palau’s risk of debt distress as low.

Development partners and sector trends

Between 2008 and 2024, the vast majority of ODF support to Palau came from five development partners, led by the United States (28%), Japan (23%), the Asian Development Bank (19%), Taiwan (19%), and Australia (7%).

In March 2024, the United States approved a renewed 20-year Compact of Free Association (COFA), providing Palau with around $889 million in economic assistance over FY2024–43, alongside continued disbursements from its Compact trust fund.

Beyond COFA-supported projects funded by the United States, both Australia and Japan financed key initiatives in Palau in 2023. Australia contributed $4 million to support the construction of a solar facility in Ngatpang, while Japan provided $5.4 million in budget support. ODF disbursements were largely consistent with regional trends in terms of sector distribution. The government and civil society sector featured prominently, accounting for 37% of incoming financing. Palau also sees higher-than-average spending in the water, sanitation, and energy sectors.

Since 2008, Palau has received $81 million in development financing with a “principal” focus on either climate adaptation or mitigation. Over this same period, the country has seen $133 million in development financing with a “significant” focus on climate outcomes. Over the past half-decade, Palau has seen a gradual rise in climate-targeting projects. As a share of total ODF received by Palau, “principal” climate projects made up 7% of total spending, below the regional average of 8%. Spending on “significant” climate projects in Palau made up 12% of incoming funds, below the regional average of 17%.

Between 2008 and 2024, Palau received $6 million in development financing with a “principal” focus on gender equality, and $188 million in development financing with a “significant” focus on gender equality. “Principal” gender equality financing constituted less than 1% of ODF received by the country, below the regional average of 2%. “Significant” marked gender financing made up 17% of incoming ODF, also below the regional average of 23%. The largest project directly targeting gender equality in Palau was the multi-year Pacific Women Shaping Pacific Development program, funded by Australia.