- Palau's economic recovery is underway with an improving fiscal balance, declining debt, and well-contained inflation, though debt is still high. The growth outlook remains robust despite exposure to global uncertainty and extreme weather events.
- Policy priorities include further reducing debt, while improving tax administration following the successful tax reform, and managing fiscal risks, particularly through the swift implementation of pension reforms. Enhanced financial oversight, vigilant management of risks arising from digital initiatives, and tailored reforms to address challenges in financial intermediation and the payment system are important for supporting financial stability and development.
- Achieving high and sustained growth will require continued efforts to diversify the economy, strengthen capacity building, promote resilience-enhancing investments, attract skilled labor, and foster foreign investment that benefits the domestic economy.
Washington, DC: On January 26, 2026, the Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for the Republic of Palau. [1] The authorities have consented to the publication of the Staff Report prepared for this consultation. [2]
Palau's economy has rebounded strongly following a delayed post-pandemic recovery, underpinned by rising tourism arrivals and robust construction activity, as well as improved confidence and fiscal space. Building on a 12 percent post-pandemic growth rebound in FY2024, growth is estimated to have remained solid at 6.7 percent in FY2025, supported by favorable developments in tourism and construction. Inflation declined to 0.2 percent in FY2025, reflecting lower commodity prices and reduced domestic utility costs.
The outlook remains robust, supported by tourism and construction. Growth is projected at 4.1 percent in FY2026, with real GDP expected to surpass its pre-pandemic level. Inflation is anticipated to rise moderately in the near term due to higher global food prices, before moderating to around 2 percent over the medium term.
Uncertainty remains high, with risks tilted to the downside. Spillovers from geopolitical tensions and global policy uncertainty could delay Palau's full tourism recovery, increase commodity price volatility, disrupt foreign investments, and affect donor support. Domestically, Palau could face potential risks arising from emerging digital initiatives and remains vulnerable to climate-related shocks.
Executive Board Assessment [3]
Executive Directors welcomed the ongoing economic recovery and the renewed Compact Review Agreement (CRA‑23) with the United States, which has significantly enhanced fiscal resources and supported debt reduction. Directors encouraged the authorities to maintain prudent policies and sustain reform momentum to secure a durable economic recovery while addressing long‑term growth bottlenecks and prepare for climate shocks.
Directors commended the authorities for their commitment to prudent fiscal policies and decisive reform efforts, including the continuing work to modernize the tax system, building on the successful implementation of tax reform in 2023. They encouraged the timely finalization and effective implementation of fiscal and debt strategies, with priority given to further debt reduction, improving the efficiency of public spending, advancing resilience‑enhancing investments, and strengthening revenue mobilization through improving tax administration. Directors also underscored the importance of strengthening fiscal risk management, particularly through the swift implementation of pension reforms and measures to enhance SOE oversight and governance.
Directors recommended enhancing financial sector resilience by strengthening financial supervision and regulation—particularly by bolstering the capacity of the Financial Institutions Commission, enhancing supervision of the National Development Bank of Palau, and updating the legal and regulatory framework to reflect the system's growing complexity. To improve financial intermediation, they encouraged the authorities to prioritize reforms that address structural impediments.
Directors agreed that efforts to improve payment efficiency should be guided by a comprehensive domestic payment strategy tailored to the country's economic size and resources. They welcomed the authorities' commitment to a cautious approach to implementation of a tokenized dollar and their openness to exploring other suitable payment options. In this context, Directors emphasized the importance of first conducting a comprehensive cost‑benefit analysis and full‑fledged feasibility study while putting in place risk mitigating safeguards. They also stressed the need to close regulatory and governance gaps and strengthen the AML/CFT framework to safeguard the financial sector from macroeconomic, fiscal, and financial risks potentially arising from digital financial initiatives.
Directors welcomed the authorities' commitment to upgrade the value‑added of the tourism sector and encouraged them to prioritize foreign direct investments that benefit the domestic economy. They agreed that integrating climate adaptation policies in the development strategy is paramount given the criticality of climate risks for Palau. Further improvement of statistics also remains crucial to support surveillance.
Building on the momentum achieved thus far, Directors called for continued carefully sequenced Fund support for capacity development.
Table 1. Palau: Selected Economic Indicators 1/ |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Option 1: Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the www.imf.org/[country ] page.
[3] At the conclusion of the discussion, the Managing Director, as Chair of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
