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Executive Summary

The Federated States of Micronesia (FSM) is a lower middle income island nation of 104,832 in 2021, an eight percent population decline from 2019.   The inhabitants live on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean.  The nation is composed of distinct, separate cultures and languages organized into four states under a weak national government.  The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands, gaining independence in 1986. Since independence, the United States has provided over $100 million annually to the FSM under a Compact of Free Association (Compact or COFA) with the United States.  FSM uses the funds for development under the administration of the U.S. Department of Interior’s Office of Insular Affairs (DOI).  The World Bank estimates FSM’s 2020 Gross Domestic Income (GDI) at $3,950 per person, a trend reflecting no growth over the previous 10 years.  The national currency is the U.S. dollar.

Commercial fishing remains the key economic sector in the FSM. The country’s primary sources of income are the sale of fishing rights ($70 million in FY2020), corporate income taxes, mainly from offshore corporate registrations for captive insurance ($10 million in FY 2020), and special revenue grants ($26 million in FY2020).  The FSM continues largely as a subsistence economy, except in larger towns where the economy is centered on government employment and a small commercial sector. The cash economy is primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or who are the surviving spouse of an American citizen.

Compact funding was anticipated to change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds derived from a trust fund developed from U.S. contributions over 20 years.  (Note: The Compact of Free Association is under renegotiation as of June 2022 and it cannot be determined if the direct funding mechanism of sector grants will continue or end).  As of September 2021, the balance of the Compact Fund stood at $1 billion.  FSM has also created its own trust fund, contributing $17 million in FY2020, raising its overall balance to $307 million. (Note: audited balances for the FSM Trust Fund for FY2021 have not yet been published).

The FSM GDP for 2018 was $402 million, a 19.5 percent increase from 2017 at constant prices. The economy recorded a trade deficit of $125 million in goods and services for the same year. FSM government debt at $83.2 million was low, giving FSM a low 23.7 debt/GDP ratio, one of the lowest in the Pacific. Major creditors are the Asian Development Bank (52.5 percent of debt) and the U.S. Rural Utility Services (20.7 percent of debt).  Despite the low levels of debt in absolute terms, the International Monetary Fund deemed FSM to be at a high level of debt stress due to the uncertainty created by looming Compact Funding reductions in 2023 and the possible need to borrow to maintain operations of state governments.

Foreign direct investment (FDI) is almost nonexistent due to prohibitions on foreign ownership of land and businesses (in specified industries), difficulties in registering companies (the process requires approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy processes.  In addition, lack of infrastructure, poor health and education systems, the scarcity of commercial flights, and high costs of imported goods and various business services also contribute to the lack of FDI.

Pohnpei State’s Legislature amended its laws in September 2018 to reduce requirements on foreign investment.  The law specified the business sectors that permit FDI, with the remaining sectors available for Pohnpei citizens only.  Domestic capital formation is very low. Commercial banks are classified as foreign entities and their ability to provide commercial loans, especially secured by real estate, is very limited.  Banks view all credit to FSM borrowers as essentially unsecured.

Most national political power is delegated to the four states by the FSM Constitution, including regulation of foreign investment and restrictions on leases.  Thus, investors must navigate nationwide between five different sets of regulations and licenses.  U.S. citizens can live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM islands.  FSM voters select national legislators (senators).  The national senators then caucus to select the president and vice-president from among the four at-large senators.  There are no political parties.  On May 11, 2019, Senators selected David Panuelo and Yosiwo George as president and vice president, respectively, for four-year terms.  The most recent elections for Congress were held March 1, 2021.

The FSM federal government closed its borders in March 2020 in response to the COVID-19 pandemic and did not allow any repatriations until May 2021.  Since that time, it has repatriated citizens and essential workers intermittently via a single flight per month into the country.  The shut-down has adversely affected the FSM’s tourism industry and the ability of the international community to implement infrastructure programs needed to support investment.  Recently, flights have increased in frequency and quarantine has been reduced, with plans to fully reopen in August 2022.

Only Yap State has undertaken any green energy initiatives with a single pilot wind project.  It has also implemented several small-scale solar projects on outer islands.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 44 of 100(Regional) 
Global Innovation Index N/A 
U.S. FDI in partner country ($M USD, historical stock positions) 2012 $30 
World Bank GNI per capita 2020 $3,950 

1. Openness To, and Restrictions Upon, Foreign Investment

There are many structural impediments to increasing foreign investment in the FSM.  The FSM has no department dedicated to promoting investment nor any ongoing dialogue with potential investors.  These challenges, both regulatory and political, affect foreign investment and economic progress in general, and addressing them requires a constitutional and political will to change that is unlikely in the foreseeable future.  Some political leaders at the state and national levels are owners of the largest businesses on the islands and strongly oppose the required structural changes that would result in increased competition.  The FSM scores in the lowest quintile in almost all measures and international indices of economic activity and climate for doing business.

In theory, the country’s courts support contractual agreements, but enforcement of judicial decisions is weak.  Foreign firms doing business in the FSM have difficulty collecting debts owed by FSM governments, companies, and individuals, even after obtaining favorable judgments.  For these reasons, the World Bank ranked the FSM very low in protecting minority investors (185th of 190 countries) and enforcing contracts (183rd of 190 countries).  U.S. companies and individuals considering doing business with parties in the FSM should exercise due diligence and negotiate credit and payment arrangements that fully protect their interests.

All four of the FSM states have limits on foreign ownership of small- and medium-sized businesses.  Large projects are assessed by the respective state governments on a case-by-case basis.  Each state requires a separate application for foreign investment permits. Foreign investment is strictly limited by local ownership requirements (51-60 percent minimum, depending on sector) and residency requirements of more than five years.  Financing through bank loans is limited due to a weak financial sector.  Local small- and medium-sized businesses are protected from foreign competition through legal restrictions.  Larger projects in competition with a business sector already owned by public figures face strong political opposition.  Politicians enthusiastically receive large and unrealistic development proposals, but do not move forward primarily due to land issues and traditional landowner disputes.  The FSM does not maintain an investment screening mechanism for inbound foreign investment.


FSM lacks a single window for online business registration or information portals providing comprehensive business registration information.  The FSM Department of Resources and Development (R&D) maintains information on trade and investment on its website.  However, all information is woefully out of date.  Post understands obtaining licenses and permits in a timely manner may depend more on the relationship of the investor (or local legal counsel) with the official in charge, rather than any clear procedure or timeline.  The World Bank’s 2020 Ease of Doing Business report ranked the FSM as 158th of 190 countries globally in terms of procedures to register a business (Note: The World Bank is currently gathering data for its Business Enabling Environment Report that will replace the Ease of Doing Business Report).

The FSM government does not promote, incentivize, or restrict outward investment. Given the small population and lack of capital formation, outward investment is negligible.

3. Legal Regime

The FSM is not a signatory to any convention on transparency in international investment. Transparency of government actions is typically based more on personalities than on the law. Regulatory bodies sometimes involve themselves in issues beyond their jurisdiction. Conversely, other regulations are not uniformly enforced.  It is often difficult to obtain public records, although some states and government organizations do require open meetings.  While basic laws are accessible on the internet, text or summaries of proposed regulations are published before enactment but are not printed in an official journal or publication, and there is no appeal or administrative review process. In addition, government audits and statistical reports are not prepared promptly, and timely data are often unavailable (the most recent publications Using three or four year old data).

The websites that provide the most relevant economic data on FSM are:

National Public Auditor 

Department of Resources & Development  

FSM Statistics 

The FSM signed on to the Pacific Island Countries Trade Agreement (PICTA) in 2001 but did not ratify the agreement.  PICTA is a free trade agreement on trade in goods among 14 members of the Pacific Islands Forum (excluding Australia and New Zealand).  Eleven countries – Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu — have ratified PICTA.  The FSM is not a member of any regional economic block, nor is it a member of the WTO.

The FSM follows the U.S. common law system and uses U.S. case law as precedent.  There are no specialized courts except for Land Courts in Pohnpei and Kosrae.  All four states have State Courts and State Supreme Courts.  The judicial system remains independent of the executive branch, but is reported to be slow, weak, and lacking the ability to enforce judgments properly.  Regulations or enforcement actions are appealable. Appeals may be adjudicated in either the State or National courts.

In September 2018, the Pohnpei State Legislature overrode the Governor’s veto of a bill on foreign investment regulations.  The bill became state law over the objection of several local business leaders.  The new law placed all decision-making power into the hands of one person, the Registrar of Corporations.

FSM national and state governments use a “traffic light” system to regulate businesses, with red for prohibited, amber for restricted, and green for unrestricted.  Industry classifications in this system vary from state to state. The individual states directly regulate all foreign investment, except in the areas of deep ocean fishing, banking, insurance, air travel, and international shipping, which are regulated at the federal level.  Thus, a prospective investor who plans to operate in more than one state must obtain separate permits in each state, and often follow different regulations as well.

The following are the regulations pertaining to restrictions by sector in each of the states:

FSM National

Red: Arms manufacture, minting of currency, nuclear power, radioactive goods.
Amber: Increased scrutiny before approval for non-traditional banking services and insurance.
Green: Banking, fishing, air transport, international shipping.

Kosrae State

Red: manufacture of toxic or biohazard materials, gambling, casinos, fishing using sodium/cyanide or compressed air.  (Note: There is also currently a ban on all business transactions on Sundays in the capital town. End Note.)
Amber: Real estate brokerage, non-ecology-based tourism, trade in reef fish, coral harvesting.
Green: Eco-tourism, export of local goods, professional services.

Pohnpei State

Red: None presently defined, determined by board from among amber candidates.
Amber: Everything not classified as green.
Green: Businesses with greater than 60 percent FSM ownership, initial capitalization of $250,000 or more, professional services with capitalization of $50,000 or more, and Special Investment Sector businesses with 51 percent FSM ownership in retail, trade, exploration, development, and extraction of land or marine based mineral resources or timber.

Chuuk State

Red:  Determined by the Director, none codified in law.
Amber:  Casinos, lotteries, and industries that pollute the environment, destroy local culture and tradition, or deplete natural resources.
Green:  Eco-tourism, professional services, intra-state airline services, exports of local goods.

Yap State

Red:  Manufacture of toxic materials, weapons, ammunition, commercial export of reef fish, activities injurious to the health and welfare of the citizens of Yap.
Amber:  None at present.
Green:  All others.

There is no law or agency governing competition in the FSM nor does the government require environmental, social, or governance disclosure to help investors and consumers distinguish between high-and-low quality investments.

The FSM Foreign Investment Act of 1997 guarantees no compulsory acquisition or expropriation of property of any foreign investment for which a Foreign Investment Permit is issued, except for violation of laws and regulations and in certain extraordinary circumstances.  Those extraordinary circumstances include cases in which such action would be consistent with existing FSM eminent domain law, when such action is necessary to serve overriding national interests, or when either the FSM Congress or the FSM Secretary of Resources and Development has initiated expropriation.  There has been no history of expropriation involving foreign investors or U.S. companies.

A bankruptcy law has been in existence since 2005, but was used only three times, generally to avoid taxes.

4. Industrial Policies

There are currently no government programs or incentives to attract foreign investment.

There is no government agency tasked with developing an industrial strategy; however, the FSM government has made recommendations for growth in several sectors, most notably tourism, fishing, and aquaculture, without substantive measures to realize those goals.  The telecommunications sector was opened to meet World Bank conditions for broadband development.  However, rivalries between the state-owned telecom operator and the state-owned infrastructure operator have held back the development of broadband infrastructure to meet the needs of both businesses and consumers.  The largest state-owned enterprise, Vital Energy, the parent of FSM Petroleum Corporation (FSMPC), built its first solar power plant in Guam in 2013 and plans to expand its renewable energy capacity into FSM in the future.

Politicians have called for expansion of the tourism sector, but have created no tax, licensing, or leasing incentives to encourage investment.  Although there is considerable potential for growth in the tourism sector, the remoteness of the FSM, land ownership prohibitions, business ownership restrictions, and the current lack of hotel facilities and tourism services mean growth in the tourism sector is unlikely to meet local expectations.  Data prior to the onset of the COVID-19 pandemic show that growth fell in the areas of scuba diving, boating, and fishing.  The March 2020 FSM border closure brought the sector to a standstill, where it currently remains due to onerous quarantine restrictions.

The United Nations Educational, Scientific and Cultural Organization (UNESCO) adopted the significant archaeological site of Nan Madol as a World Heritage Site in 2016 and has been working toward designating other sites in Yap, Kosrae, and Chuuk.  Other efforts, including those by the U.S. Embassy and National Geographic Society, are underway to highlight the considerable cultural heritage extant in the FSM.

The government currently does not offer incentives for green energy investments.

There are no Foreign Trade Zones, Free Trade Zones, Special Economic Zones, or Free Ports in the FSM.

The FSM government mandates local employment when qualified individuals are available. U.S. citizens may reside in and work in the FSM indefinitely.  Citizens of other countries must apply for the appropriate permits. (Note: The Philippine government in 2017 imposed restrictions on the entry of new Filipino workers into the FSM under the Philippines Overseas Worker Program.  Filipinos make up the vast majority of foreign workers in the FSM).  There are no defined performance requirements for investments.

5. Protection of Property Rights

The most important impediments to foreign direct investment (FDI) are derived from land and contract issues.  Foreign ownership of land is prohibited; most land is owned and passed on within the clan structure, leading to conflicting title claims, the need to negotiate leases with multiple parties, and the possibility of changes when the original senior lessor dies.  Dual citizenship is illegal, so Micronesian citizens born in the United States are unable to inherit or own property unless they renounce their U.S. citizenship. There is no system for land title insurance in any of the country’s four states.  The combination of these factors ranked the FSM at 187th out of 190 countries globally in the World Bank’s Ease of Doing Business report’s assessment of registering property.

Although foreign nationals, including corporations, cannot own real property, they can own buildings or other structures and lease the land beneath on a long-term basis.

Intellectual property rights (IPR) in the FSM are nominally protected and the country is a member state of the World Intellectual Property Organization (WIPO).  The country is not listed in the USTR Special 301 Report, nor is it listed in the Notorious Market Report. The Embassy has not received complaints from U.S. firms regarding IPR issues, and the only U.S. corporations currently operating in FSM are United Airlines and Matson Shipping.  The only three U.S. chains present (Ace Hardware, True Value Hardware, and NAPA auto parts) are 100 percent locally owned franchises.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at .

6. Financial Sector

There are no stock or commodities exchanges in the FSM.

The two commercial banks operating in the country, the Bank of Guam and the Bank of the FSM, can only make small, short-term unsecured loans because of the prohibition of using land or businesses as collateral, difficulties inherent in collecting debts, and the inability to identify collateral that can be attached and sold in the event of default.  There are no credit reporting agencies.  The Bank of the FSM is prohibited by its charter from investing in any securities not insured by the U.S. government, so the bulk of its holdings are in U.S. Treasury bonds.  The Bank of Guam operates as a deposit collector and transactions facilitator in the FSM, with most of its loans made in Guam.

The Bank of the FSM is protected from takeover by a trigger from the Federal Deposit Insurance Corporation (FDIC) that will cancel its insurance status if foreign ownership exceeds 30 percent.  Foreigners are not allowed to open accounts with the bank unless they provide proof of local residence and work permits and fulfill U.S. Treasury “know thy customer” requirements.

Money exchange companies such as Western Union operate within FSM and handle the majority of remittances.

Since most businesses are family owned, there are no shares that can be acquired for mergers, acquisitions, or hostile takeovers. The FSM enacted a secured transaction law in 2005 and established a filing office in October 2006 primarily to serve the foreign corporate registration market.

The FSM has no sovereign wealth fund, but the government established a national trust fund modeled on the Compact Trust Fund to provide additional government income after 2023. That fund is managed by a U.S.-based commercial fund manager.

7. State-Owned Enterprises

The FSM has established state monopolies and maintains state-owned enterprises (SOEs) in the areas of fuel distribution, telecommunications, and copra production.  These companies are Vital Energy (the parent of FSM Petroleum Corporation, FSMPC), the FSM Telecommunications Corporation, the FSM Telecommunications Cable Corporation, and the FSM Coconut Development Authority, which was folded into Vital Energy in 2014.  Legislation passed in 2016 opened the telecom market to private companies to qualify for World Bank funding for broadband development, including a submarine fiber optic cable to Yap and Palau.  Other prominent SOEs include the National Fisheries Corporation, the FSM Development Bank, the College of Micronesia, and Caroline Islands Air, Inc.

FSM does not currently adhere to the convention on the Organization of Economic Cooperation and Development (OECD) guidelines on corporate governance of SOEs.

There is currently no privatization program in the FSM.

8. Responsible Business Conduct

There is little awareness or definition of responsible business conduct (RBC) in the FSM.  However, most local businesses are small and generally responsive to the community in which they operate.  The two U.S.-based companies in the FSM generally follow RBC principles.  The host government does not promote RBC or factor it into evaluations for public contracts, nor does the country adhere to the convention on OECD guidelines for multinational enterprises.

Department of State

Department of the Treasury

Department of Labor

The FSM Climate Change Policy Assessment (CCPA) takes stock of the Federated States of Micronesia’s climate response plans, from the perspective of their macroeconomic and fiscal implications.  CCPA explores the possible impact of climate change and natural disasters and the cost of FSM’s planned response.  It suggests macroeconomically relevant reforms that could strengthen the national strategy and identifies policy gaps and resource needs.  FSM has made progress toward its Nationally Determined Contribution mitigation pledge by beginning to expand renewable power generation and improve its efficiency. The authorities plan to continue this and encourage the take-up of energy efficient building design and appliances. Accelerating adaptation investments is paramount, which requires addressing critical capacity constraints and increasing grant financing.  It is recommended that FSM needs to increase its capacity to address natural disaster risks following the expiry of Compact-related assistance in 2023.  It is advised to improve climate data collection and use, including on the costs of high and low intensity disasters and disaster response expenditure.

The FSM government has not introduced any policies to reach net-zero carbon emissions by 2050 as the FSM is a negligible contributor to global emissions.  Hence, there are no regulatory incentives that target mitigation.  Public procurement policies are focused on adaptation and climate resilience, namely reducing and responding to climate-induced natural disasters.  Sea level rise and increased salinity in ground water has already begun to affect agricultural production on the country’s more remote outer islands.

Accelerating adaptation investments is paramount, which requires addressing critical capacity

constraints and increasing grant financing.  FSM’s overall planning for adaptation is fragmented

and individual sectoral projects include varying levels of adaptation measures.  Progress has been hindered by capacity constraints, particularly in investment project execution at the state level.  However, FSM has a financing gap of $400–500 million over the next 15 years between its ambitious climate change investment plans and currently available grant funding.

9. Corruption

The FSM has laws prohibiting corruption and there are penalties for corrupt acts.  The National Office of the Public Auditor, with support from the Department of Justice, is the entity most active in anti-corruption activities.  Several senior ex-FSM Government officials were convicted of corruption under the FSM Financial Management Act, usually involving procurement fraud.  An FSM government transportation official pled guilty April 3, 2019, in U.S. District Court to conspiring to launder bribe money he accepted from a U.S.-citizen president of a Honolulu civil engineering company.  The official was then-FSM President Christian’s son-in-law who served 18 months in prison in the United States and was subsequently deported back to the FSM in 2021.  Corruption is not a predicate offense under the money laundering statute.  Bribery is punishable by imprisonment for not more than 10 years in addition to disqualification from holding any government position.  Traditional custom permits a lawbreaker to ask and receive forgiveness by paying a fine to those victimized.  Given many FSM national, state, and municipal government officials also own businesses, there exists significant potential for conflicts of interest.

The degree to which government officials accept direct bribes is unknown but believed to be commonplace, especially deriving from state actors.  Pohnpei State and Yap State are currently prosecuting corruption cases. The Yap State governor and lieutenant governor reported receiving cash envelopes in inauguration presents which they promptly handed to Yap State’s Acting Attorney General who conducted an investigation.  The FSM has not signed or ratified the UN Convention on Corruption or the OECD Convention on Combating Bribery.

The FSM has no government agency specifically assigned with responsibility for combatting corruption.  State prosecutors are the usual avenue for prosecuting corruption, with several cases brought to trial in the last few years, especially in Pohnpei State.  The Public Auditor highlighted irregularities but relies on government prosecutors for enforcement capability. The Department of Justice in prior years prosecuted cases, but activity in this area recently has been varied; Pohnpei State and Yap State have been more active.

The principal contact for these types of cases is:

Joses Gallen
Attorney General, FSM Department of Justice
Palikir, Pohnpei

There are no non-governmental “watchdog” organizations in the FSM that monitor corruption.

10. Political and Security Environment

FSM enjoys a stable, democratic form of government with no history of civil or political strife. The islands became part of a UN Trust Territory under U.S. administration following World War II, after periods of Spanish, German, and Japanese control.  In 1979, the islands adopted a constitution, formally becoming the Federated States of Micronesia.  Independence came in 1986 under a Compact of Free Association with the United States that was amended and renewed in 2004 and portions related to financial assistance currently are being renegotiated.  Under this agreement, the U.S. Government guarantees the FSM’s external security.

The country’s last presidential election was held in March 2019, in which incumbent Peter Christian lost his bid for a second term to current President David W. Panuelo.  The population’s main concerns during the campaign season were related to the high unemployment rate, depletion of marine resources from overfishing, corruption, and a reliance on foreign aid.

11. Labor Policies and Practices

Wages in FSM are low with minimum wage laws for government employees in all states and the federal government.  Only Pohnpei has a minimum wage for the private sector at $1.75 per hour.  However, employers report that they cannot hire employees for less than $3.00 per hour.  Employment in the public sector is preferred because the wages are significantly higher.  The minimum hourly wage for employment with the national government was $2.65.  The minimum hourly wage for government workers in the individual states was: Pohnpei $2.00, Chuuk $1.25, Kosrae $1.42 and Yap $1.60.  The FSM’s minimum wage was last adjusted January 1, 2015.

There are no laws regulating hours of work (although a 40-hour work week is standard practice, with 32 hours standard in Kosrae State), nor are there enforceable standards of occupational safety and health.  While there was one federal regulation that required that employers provide a safe workplace, neither the Department of Health nor the Environmental Protection Agency has enforcement capability, resulting in varying working conditions.  There is no law for either the public or private sector that permits workers to remove themselves from dangerous work situations without jeopardizing their continued employment.

Skilled labor in FSM is limited, with few FSM citizens trained to perform tasks of any technical nature.  Foreign workers, primarily Filipinos, are typically hired to fill roles requiring technical skills. In September 2018, after having banned all Filipino workers from working in the FSM in mid-2018, the Philippine Department of Foreign Affairs revised its deployment ban on Philippine labor coming to the FSM to ban only new recruits, exempting the 2,000 Filipino workers already in country.  Philippine overseas foreign workers were FSM’s main source for educated and skilled labor but, with the ban in place, this pool can no longer be replenished.

A labor dispute at a privately run hospital in Pohnpei led to the dismissal or resignation of several doctors and surgeons, all from the Philippines.  As a result, service hours were cut and capacities are in doubt. The hospital is one of the embassy’s preferred medical providers, as the island’s only other hospital did not meet hygienic standards, although the medical care itself was generally adequate for non-specialized treatment.  Likewise, wage disputes in Yap state resulted in the mass resignation of 40 doctors and nurses from the Yap State Hospital, triggering a state of emergency and frantic search for replacement medical personnel.

Most doctors, nurses, accountants, lawyers, engineers, construction foremen, and heavy equipment operators are overseas workers from the Philippines.

The FSM has no collective bargaining or strikes.  Unemployment is high, and workers are easily replaced.  There is no child labor, except in small family businesses.  Occupational safety and health standards are low.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2020 $3,950 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2020 $1.0 2012 $30.0

Host country’s FDI in the United States ($M USD, stock positions) N/A $1 BEA data available at
Total inbound stock of FDI as % host GDP N/A N/A UNCTAD data available at:

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Frank Talluto
Economic/Consular Officer
1286 U.S. Embassy Place, Kolonia, Pohnpei 96941
+691 320-2187


Executive Summary

The Republic of Palau is a small island nation of about 350 islands in the western Pacific Ocean, with an estimated population of about 21,000 people. The government is the country’s largest employer, with approximately 30 percent of the workforce, and the tourism sector is Palau’s biggest economic driver, contributing an estimated 40 percent to GDP. GDP in 2021 was $257 million, approximately $14,243 per capita. Palau’s official currency is the U.S. dollar, and the country has three FDIC–insured U.S. banks. Apart from tourism, commercial industries include wholesale/retail trade, business services, commercial fisheries, and construction. Fish, coconuts, breadfruit, bananas, and taro cultivation constitute the subsistence sector, though the country’s agricultural base is small. Palau has a limited export base and production capacity, thus highly vulnerable to external shocks. Primary exports include frozen fish (tuna), tropical aquarium fish, ornamental clams and corals, coconut oil, and handicrafts. Palau continues to rely heavily on imports and continues to run trade deficits ($45.8 million in 2018). The country exports $0.5 million to the United States in 2021.

Palau’s economy remains dependent on donor funding. Since independence, Palau has operated under a Compact of Free Association (COFA) with the United States, which provides it with U.S. direct assistance, subsidies, and other financial support. In 2019, U.S. assistance to Palau was $32 million, roughly one-fourth of government spending. Palau receives additional aid from Australia, Japan, Taiwan, and international organizations such as the World Bank, ADB, and UDP.

Palau’s economy was hit hard by the COVID-19 pandemic, which had a devastating effect on tourism. The economy shrank 8.7% and 19.7% in 2020 and 2021, respectively. To offset COVID-related losses, the ADB provided Palau with $41 million in 2020.

The Foreign Investment Act guides the foreign investment process in Palau, and Foreign Investment Regulations restrict some sectors to Palauan citizens, including wholesale or retail sale of goods, all land and water transportation, travel and tour agencies, and commercial fishing. Other sectors are semi-restricted, requiring a Palauan partner. Foreigners cannot own land in Palau, but they can lease land and own buildings on leased land. While the government welcomes foreign investors, Palau’s investment climate poses challenges. Some U.S. investors have made allegations of corrupt practices when seeking government permits, doing business with local partners, and in public procurement processes. Establishing secure land title may be complicated due to the complexity of Palau’s traditional land ownership system and occasional over-lapping claims. Palau is not a member of the World Intellectual Property Organization, the WTO, or any other organization or convention protecting intellectual property rights. Palau has no bilateral investment protection agreements and is not a member of any free trade associations. Human resource constraints are a challenge for foreign investors and, third country nationals from Bangladesh and the Philippines comprise a large proportion the labor force.

FDI flows accounted for $24 million in 2020, up slightly compared to 2019 ($22 million), despite the pandemic. The stock of FDI grew to $488 million in 2020. Traditionally, FDI has be is mostly directed towards the tourism and real estate sectors. Main investment partners include China, Taiwan, and Singapore.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 N/A
Global Innovation Index 2021 N/A
U.S. FDI in partner country ($M USD, historical stock positions) 2020 $10 million
World Bank GNI per capita 2021 $14,243

1. Openness To, and Restrictions Upon, Foreign Investment

The government actively seeks foreign direct investment, and the country’s Foreign Investment Board (FIB) is responsible for approving and regulating foreign investment. There are no specific financial incentives extended to foreign investors.

The Foreign Investment Regulations detail the significant number of restricted and semi-restricted sectors. Semi-restricted businesses can include foreign ownership, as long as a Palauan citizen also has an ownership interest. These semi-restricted businesses are as follows:

  • handicraft and gift shops;
  • bakeries;
  • bar services;
  • operations [selling] products being produced by wholly Palauan-owned manufacturing enterprise;
  • equipment rentals for both land and water within the Republic, including equipment for purpose of tourism; and
  • any such other businesses, as the Foreign Investment Board may determine.

Sectors not listed as either closed or semi-restricted are presumed to be open for foreign investment. The Foreign Investment Board may, however, amend the semi-restricted sector list for “any such other businesses as the Board may determine.”

The Government of Palau has not conducted an investment policy review through any organization or institution in the past five years.

3. Legal Regime

Regulatory and accounting systems are largely consistent with international norms. Bureaucratic procedures (e.g. permitting processes, approvals, etc.) may lack transparency and be influenced by cronyism, partly due to the country’s small size and extensive family networks. Proposed laws and regulations are available in draft form for public comment pursuant to the Administration Procedures Act, Title 6 of the Palau National Code. Generally, tax, labor, environment, health and safety, and other laws and policies do not impede investment. There are no informal regulatory processes managed by nongovernmental organizations or private sector associations. The Government of Palau, through the Financial Investment Act and the Environmental Protection Act, requires companies’ ESG disclosure to facilitate transparency and inform the application process in distinguishing between low- and high-end investment.

The Pacific Island Forum, of which Palau is a member, has a model regulatory and policy framework focused on competition, fair trading, and consumer protections. Palau is not a WTO member.

The legal system in Palau is composed of a mix of civil, common, and customary law. Palau also has a specialized Land Court for disputes arising from conflicting claims of land ownership, which is a complex issue in the country. The legal system is patterned on common law proceedings as they exist in the United States. The judiciary comprises a four-member Supreme Court, a Court of Common Pleas, and a Land Court. The Supreme Court has a trial division and an appellate division. Court rulings, legal codes, and public law can be found on their website: .

All non-citizens wishing to invest in the Republic of Palau must obtain a Foreign Investment Business License (FIBL). The FIBL is obtained from the Registrar of Foreign Investment in the office of the Attorney General. In coordination with the Investment Promotion Unit at the Ministry of Natural Resources and Commerce, the Ministry of Finance reviews the application and ensures that the business does not fall under the categories of the National Reserved List listed above. The application process usually takes 7-10 working days.

Palau does not currently have any anti-trust legislation, although the Foreign Investment Board considers competition-related concerns in its review process.

Although the Palauan constitution provides for the right of the government to condemn land for national interest (“eminent domain”), there are no reported property-expropriation cases. Most of the land is privately owned by Palauan citizens through complex family lineages.

There is no legal provision for bankruptcy in the Republic of Palau. It ranks 166 out of 190 for resolving insolvency in World Bank’s 2020 Doing Business Report.

4. Industrial Policies

The Government of Palau does not offer incentives to domestic or foreign investors.

The Free Trade Zone Act of 2003 established the Ngardmau Free Trade Zone Authority. Another “Tax Free Zone” was established in the state of Melekeok, covering a one-mile radius around the Federal capitol building.

Palau does not currently have laws or regulations on domestic storage or localization requirements.

The Palau government requires all investors employing non-resident workers to agree to:

Cover the cost of repatriating non-resident workers to the place hired.

Train one or more citizen workers to perform the work for which the non-resident worker is employed.

This requirement is set and evaluated on a case-by-case basis and is usually included as part of a whole package that also includes investment incentives such as favorable taxation statuses. U.S. Citizens do not require a visa to enter Palau and may be employed in Palau without obtaining a work permit or a visa. They must register as a non-resident worker with the Bureau of Immigration annually.

5. Protection of Property Rights

Other than the foreign-ownership restrictions for certain business sectors, there are no restrictions on private entities to engage in all forms of remunerative activity.

Establishing secure land title may be complicated due to the complexity of the traditional land ownership system and occasional over-lapping claims. Banks offer mortgages, and the recording system is reliable. The Land Court has primary responsibility to adjudicate disputes over land ownership. Non-Palauans may not purchase land, although they are able to lease for up to 99 years. Non-citizen investors must negotiate lease agreements directly with private owners or the state government.

Palau is not a member of the World Intellectual Property Organization (WIPO), the WTO, or any other organization or convention protecting intellectual property right. In general, Palau does not strictly enforce intellectual property rights.

Embassy Contact
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6. Financial Sector

There are no stock exchanges or financial regulatory institutions in the country.

Palau uses the U.S. dollar and has no central bank. The country has three FDIC–insured banks: Bank of Hawaii, Bank Pacific, and Bank of Guam. All three are publicly owned U.S. companies with headquarters in Guam. There are several smaller private banks and a national bank, the National Development Bank of Palau.

The Palau Financial Institutions Commission is the regulatory body responsible for establishing and maintaining the financial supervisory system in Palau.

Palau has no sovereign wealth fund (SWF) or asset management bureau (AMB), but the Compact of Free Association established a Trust Fund for Palau that is independently overseen by the COFA Trust Fund Board composed 5 members who are appointed by the President of Palau and confirmed by the Senate.

7. State-Owned Enterprises

In Palau, most of the major industries are controlled by state-owned- or quasi-state enterprises. These include the utilities sector, telecommunications, and the national bank. The SOE sector continues to underperform and to impose significant risks and burden on the fiscal system and economy.

Palau has no on-going privatization program.

8. Responsible Business Conduct

Many businesses provide corporate donations to environmental and social Non-Governmental Organizations (NGOs), and /or engage in environmental corporate social responsibility programs to preserve Palau’s environment and wildlife. Most CSR activities are conducted via donation, partly attributable to the available tax deduction of up to 10 percent of a company’s Gross Revenue for donations to non-profit organizations.

Palau has some basic worker protection laws, including a minimum wage and protections for foreign workers.

9. Corruption

Corruption remains a challenge to doing business in Palau, despite a robust legal mechanism to detect and prosecute corruption. The Code of Ethics regulates transactions by national and state public employees, officials, and elected officials, as well as persons making campaign contributions. The law prohibits personal gain through governmental transactions, prohibits conflict of interest, restricts incompatible outside employment, prohibits solicitation of gifts and severely restricts the size of campaign contributions, limiting such contributions to Palauan citizens.

The Special Prosecutor Act established the Office of the Special Prosecutor, who has the power to investigate and prosecute the national and state governments, and its officials, for violations of the Constitution and laws of the Republic or for failure to implement such laws. Local media often reports on alleged corruption cases and serves as an informal watchdog. Palau does not appear in Transparency International’s Index of Corruption. There are no formal anti-corruption NGOs or international watchdogs based in Palau.

10. Political and Security Environment

Palau is stable, and not prone to political violence. The World Bank placed Palau in the 84th percentile in its 2015 rating of country political stability.

11. Labor Policies and Practices

With an estimated total of 12,500 Palauan nationals in country (including non-working individuals, such as children and elderly) and 4,300 estimated foreign workers, foreign labor comprises a large proportion of Palau’s labor force. Palau has a fairly low unemployment rate across all age categories.

Under the Compact of Free Association, Palauan citizens are entitled to live, attend school, and work in the United States visa-free as “nonimmigrant residents.” Accordingly, many skilled and professional workers migrate to the U.S. for its higher wages and standards of living. Professional, medical, management, and other special labor skills are in high demand in Palau. Given the scarcity of resident qualified workers, Palau allows investors to employ non-resident workers provided they agree to cover the cost of repatriation, that they hire and train at least one citizen to perform the same work.

In October 2013, Palau established the minimum wage for workers. Foreign workers are generally hired on a contract basis with opportunities for annual renewals.

As of 2020, there are no new labor related laws or regulations enacted during the last year as well as no pending draft bills.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2015 $287 2019 $274
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2020 $10 BEA data available at
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at
Total inbound stock of FDI as % host GDP N/A N/A N/A N/A UNCTAD data available at

Table 3: Sources and Destination of FDI
Data not available.

14. Contact for More Information

David Ryan Sequeira
Deputy Chief of Mission
U.S. Embassy Koror
Republic of Palau
Tel: +680-587-2920 x 2002

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