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 $488 million in 2020. Traditionally, FDI has be is mostly directed towards the tourism and real estate sectors. Main investment partners include China, Taiwan, and Singapore.
|TI Corruption Perceptions Index||2021||N/A||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2021||N/A||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2020||$10 million||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2021||$14,243||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD|