ADB's Work in Palau

Palau is a small island developing state in the North Pacific. Its tourism industry accounts for about 40% of gross domestic product, while assistance under its Compact of Free Association with the United States (the Compact, amended in 2018) will provide more than $120 million in grant funding through to 2024.

Despite its tourism industry and Compact assistance, Palau is exceptionally vulnerable to natural disasters, and its narrow economic base exposes it to international market volatility. The coronavirus disease (COVID-19) pandemic and associated travel restrictions severely threaten Palau’s tourism-based economy—emphasizing the need for prudent financial management and deeper private sector involvement as the country pursues more inclusive and sustainable growth.

Traditional Palauan pottery

Palau joined the Asian Development Bank (ADB) in 2003 and was classified as a developing member country (DMC) in December 2005. Since then, ADB has committed loans totaling $129.7 million, grants of $1.2 million, technical assistance worth $6.8 million, and ADB-administered cofinancing of $3.9 million for Palau.

In 2020, ADB committed $41 million for COVID-19 response in Palau, comprising $20 million from the Health Expenditure and Livelihoods Program, $20 million from Phase 3 of the Pacific Disaster Resilience Program, and $1 million from COVID-19 Emergency Response.

During the year, the bank also committed $5 million to support Phase 1 of Palau’s Public Utilities Corporation Reform Program and administered $3 million from the Japan Fund for Poverty Reduction for the Disaster Resilient Clean Energy Financing Project.

Prior to the pandemic, ADB committed $15 million under Phase 2 of the Pacific Disaster Resilience Program to help Palau mitigate immediate economic and social impacts caused by major disasters through immediate access to resources. This was fully drawn down in 2020 in response to the impacts of the COVID-19 pandemic. It also provided almost $30 million for the Koror–Airai Sanitation Project to deliver efficient and sustainable sewage collection systems.

Aerial shot of the location of the Koror-Airai Sanitation Project.

ADB supported Palau’s involvement in the North Pacific Regional Connectivity Investment Project. The project provides Palau with affordable, high-speed broadband internet access through a submarine fiber-optic cable system, which went live in December 2017.

The bank is also providing significant support to improve business conditions in Palau. Through its Pacific Private Sector Development Initiative (PSDI), ADB helped prepare an updated private sector assessment and helped facilitate growth by improving business registration systems. It also provided technical assistance for new legislation on secured transactions to improve access to commercial credit. The government then launched a secured transaction registry, making it possible for banks to provide loans with greater security at reduced risk. The PSDI also provided support to improve governance in Palau’s stateowned enterprises, including developing a formal policy (as well as relevant legislative measures) on these enterprises, and in completing the country’s Household Income and Expenditure Survey.

Nonsovereign Operations

As a catalyst for private investments, ADB provides financial assistance to nonsovereign projects and financial intermediaries. Total commitments in loans and equity investments from ADB’s own funds in 2020 amounted to $1.4 billion for 38 transactions in economic and social infrastructure, finance sector, and agribusiness. ADB also actively mobilizes cofinancing from commercial and concessional sources. In 2020, ADB mobilized $1.9 billion of long-term project cofinancing and $3.3 billion of cofinancing through its Trade and Supply Chain Finance Program and Microfinance Program. Total outstanding balances and commitments of nonsovereign transactions funded by ADB’s own resources stood at $14.3 billion as of 31 December 2020.

Financing Partnerships

Financing partnerships enable ADB’s financing partners, governments or their agencies, multilateral financing institutions, and commercial organizations to participate in financing ADB projects. The additional funds are provided in the form of loans and grants, technical assistance, and other nonsovereign cofinancing such as B loans, risk transfer arrangements, parallel loans and equity, guarantee cofinancing, and cofinancing for transactions under ADB’s Trade and Supply Chain Finance Program and Microfinance Program.

ADB began cofinancing operations in Palau in 2015. Since then, sovereign cofinancing commitments for Palau have amounted to $25.5 million for two investment projects.

In 2020, Palau received $3 million grant cofinancing from the Japan Fund for Poverty Reduction for the Disaster Resilient Clean Energy Financing.

A summary of cofinanced projects is available at Palau: Cofinancing.

Operational Challenges

Because Palau is a relatively new nation state, ADB continues to focus on strengthening the country’s institutional foundations for effective economic management. This helps ensure that wealth and prosperity generated through the successful development of tourism are broadly shared and translate into sustainable improvements in quality of life.

Implementation of the Koror–Airai Sanitation Project is progressing well, while the North Pacific Regional Connectivity Investment Project was delivered to Palau ahead of time and under budget. This illustrates that efficient implementation is possible, even with relatively large projects. However, project implementation capacity remains a significant limitation in Palau, and the government must work to ensure that improvements in implementation can be sustained by harnessing new digital applications.

With new office, ADB will strengthen and deepen engagement with Palau.

Future Directions

To support sustainable recovery from the COVID-19 pandemic, ADB will continue to concentrate its assistance to Palau on improving public sector performance and promoting private sector development. The bank will complement this assistance with financing for key infrastructure investments that deliver inclusive economic and social benefits. Technical support, through ADB country and regional programs, will continue to provide flexible and responsive support in capacity strengthening and knowledge for Palau’s development goals. Regional programs supported by ADB will advance reforms in public sector management, improve labor market outcomes, and advise on economic policy and private sector development. ADB will continue to encourage Palau’s involvement in regional cooperation programs, particularly in expanding access to renewable resources, improving energy efficiency, and responding to the impacts of climate change.