ADB's Work in Palau

Drawing on Palau’s exceptional natural and cultural resources, tourism underpins the country’s economy. A recent downturn in economic activity, however, illustrates that Palau remains vulnerable to external economic shocks as well as climate change and other environmental and weather-related risks.

Reforms to improve and simplify Palau’s business regulations are needed to promote private sector development, but slow progress on simplifying the country’s tax policy has limited prospects for creating the conditions necessary for more inclusive development.

Traditional Palauan pottery

Palau receives annual grant assistance under the Compact of Free Association with the United States (the Compact). In 2018, the United States Congress authorized the 2010 Compact Review Agreement, which includes the deferred payment of over $120 million in Compact grants. Due to the renewed economic assistance terms of the Compact, it is projected that Palau’s Compact Trust Fund will achieve its original objective of replacing Compact assistance beyond 2044.

Palau joined ADB in 2003 and was classified as an ADB developing member country in December 2005.

Since 2005, ADB has committed loans totaling $84.8 million, a grant of $0.2 million, and technical assistance worth $3.8 million for Palau.

ADB is working in a variety of ways to improve the standard of living for the people of Palau. The bank has committed almost $30 million for the Koror–Airai Sanitation Project, which will create efficient and sustainable sewage collection systems in Koror (home to 70% of Palau’s population) and Airai. This project will ensure sewage treatment and disposal meet Palau’s environmental standards, as well as making safe and hygienic public toilets available in Koror. ADB also 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.

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

ADB is providing significant support to improve business conditions in Palau. The bank assisted with the preparation of an updated private sector assessment and has helped facilitate growth in the sector by improving business registration systems. To improve access to commercial credit, ADB has provided technical assistance for new legislation on secured transactions. The government has since launched a secured transaction registry, making it possible for banks to provide loans with greater security and at reduced risk. The bank also supported the Government of Palau with the completion of the Household Income and Expenditure Survey and with publishing the resulting analysis.

ADB has also provided technical assistance to improve governance in Palau’s state-owned enterprises and develop a formal policy (including relevant legislative measures) on these enterprises.

Nonsovereign Operations

As a catalyst for private investments, ADB provides financial assistance to nonsovereign projects and financial intermediaries. Total commitments from ADB’s own funds (in equity and direct loans) in 2019 amounted to $3.00 billion for 38 transactions in economic and social infrastructure, the finance sector, and agribusiness. ADB also actively mobilizes cofinancing from commercial and concessional sources. In 2019, ADB mobilized $3.28 billion of long-term cofinancing and $3.69 billion of cofinancing in trade finance, microfinance, and supply chain finance programs. Total outstanding balances and commitments of nonsovereign transactions funded by ADB’s own resources stood at $13.78 billion as of 31 December 2019.

Financing Partnerships

Financing partnerships enable ADB’s development 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 Finance Program and Supply Chain Finance Program.

ADB began cofinancing operations in Palau in 2015. Since then, sovereign cofinancing commitments for Palau have amounted to $22.50 million for one investment project.

Projects Cofinanced, 1 January 2014–31 December 2018

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

ADB will continue to concentrate its assistance on improving public sector performance and promoting private sector development in Palau. The bank will complement this assistance with support 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 for Palau’s development goals. Regional activities will support 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.