ADB's Work in Palau

Palau is a small island developing state in the North Pacific. Tourism accounts for about 40% of the economy, and assistance under its Compact of Free Association with the United States (the Compact) will provide about $120 million in grants through 2024. The collapse of tourism due to the coronavirus disease (COVID-19) pandemic emphasized the need for prudent financial management and revenue alternatives.

Rock Islands of Palau aerial shot. It is also known as Chelbacheb and is a top-rated dive destination. Photo: Eric Sales/ADB

The Pacific Approach, 2021-2025 of the Asian Development Bank (ADB) is the country partnership strategy for Palau, and focuses on building resilience against economic shocks, delivering sustainable services, and promoting inclusive and sustainable growth. It introduces new priorities for (i) a programmatic approach to climate change, (ii) longer-term capacity support, (iii) procurement flexibilities, and (iv) an emphasis on gender equality.

In 2021, ADB provided $25 million in budget support loans under a systems and expenditure support program to assist Palau in strengthening policy and legislative frameworks for public financial management, reducing fiscal risks from weak public sector asset management, and supporting private sector development. ADB also committed a $3.7 million grant for COVID-19 assistance to support affected vulnerable groups in Palau including the elderly and persons with disabilities, enhance food security, and address gender-based violence.

To date, ADB has committed 24 public sector loans, grants, and technical assistance totaling $164.3 million to Palau. Cumulative loan and grant disbursements to Palau amount to $130.6 million. These were financed by regular and concessional ordinary capital resources, and other special funds. ADB’s ongoing sovereign portfolio in Palau includes 5 loans and 2 grants worth $75.3 million.

ADB has provided $40 million in loans and $4.7 million in grants to address COVID-19, including a $3.7 million social protection grant for vulnerable groups. Budget support under a health and livelihoods program of $20 million loan helped mitigate COVID-19 impacts on health, tourism, and social protection; while a $1 million COVID-19 emergency response grant provided life-preserving goods and services to communities affected by the pandemic. Phase 3 of ADB’s Pacific Disaster Resilience Program will provide a $20 million disaster-contingent financing grant for recovery and reconstruction following natural hazards or health emergencies.

The Pacific Regional Infrastructure Facility helped Palau finalize its National Infrastructure Investment Plan, which set priorities for investments during 2021–2030. The Pacific Private Sector Development Initiative is strengthening the business environment by supporting public-private partnerships, increased transparency, and improved access to credit.

Operational challenges. Palau is exceptionally vulnerable to natural hazards, and its narrow economy exposes it to international market volatility. The country continues to require support for public financial management, and key infrastructure in the energy, water and sanitation, and information and communication technology sectors.

Implementation of a sanitation project in Koror–Airai was delayed due to the pandemic. On the other hand, a 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, limited project implementation capacity remains a significant barrier in Palau, and the Government of Palau must work to ensure that infrastructure improvements from recent investments are sustainable.

Knowledge Work

ADB brings added value beyond its role in project financing. ADB supported the preparation of an urban development strategy and action plan, which focuses on the strategic development of Babeldaob Island in relation to Koror as the driver for economic growth. It is a timely framework that highlights state-focused goals on resilient housing and livable neighborhoods, tourism industry growth, and sustainable urban development. ADB publishes knowledge products on macroeconomic forecasting and public sector management in its Asian Development Outlook and Pacific Economic Monitor. Recent publications discuss progress on COVID-19 vaccinations, pandemic-related school closures and impacts on learning outcomes and earning capacity, medium-term revenue strategies for fiscal sustainability, and supporting recovery in the tourism sector.

  ADB Projects in Palau Project data sheets for loans, grants, TAs

Future Directions

To support sustainable recovery from the COVID-19 pandemic, ADB is focusing its assistance in Palau on improving public sector performance and promoting private sector development. ADB 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 assistance in capacity strengthening and knowledge solutions to help meet 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 energy resources, improving energy efficiency, and responding to the impacts of climate change.