Overview:
A new GAO report warns that delays in U.S. compact funding and oversight could threaten Palau’s economic recovery, hospital repairs and education projects. The report highlights growing concerns over bureaucratic bottlenecks in both Palau and Washington as billions in aid remain tied up.
Report warns bureaucratic hurdles in both Palau and Washington could weaken strategic and economic goals
By: L.N. Reklai
KOROR, Palau – (May 7, 2026) A new U.S. government watchdog report is raising concerns that delays and bureaucratic bottlenecks tied to Compact of Free Association funding could undermine Palau’s fragile economic recovery, critical public services and strategic importance in the Pacific.
In its May 2026 review of the compact agreements with the Republic of Palau, Federated States of Micronesia and Republic of the Marshall Islands, the U.S. Government Accountability Office found that while education and health remain top priorities for compact spending, implementation and oversight continue to fall behind legal requirements.
The report warns that delays in audits, planning documents and coordination among U.S. agencies could weaken the effectiveness of more than $6 billion in assistance pledged to the freely associated states through 2043.
Among the three nations, Palau was highlighted as particularly vulnerable because of its heavy reliance on U.S. assistance and its exposure to economic and geopolitical pressures.
According to the report, U.S. compact grants and other federal programs made up roughly 36 percent of Palau’s government revenue in 2022. Under the amended 2023 compact agreement, Palau is expected to receive an estimated $889 million in grants, trust fund contributions, infrastructure funding and fiscal support through 2043. Annual grants for health, education and government operations are also scheduled to increase by 2 percent each year.
The funding comes as Palau continues to recover from the devastating economic impact of the COVID-19 pandemic.
The report notes that between fiscal years 2019 and 2022, Palau’s gross domestic product declined by more than 18 percent after international tourism collapsed. Visitor arrivals fell from nearly 116,000 tourists in 2018 to only about 3,400 in 2021 during pandemic border restrictions.
The economic downturn also resulted in the loss of more than 1,500 private-sector jobs, even as the country’s population remained relatively stable.
Palau’s 2025 compact spending plans show the extent to which U.S. assistance supports essential government services. The government plans to allocate about $10.4 million for health services and $10 million for education, with most of the funding directed toward salaries for employees within the Ministry of Health and Human Services and the Ministry of Education.
Additional compact infrastructure funding is expected to support school construction and repair projects, including a new nine-classroom facility in Airai and renovations at Palau High School and several elementary schools.
However, the report says some major projects are still facing delays.
Investigators pointed to serious structural problems at Palau’s main hospital, including water damage and exposed rusted reinforcing steel. Although the government appropriated $2.6 million from a compact-funded maintenance account in 2024 for repairs, procurement delays and limited local capacity have slowed progress.
The report also highlighted ongoing problems with oversight and accountability.
Palau’s annual “single audit” reports covering the use of U.S. funds were submitted hundreds of days late between fiscal years 2019 and 2022. Audits for 2023 and 2024 also missed federal deadlines.
While the U.S. Department of the Interior’s Office of Insular Affairs has provided technical assistance and Palau hired additional accounting staff, the Office of the Public Auditor continues to face a backlog of unfinished audits.
The GAO found similar delays in Washington.
A congressional interagency group established to coordinate U.S. policy toward the freely associated states submitted its first report to lawmakers 10 months late. Meanwhile, plans to establish a dedicated State Department office focused on compact implementation and relations with the freely associated states have been delayed because of hiring freezes and staffing constraints.
The report warns that if compact funding continues to move slowly or cannot be spent efficiently because of limited capacity, Palau could face further delays to critical infrastructure projects, hospital repairs and civil service reforms intended to retain skilled workers in the country.
The GAO also noted the broader strategic implications for the region. The report states that prolonged U.S. administrative delays could weaken efforts to counter growing Chinese economic and criminal influence in Palau, where Chinese sources account for roughly 40 percent of foreign investment and tourism has previously been used as political leverage.
In comments attached to the report, the Palau government described itself as a steadfast ally of the United States and called for stronger and more timely support to ensure the compact agreement fulfills its goals of stabilizing the economy and improving living conditions for Palauan citizens.
