EXECUTIVE SUMMARY
The Republic of Palau is a small island nation in the western Pacific Ocean, with an estimated population of about 18,000 people. The government is the country’s largest employer, with approximately 30 percent of the workforce, and the tourism sector was Palau’s biggest economic driver, contributing an estimated 40 percent to GDP. In 2025, GDP was $345 million, approximately $18,000 per capita. Palau’s official currency is the U.S. dollar, and the country has three U.S.-headquartered banks. Apart from tourism, major commercial industries include:
- Wholesale/retail trade
- Business services
- Local commercial fisheries and
- Construction
The country’s small agricultural base supports a subsistence sector centered on fishing and the cultivation of:
- Coconuts
- Breadfruit
- Bananas and
- Taro
Palau has a limited export base and production capacity, making it highly vulnerable to external shocks. Already limited exports reached their lowest level following the implementation of the Palau National Marine Sanctuary in 2020, as foreign companies were prohibited from fishing in the Palau Exclusive Economic Zone. U.S. military exercises have supported the economy through the purchase of:
- Fuel
- Hotel rooms
- Car and boat rentals and
- Scuba diving activities
The country remains heavily dependent on imports and continues to run trade deficits. In 2024, Palau’s exports to the United States were $2.2 million compared to imports from the United States of $21 million. In 2025, exports to the United States fell to $413 thousand, its lowest point since 2011, with imports from the United States rising to $24 million.
The government is reshaping its priorities, plans, and policies for investment in infrastructure affecting areas including:
- The economy
- Education
- Health
- The environment and
- Human resources
Limited resources require public and private collaboration and partnership to improve standards of living and the business environment. Since independence in 1994, Palau has operated under a Compact of Free Association (COFA) with the United States. A new Compact Review Agreement entered into force in March 2024, providing $889 million in U.S. economic assistance over 20 years. U.S. government agencies also provide direct technical and grant assistance through the Federal Programs and Services Agreement. Palau receives additional aid from:
- Australia
- Japan
- Taiwan and
- Other countries with which it has diplomatic relations
It also receives funding from international organizations such as the World Bank and the Asian Development Bank (ADB). The Japan International Cooperation Agency (JICA) is assisting the Palau Public Utilities Company to upgrade the national electricity grid. Australia will fund the installation of batteries to the Independent Power Producer (IPP), which had built a solar photovoltaic facility to advance Palau’s goal of becoming net zero by 2032.
According to ADB, Palau’s GDP grew 12 percent in fiscal year 2024, and 6.9 percent in fiscal year 2025 driven by continued recovery in tourism.
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
- Commercial fishing and
- “Any such other businesses as the Board may determine”
Certain other sectors are semi-restricted, requiring a Palauan partner, while unnamed sectors do not generally require a partner.
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. Foreigners cannot own land in Palau, but they can lease land and own buildings on leased land. Leased land often cannot be released or transferred from the lessee to another, while some leased lands must be returned to the state government at termination or default. Establishing secure land title is often complicated by Palau’s traditional land ownership system and overlapping claims.
Palau is not a member of the World Intellectual Property Organization (WIPO), the World Trade Organization (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 association. Human resource constraints are a challenge for foreign investors and, third country nationals from Bangladesh and the Philippines comprise a large proportion of the labor force.
An overview by the World Bank indicated that foreign direct investment (FDI) is directed towards the tourism and real estate sectors. Palau’s main investment partners include:
- China
- Taiwan
- Japan and
- The United States
