IMF Staff Completes 2025 Article IV Mission to Palau
November 19, 2025
- Palau’s economic recovery is underway. Fiscal balance is improving, debt is declining, and inflation is well-contained, though real GDP remained below pre-pandemic levels in FY2024 and debt is still high. The growth outlook remains robust despite exposure to global shocks and extreme weather events.
- The authorities’ successful implementation of the tax reform and continued efforts to modernize the tax system are commendable. Swift implementation of pension reform is key. Extended grant from the renewed COFA agreement presents an important opportunity for the authorities to prioritize reducing debt obligations for current and future generations and enhance resilience.
- Going forward, Palau would benefit from structural reforms aimed at diversifying the economy, improving the infrastructure and climate resilience, attracting skilled labor, and promoting foreign investment that generates positive spillovers to the domestic economy. Reforms to modernize the financial system will be most effective if tailored to Palau’s specific needs, supported improved financial literacy, robust regulation and enhanced cyber security measures.
Washington, DC: An International Monetary Fund (IMF) team led by Ms. Yuanyan Sophia Zhang conducted discussions on the Palauan economy for the 2025 Article IV Consultation from November 6 to 19, 2025. At the end of the mission, Ms. Zhang issued the following statement:
“Palau’s economy has experienced a strong rebound following a delayed post-pandemic recovery. Building on 12 percent growth in FY2024, growth is expected to have remained robust at 6.7 percent in FY2025, supported by favorable trends in tourism and construction. Inflation has returned to low single digits, and minimum wage increases have helped real wages recover to their pre-pandemic trend.
“The fiscal position has improved, although the debt level remains high. Economic recovery, increased grants, successful tax reform, and prudent spending restraint have turned fiscal deficits into surpluses. Public debt declined from a peak of 81 percent to 67 percent of GDP by the end of FY2024.
“Palau’s recovery is expected to continue with growth remaining robust in FY2026, supported by a gradual rebound in tourism, construction and infrastructure investment. Inflation is expected to rise from the low level of 0.2 percent in FY2025, driven by higher global food prices and wage increases, and stabilize around 2 percent over the medium term.
“Risks remain on the downside. Geopolitical tensions and global policy uncertainty could slow tourism activity, disrupt foreign investment, and affect donor support. On the upside, swift parliamentary approval of the full FY2026 budget could boost confidence and improve the outlook.
“The mission commends the authorities for successfully implementing the tax reform, including the rollout of the Palau Goods and Services Tax (PGST). Further improvements to revenue administration, including modernizing the IT systems and building institutional capacity, will help Palau fully realize the benefits from the tax reform.
“It is key to maintain fiscal prudence and preserve buffers through the effective implementation of a medium-term fiscal strategy. The FY2026-29 fiscal strategy will be most effective if it provides a clear roadmap to align Palau’s fiscal policy priorities with its development objectives, including reducing the debt-to-GDP ratio to pre-pandemic levels.
“We welcome the authorities’ commitment to swiftly reform the civil service (CSPP) and social security (ROPSSA) pension plan. Conducting a thorough cost and benefit analysis of the design and implementation strategy will be essential to ensure the success of pension reforms.
“There is potential to strengthen the role of Palau’s financial system in channeling bank deposits into domestic investment. Currently, credit to the private sector remains limited. Addressing financial intermediation challenges associated with access to credit risk information, caps on the commercial lending rates and legal uncertainties related to land titles, could help unlock private credit growth and support economic development.
“Efforts to modernize the payment system and mobilize domestic savings are welcome and can be most effective if tailored to identified use cases and Palau’s economic size and resources. The mission recommends a cautious approach to digital initiatives like the tokenized dollar, beginning by addressing inherent risks and gaps in the legal, prudential, and regulatory frameworks. Near term focus should be on preparing a national payment strategy exploring tailored approaches, including the possibility of mobile money.
“Structural reforms are key to diversifying the economy and enhancing its growth potential. Priorities include implementing a high-value tourism strategy, promoting foreign investment, attracting skilled labor, improving food security, and strengthening climate resilience. Educational programs should focus on vocational training and financial literacy. An updated national development plan, that holistically prioritizes these reforms would support stronger and more inclusive growth.
“The IMF team exchanged views with officials in the government, the financial sector, other public institutions, the donor community, and representatives of the private sector. The team would like to thank the authorities and other interlocutors in Koror and Airai for the productive discussions and exceptional hospitality.”
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