Overview:
IMF says Palau’s economy is “strongly rebounding” — but what does that mean for everyday life?
Tourism and construction are pushing growth up, inflation is low, and government debt is going down. Prices may rise a little next year, but the IMF says inflation should stay manageable.
By: L.N. Reklai
Koror, Palau — “Palau’s economy has experienced a strong rebound,” an International Monetary Fund team said as it concluded its 2025 Article IV mission, highlighting steady growth, lower debt and better government finances.
The IMF reported that Palau’s economy grew strongly in the last two years, supported by the return of tourists and increased construction. The country saw 12% growth in FY2024 and about 6.7% in FY2025. Inflation stayed low, and increases in the minimum wage helped workers’ earnings recover.
The IMF team, led by mission chief Yuanyan Sophia Zhang, said the government’s finances have also improved. With higher revenues, more grants and careful spending, Palau has moved from budget deficits to surpluses. Public debt dropped from 81% to 67% of GDP by the end of FY2024.
Growth is expected to stay strong in FY2026, driven mainly by tourism, construction and infrastructure projects. Inflation may rise slightly due to higher global food prices and wage increases, but the IMF expects it to remain around 2% in the medium term.
However, the IMF warned that global tensions and economic uncertainty could affect tourism, foreign investment and donor support. Quick approval of the full FY2026 national budget, the IMF said, would help boost confidence.
The mission praised Palau for successfully launching the Palau Goods and Services Tax (PGST) and encouraged further upgrades to revenue systems and staff capacity. It also stressed the need for Palau to keep managing its spending wisely and follow a clear fiscal plan for 2026–2029, especially to reduce debt.
The IMF said Palau’s planned pension and civil service reforms are important and should be backed by strong analysis to ensure long-term sustainability.
On the financial sector, the IMF noted that private-sector lending remains low. Issues such as limited credit information, caps on commercial lending rates and concerns over land title rules continue to restrict borrowing and business growth. Strengthening the financial system, the IMF said, is key to helping more domestic investment.
The team also encouraged careful consideration of digital finance tools. Before adopting initiatives like a tokenized dollar, the IMF recommended ensuring strong legal and regulatory safeguards. A national payment strategy — possibly including mobile money — should be the first step.
To support long-term growth, the IMF highlighted the need to diversify the economy. Priorities include promoting high-value tourism, attracting skilled workers, improving food security, strengthening climate resilience and focusing education on vocational skills and financial literacy.