Koror, Palau — President Surangel Whipps Jr. is prioritizing debt repayment and more cautious borrowing to address Palau’s growing external debt, which sharply increased during the COVID-19 pandemic after years of relatively low debt levels.
Palau’s debt-to-GDP ratio remained moderate prior to the pandemic, with figures around 30% in FY2019 and rising to 52% in FY2020. The ratio surged during the height of COVID-19 as the government took on significant loans to support pandemic relief and economic resilience, peaking at nearly 79% in FY2023, according to the Palau Economic Update FY 2024 report released by former Finance Minister Kaleb Udui Jr.
In FY2024, the ratio declined somewhat to 69%, following economic recovery and debt consolidation efforts, but remains historically high for Palau’s small economy.
In a transmittal letter for the proposed FY2026 budget sent to the Palau Congress, Whipps outlined plans to more prudently manage external financing by focusing on paying down expensive, high-interest loans rather than expanding government spending.
“We are revising our treatment of the $7.5 million Asian Development Bank (ADB) policy-based loan that was previously included as a funding source in the FY2025 budget. Instead, these funds will be reserved for FY2026 to pay down high-interest loans,” Whipps said.
Since taking office in 2021, Whipps has targeted Palau’s $164 million external debt. At the April State of the Republic Address, Whipps included the $38 million airport loan and a $15 million USDA loan to the national telecom company in the national debt. Both loans guaranteed by the Republic are paid by two semi-private enterprises, the Palau International Airport Corporation and the Palau National Telecommunications Corporation.
The administration has secured some relief, reducing the USDA loan interest from 5% to 3% and obtaining a $36 million USDA grant for fiber infrastructure. The Compact Review Agreement secured $10 million annually for six years earmarked for debt repayment.
Palau’s borrowing during the pandemic consisted primarily of $115 million in Asian Development Bank policy-based loans, including $15 million under the Disaster Resilience Program and $55 million under the RISES Program. Non-COVID strategic borrowing before COVID totaled $60.8 million, including loans from Taiwan, Australia, Japan, and a planned Saudi Arabia loan.
Despite the surge in borrowing, the Economic Update notes Palau’s debt remains relatively low risk due to concessional loan terms and significant grants such as the Compact 2023 grant, which eased repayment pressures. Still, the report warns that recent global interest rate increases could raise future costs and recommends strengthening fiscal discipline, leveraging grants, avoiding non-essential borrowing, and boosting economic growth to reduce debt ratios.
Whipps called the debt consolidation strategy “critical for ensuring sustainable debt repayment that doesn’t burden future generations.”
A dedicated debt management office was established under the Ministry of Finance in June 2025 better to coordinate sustainable financial strategies amid the complex debt environment. (By: Bernadette Carreon)