Palau pursues innovation, assistance from partners to enhance economy, security

FORUM Staff

Palau’s improved digital connectivity through undersea cables may help transform the island nation’s economy, which the COVID-19 pandemic devastated.

Palau hopes to “take advantage of this opportunity and really make economic diversification something that could happen for us,” Finance Minister Kaleb Udui Jr. told a panel on United States’ cooperation and engagement in Pacific Island Countries (PICs), assembled in mid-October 2022 by the Center for Strategic and International Studies in Washington, D.C. for its annual Global Development Forum.

“This is a big one for us. We are also looking for assistance in trying to make that happen,” Udui said. To diversify, Palau is also looking to Indo-Pacific partners, including Australia, Japan, South Korea and the U.S., as well as investors outside the region such as Saudi Arabia, he said.

Palauan President Surangel Whipps Jr. appointed Udui in 2021 to help the nation recover from the pandemic, implement tax reform and strengthen its debt repayment ability. The new telecommunication links also offer opportunities for Palau to improve its banking and payment systems, which will also enhance its economic security, Udui said.

Palau’s first undersea cable, which connects to international networks through Guam and was funded by an Asian Development Bank (ADB) loan, launched in 2017. A second cable is nearing completion that will directly tie Palau to Singapore and the mainland U.S. to ensure redundancy and reliability and accommodate increased demand for communication. The Australia-Japan-U.S. partnership for infrastructure investment financed the second cable through grants and loans. (Pictured: Palauan President Surangel Whipps Jr. speaks at the U.S. State Department in Washington, D.C., on September 29, 2022.)

Communication and technological capabilities enabled by the cables will help Palau to overcome the so-called tyranny of distance, imposed by the archipelago’s location in the Western Pacific, Udui said.

In January 2022, Palau launched a digital residency program open to applicants worldwide. “We already have 1,800 digital residents. The idea is mainly to support them in the metaverse and in other trading platforms and cryptocurrency,” Udui said.

Palau also started hosting digital nomads in 2022 as part of its diversification strategy.

“U.S. or Western companies domiciled in Palau or having corporate retreats or headquarters there or corporate meetings there, moving from Hong Kong as an example, could be an advantage. We are within five hours of every major Asian city,” Udui said. Whipps recently signed an open skies agreement with Singapore to enhance physical connectivity as well.

Palau still has many challenges to overcome that will require assistance from partners. Udui praised the increasing presence of offices in Palau and the region for agencies such as the ADB and the U.S. Agency for International Development.

The pandemic proved devasting for Palau, he explained. While other parts of the world have recovered, it may take Palau a decade to bounce back.

“COVID wiped out over 30% of our economy, and we don’t see growth coming back soon,” Udui said.

Palau’s economy, which is heavily reliant on tourism and based on the U.S. dollar, is also experiencing other post-pandemic effects, including managing debt incurred during the COVID-19 calamity. Although the nation was eligible for aid under the U.S. government’s Coronavirus Aid, Relief, and Economic Security and American Rescue Plan acts as part of its Compact of Free Association with the U.S., Palau will likely have to assume more debt to keep the country working post-COVID, Udui said. “It’s not a very attractive option to try to borrow our way out of a crisis.”

Palau’s economy was strengthening before the pandemic to the extent that it will no longer be considered a “least developed nation” by the United Nations and global financiers. “Palau has been put deeper in debt because we have succeeded and graduated in our income per capita,” Udui said. “So, we are trying to explain to people you need to look at us differently.” To finance the first underwater cable, Palau received aid from the ADB, for example, in the form of loans, which must be paid back and entail reforms, as opposed to grants received by less successful nations that don’t have to be repaid, Udui explained.

A strengthening U.S. dollar internationally is also slowing Palau’s recovery by making it a more expensive destination for tourists, who hail mainly from Asia. Many still face quarantines when returning home, which imposes additional costs, Udui said. Meanwhile, global inflationary pressures are increasing interest rates, making borrowing more difficult for Palau. Elevated fuel prices are especially problematic, with gasoline costing more than U.S. $6 per gallon in Palau, he said.

In real dollars and because of increased costs, “people are earning less, so we don’t feel like we’ve graduated,” Udui said.

Nations need to factor Palau’s unique value and position when offering assistance. Palau not only is more vulnerable to climate impacts, for example, but it also offers value to the planet as part of the Pacific, a massive carbon sink that absorbs greenhouse gases from the atmosphere, Udui said. “The issue is how to classify us. We don’t fit into the boxes very easily.”

“So those values need to also be captured when Palau is being assessed in terms of its development and considered in terms of what assistance Palau should receive.”

The U.S. has provided over U.S. $1.5 billion for the Pacific Islands over the past decade. Under its Indo-Pacific Strategy, the U.S. will continue to broaden efforts to partner with Palau and other nations and territories on key challenges, including economic and environmental resilience, water and food security, health security, maritime domain awareness, and strengthening democratic institutions and good governance, according to the U.S. State Department.

The U.S. recently strengthened its commitment through the inaugural U.S.-Pacific Island Country Summit in Washington, D.C., in late September 2022, when U.S. President Joe Biden announced more than U.S. $810 million in expanded programs.
IMAGE CREDIT: THE ASSOCIATED PRESS