Palau has emerged from the pandemic with significant output loss, high external debt, and inflation. After contracting by 2.0 percent in FY2022, economic activity is estimated to have stalled, growing by 0.8 percent in FY2023. Declining construction activity due to delays in the implementation of new infrastructure projects, is estimated to have offset a modest increase in tourism. Since fully lifting border restrictions in July 2022, the recovery in the tourism sector has been slow, reflecting lack of flights, tighter travel restrictions in Palau’s source markets in East Asia, and the appreciation of the US dollar. After expanding to support the economy during the pandemic, fiscal policy has been significantly tightened towards its pre‑pandemic balanced position.[..]