Context. Palau has emerged from the pandemic with significant output loss, elevated public debt and historically high inflation. Adverse demographic trends, high dependence on tourism and external support, and vulnerability to climate change risks raise vulnerabilities. The authorities successfully enacted a fiscal responsibility framework and modernized the tax system. A new Compact Review Agreement (CRA-23), with better financial terms, is awaiting approval by US Congress.Outlook and risks. Baseline projections assume the approval of Compact Agreement in FY2024. A gradual rebound in tourism is expected to support the recovery. Uncertainty around the outlook is elevated, reflecting the timing of approval of the CRA-23, strength of tourism recovery, international commodity price volatility, and natural disasters, with risks tilted to the downside.Policies. Policies should focus on maintaining the reform momentum to secure a robust and sustainable economic recovery while addressing long-term growth bottlenecks. The CRA-23 presents an opportunity to pay down debt and rebuild fiscal buffers, while at the same time expanding spending in priority areas, including education, health, social security, infrastructure, and adaptation to climate change.