The economy is heavily dependent on the grants received from the United States as part of the Compact agreement. In the 1998-99 budget the Compact grants were $13 million (10 percent of GDP), and other grants from the United States were $11 million (8.5 percent of GDP). The Compact grants are scheduled to be phased out, and to end in 2008-09. Palau has invested some of the large early payments under the Compact agreement, and income from these investments will serve to cushion the position when the Compact agreement is due to end. It is expected that the Compact agreement will be renewed, as the defense provisions are an important consideration for Palau, and it is possible that Compact grants will be continued. Even if they are not, it is likely that the United States will increase grants under other headings to compensate, so that the situation after 2008-09 is not likely to be as severe as at one time anticipated.
Tourism is clearly the best long-term prospect for generating income in Palau, given the scenic attractions of the mountainous islands and the strong association with Japan (Japanese is an official language in one of the states). However, international investment will be necessary for the development of tourism, but a barrier at present is the regulation that prevents foreigners from owning land.