Explainer: Why did the U.S. just give $87.3 million to Palau?

 

On 1 October, 2018, Palau celebrates its 24th Independence Day, with a welcome birthday gift of $87.3 million from the United States Department of Interior.

The $87.3 million represents a down payment of a larger economic assistance package of $123.9 million that was appropriated in the U.S. National Defense Authorization Act and the 2018 Omnibus Bill signed into law by President Trump. The funding is actually overdue and a relief for civil servants and elected officials from both Palau and the U.S. who have been working diligently to get the funding secured from the 2010 Compact Review Agreement (CRA).

What can it be used for?

According to a letter signed by U.S. Interior Secretary Ryan Zinke to Palau President Tommy Remengesau, $65.2 million will be paid to the Compact Trust Fund and provides $22.1 in additional economic assistance.

The total funds, $123.9 million, were provided as a lump sum to be allocated as determined by the 2010 Agreement. The terms originally specified in the CRA were for continuing current grant assistance, although at a declining level. Additional resources were provided to support the Compact Trust Fund, infrastructure maintenance and capital projects.

Zinke Letter
Source: Palau Government Facebook post.

While the creation of the Palau Compact Trust Fund has been an important feature of original Compact, it has led to its share of disputes in part due to its lower than expected rates of return. According to an economic review from the Graduate School:

“The CTF was intended to provide $5 million annually from FY1999 to FY2009 and then $15 million annually for government operations through the Compact’s 50th year in FY2044. However, these projections were based on the CTF’s achieving an annual return of 12.5 percent. As it turned out, the CTF achieved a 7.47 percent return through FY2009. This result was actually slightly better than the blended benchmark market rate of return of 7.32 percent over the same period; however, based on projections made at the end of FY2009 the CTF would have failed by FY2022, long before the Compact objective of providing level funding through all 50 years (FY2044).”

Palau has consistently referenced the “inflation adjustment factor” and has sought to have the remaining funds “front ended” so they can be invested to protect from inflation until zeroed out. Having funds in a money earning instrument able to be monitored by both governments provides for transparency and understanding. The money is intended to be subject to a withdrawal schedule under the agreement, but is not part of the documents released publicly at this stage.

Why Palau?

The U.S. and Palau have a special relationship via the Compact of Free Association. It is separate but similar to the Compact of Free Association with the Republic of the Marshall Islands and Federated States of Micronesia (with all three countries referred to as the ‘Freely Associated States’ or FAS). Essentially, the Compact provides for U.S. economic assistance (including eligibility for certain U.S. federal programs), defense of the FAS, and other benefits in exchange for certain operating rights, denial of access to the territory by other nations, and other agreements.

Importantly, flashpoints in the South China Sea and Korean Peninsula have helped revive U.S. policy attention and financial support for the Freely Associated States. In a statement, U.S. Interior Secretary Zinke said, “The U.S. Insular Areas are on the front lines of North Korean aggression and are an important part of the strategic defense for our nation. Authorizing full funding for the agreement is an important element of the Pacific national security strategy to maintain stability in the Western Pacific Region and we look forward to continuing our work with Congress to get this job done.”

Geopolitics over the last several years combined with a new administration have led to improved policy coordination and a whole-of-government approach to its bilateral relationships; U.S. Departments of Interior, State, Commerce, Health & Human Services, Education, Homeland Security, Energy, and others are working much more closely than in recent memory. This has been essential in moving forward interests of both the U.S. and Freely Associated States.

Timeline of the U.S. – Palau Compact

Untitled presentation

What’s next?

Although funding for the Compact Review Agreement was just reignited, it appears the term of the Agreement will still expire at the end of FY2024 and further funding thereafter will be provided from distributions from the Compact Trust Fund. Almost more important than direct financial assistance for Palau are the many federal programs and services Palau currently benefits from that are provided through annual Congressional appropriations. The range of programs included within the Compact include: Postal Services, FDIC, NOAA, Pell grants, FAA, education, health programs, and so forth which are subject to Congressional authorization.  

Palau is a large ocean state, made up of more than 21,000 people and hundreds of islands. Its most pressing issues are dealing with non-communicable diseases, infrastructure development (including for tourism), advocating for global climate action, and sustainable management of its maritime zone. These are all medium and long-term issues that require sustained budgeting and attention.

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