The Asian Development Bank is planning to help Palau in its transition to a more sustainable and self-reliant economy through policy advice and technical assistance grants.
Palau's economy relies heavily on the public sector, which has been largely funded by external assistance from the United States, Japan and Taiwan.
However, this external assistance may decline substantially with the completion of the Compact of Free Association between the country and the US in 2009.
The ADB's director general for the Pacific, Philip Erquiaga, says there are widespread concerns over the consequences of the completion of the compact.
The Bank says Palau may not be able to sustain its current high income levels and high standard of living.
The ADB' s assistance will focus on strengthening economic and fiscal management, promoting policies for private sector development, and facilitating sound infrastructure development and management.
Next year a 600 thousand US dollars grant will help this process.
This assistance will also assess Palau's capacity to absorb debt and access international capital markets.
In addition money will be provided for a water supply and sanitation project in the capital, Babeldaob.