The Asian Development Bank says Palau is facing urgent infrastructure and environmental challenges due to its booming tourism industry.
In a report assessing Palau's private sector, the ADB said rapidly increasing numbers of tourists, and what it called 'low-end tourism', could damage Palau's most precious natural attractions, including its two World Heritage sites.
The report recommended the Government establish a national tourism policy and also build more infrastructure that would attract high-value tourists who would make repeat visits.
Its author, economist Paul Holden, said Palau had seen an explosion in tourism in the last couple of years, primarly due to package tours from China.
"Many people say that the growth of the tourist industry is threatening to degrade the natural beauty sites in Palau and the big danger is that these sites will be become overcrowded and thereby destroy the experience," said Paul Holden.