The bank said strong economic growth was masking urgent infrastructure and environmental challenges that threaten the long term sustainability of Palau's economy.
In an ADB assessment it warned the rapid growth of low-end tourism could damage Palau's famed natural environment and World Heritage sites.
The bank's Liliana Warid says figures showing GDP growth of 5.3 percent in 2014 and 8.2 percent in 2015 don't capture the risks that increased tourist numbers bring to popular sites.
She said to sustain economic growth and build on the success of earlier business environment reforms, Palau should try and reduce overall tourist numbers but raise individual tourist spending.
It wants a comprehensive national tourism policy and the building of infrastructure to encourage high-end tourism.
Photo: Binter via wikicommons The capital of Palau, Koror.