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Pacific Islands

Briefing Notes for the Launch in Suva, March 2009

Impact of commodity price fluctuations on growth: Both GDP (4.8%) and inflation (8.7 %) rose in 2008

  • Pacific island countries experienced a rise in growth from 2.4% in 2007 to 4.8% in 2008, due largely to continued economic expansion in Papua New Guinea (growth rate of 7.3%) as a result of the commodity boom in early 2008. Growth is more modest in all other economies.
  • Inflation rose owing to rise in imported food and fuel prices. Current account and government budgets also affected as a result.
  • Liberalization of the telecommunication sector led service sector growth while improved infrastructure, completion of construction projects and increased international air services boosted growth in the tourism sector.

Effects of the global financial crisis: Both growth (4.3%) and inflation (5.5%) forecast to fall in 2009

  • As the global financial crisis causes economic slowdown in their major trading partners, growth of Pacific economies is indirectly affected as well.
  • Countries with commodity-based economies, like Papua New Guinea, Solomon Islands and Timor-Leste, are likely to experience a decrease in growth, as global commodity prices have fallen in late 2008.
  • Fall in global commodity prices expected to slow activity in commodity-based economies such as Papua New Guinea and Solomon Islands.
  • Economic slowdown in Australia, Japan, New Zealand and United States expected to lower tourism receipts, especially in Fiji, Palau, Samoa, Vanuatu and the Cook Islands.
  • Stock market falls expected to affect smaller countries--primarily in Micronesia-- dependent on Compact or Trust Funds.
  • Inflation is forecast to fall owing largely to drop in imported fuel and food prices.
  • Long-term challenges include climate change and sea level rise.

Pacific Islands face continuing challenges

  • Pacific islands growth rates are considerably below those of Asia. To reach higher growth levels will depend on how fast governments can overcome the challenges they face. Challenges are both internal and external.
  • Internal challenges include the poor investment climate in many Pacific Islands. Much higher levels of investment are required to sustain higher economic growth. The poor investment climate – the difficulty that investors face in getting projects off the ground – can only be overcome by strong leadership and sound policy to make the changes that are necessary.
  • A second internal challenge is political stability. This is essential to provide the necessary certainty that investors and the private sector need to invest and create jobs. Political stability has affected the long term prospects (and short term prospects in some cases) of Fiji, Tonga and Solomon Islands.
  • A third internal challenge is the limited scope for export diversification. Many Micronesian countries have only a very limited range of export earners. Others, such as Fiji, are seeing traditional export earners facing long term decline.
  • A final internal challenge is poor infrastructure, especially transport infrastructure. This is a continuing constraint on developing export markets, and also on developing internal markets.
  • Pacific Islands also face challenges which are external, for which governments have limited control over. These include the moves to greater trade liberalization; continuing high oil prices; and geographic isolation which raises costs of production and limits the possibilities for reaping economies of scale.

Growth modest in most countries

Melanesia

  • The Fijian economy grew by 1.2 % in 2008 after a 6.6% contraction in 2007 despite the fall in sugar production and sugar exports from Fiji to the European Union. Although the number of tourists to Fiji increased in 2008, the economic slowdown in Australia, New Zealand and the United States was expected to affect tourism receipts in 2009. A growth rate of 2.4% is expected for 2009. Exports, especially of mineral water and gold, were projected to rise sharply in 2009. Tariffs were raised on selected import items in order to raise Government revenues and protect local manufacturers; petroleum products accounted for nearly one third of all imports.
  • Papua New Guinea led growth in the Pacific. The economy grew from 6.7% in 2007 to 7.3% in 2008 as global commodity prices rose and the mining sector expanded. Development of infrastructure and telecommunications fuelled the building and construction sector. Growth in the transport sector, coupled with liberalization of its international air transport market, was expected to boost the tourism industry. A trade surplus was expected in 2008, where mineral exports comprise more than four-fifths of its exports.
  • Economic growth in the Solomon Islands was among the highest in the Pacific, despite a drop from 10.3% in 2007 to 7.0% in 2008. Major sources of economic growth are timber exports and tourism, which grew by nearly 50% between 2003 and 2008. Improved infrastructure, domestic air services and telecommunications could lead to further growth in tourism. Exports continued to rise in 2008, with timber accounting for two thirds of total exports in 2007. Gold production is expected to commence in the next two or three years.
  • Vanuatu’s growth rates declined less than expected, from 6.6% in 2007 to 5.7% in 2008, due to growth in the services sector. The liberalization of telecommunications is expected to further strengthen the services sector. Improved international air services boosted growth in the construction and tourism sector. In 2008, exports were expected to continue growing, with copra, kava and coconut oil accounting for half of the country’s exports, along with beef, cocoa and timber, but imports were expected to slow.

Micronesia

  • Rise in construction and retail trade led to a 3.7% growth in Kiribati in 2008. Despite fluctuations in revenue from fisheries, the weakening of the Australian dollar against the United States dollar has strengthened earnings.
  • Growth in Marshall Islands is expected to moderate to 1.2% in 2008 due to rising energy costs and reduced employment at the US military base in Kwajalein. Disbursement of grants, primarily through the Compact of Free Association with the United States, has enabled the Marshall Islands to maintain its balance of payments.
  • The economy of the Federated States of Micronesia is expected to grow by 0.5% in 2009 as commodity prices fall and infrastructure grants are disbursed. External debt remains about 30% of GDP.
  • Although Nauru is likely to be minimally affected by the global economic slowdown, the closure of an Australian refugee-processing centre caused economic contraction. Australia was expected to sustain high levels of official assistance.
  • Palau’s growth was expected to moderate to 2.5% in 2008 due to decline in privatesector investment, consumer demand and tourist receipts.

Polynesia

  • Economic growth in Samoa was expected to slow from 6.1% in 2007to 3.3% in 2008 due to the completion of the South Pacific Games in September 2007. Although liberalization of the telecommunications sector was expected to boost growth in the services sector, tourist receipts were expected to be lower than forecast in 2009. Exports declined due to a significant fall in fish exports. Owing to a rise in public sector 3 wages, imports increased rapidly. Petroleum imports in 2008 rose by more than 50% over the corresponding period in 2007. Remittances from Samoans working overseas are expected to decline in 2009, due to the global economic slowdown.
  • Tourism receipts in Tonga rose by more than 70% in 2008, while tourist arrivals rose by more than 25% to an estimated 67,000 visitors, due to the increased arrival of cruise ships. The construction sector is expected to grow in 2009 owing to the planned reconstruction of Nuku’alofa. Exports declined in 2008, due to a fall in agriculture and fisheries production caused by lower production of root crops, bananas, watermelons and squash, depletion of fish stocks, harsh weather and shortage of cargo space in airlines. With more Tongans living abroad than in Tonga, large inflows of remittances sustain the economy. Private transfer receipts rose by 15% annually between 2000 and 2005.