Briefing Notes for the Launch in Suva, 6 May 2010
Transmission of crisis impact to Pacific islands
- The crisis was transmitted to the region through various channels, i.e., declining demand for exports; falls in tourism income; falls in remittance earnings; changes in oil prices; loss of value in off-shore trust funds.
- Pacific island countries slowed but maintained a positive growth at 1.9% in 2009, due largely to continued, albeit more modest, economic expansion in Papua New Guinea (growth rate of 4.5%).
- Relatively modest impact of crisis on Australia and New Zealand, Pacific islands’ major trading partners, have cushioned the impact of crisis.
Economic performance of Pacific island countries
Varied growth among commodity exporters
- Papua New Guinea suffered less than other island economies, helped by healthy foreign exchange reserves and domestic bank liquidity resulting from the commodity boom years. Economy decelerated but still expanded by 4.5% in 2009, supported by Government spending in infrastructure as well as strong growth in lending to the private sector. Continued strength in gold price further supported the economy. Recent commodity boom has also contributed to increase in formal employment.
- Solomon Islands' economy decelerated to 0.4% growth in 2009, after three years of strong growth. Log exports, the main contributor to recent economic growth, plunged by about 40% in the first half of 2009 as demand from China collapsed. More worrisome is the estimate that logging is far beyond the sustainable rate and exports could continue to decline and may virtually cease by 2014. The economy is also suffering from a visible slowdown in tourism, its second important contributor to strong economic growth in recent years.
- Economic growth of Nauru remained at 1% in 2009. Strong growth of phosphate exports in both volume and prices was offset by the closure of an Australian refugee-processing centre in 2008. In 2009, a sharp decline in prices for phosphate and physical damage to its port halted sales of phosphate from Nauru to Australia in 2009.
Hard hit tourism- and remittance-dependent economies
- Fiji's economy contracted by 2.5% in 2009 due to a combination of severe flooding at the beginning of the year, declining tourism arrivals and reduced earnings from sugar exports. The 20% devaluation of the Fijian dollar in April 2009 partly offset the decline in the EU sugar price, while leading to a rebound in tourist arrivals.
- The economy of Palau contracted by 3% in 2009, due to a 11.3% fall in number of visitors from crisis-struck countries, notably Japan and the Republic of Korea. It added to 10.1% falls in tourist arrivals in 2008 due to closure of a charter-flight operator from Taiwan Province of China.
- Vanuatu grew at 3% in 2009 and has become one of the few countries that resisted the global economic downturn with strong growth in tourism. The recent growth in services sector is partly attributable to the reform of its international air transport sector.
- Samoa and Tonga rely most heavily on remittances among Pacific island countries. Economic crisis reduced overseas employment prospects while both were struck by a devastating tsunami in September 2009. The economy of Samoa recovered to -0.8% in 2009 after a 4.9% contraction in 2008. However, losses from the tsunami are estimated at around 20% of 2008 GDP and reconstruction costs may rise to $154 million.
- Tongan economy decelerated to 0.4% growth in 2009, hit by the tsunami while still struggling to recover from the sharp fall in commerce and tourism in 2006. The tsunami caused extensive damage and the difficulty in reaching remote villages will make their rehabilitation very difficult, even though the reconstruction of Nuku’alofa is expected to stimulate the economy with external loans.
Dependence on public sector in small atoll countries
- Kiribati’s economy is expected to grow at 1.5% in 2009, reflecting a slight expansion in fisheries and public administration, which has been a dominant contributor to the economy, providing almost two thirds of all paid employment and contributing half of GDP.
- The economy of Tuvalu grew by 1% in 2009, with continued support from Government expenditure, a major player for an economy with a narrow economic base. The global crisis negatively affected the country’s fiscal position through the sharp fall of the Tuvalu Trust Fund, which is mostly invested in offshore markets.
- Both the Marshall Islands and the Federated States of Micronesia barely managed to achieve any economic growth in 2009 (0.5%). Both countries continued to depend heavily on financial assistance from the United States under the Compact of Free Association Grants, amounting to about one quarter of the GDP of the Federated States of Micronesia and about 64% of projected revenue and grants of the Government budget in the Marshall Islands.
Lower but varied inflation
- Inflation rates decelerated in 2009 along with the fall in commodity prices and weak demand.
- The impact of volatility in commodity prices was more pronounced among the various Pacific island countries because of their dependence on imported commodities and the impact of fuel prices on the substantial costs of transport in island economies. For example,
- Inflation rates in Kiribati and the Marshall Islands soared in 2008 by 18.6% and 17.5%, respectively, reflecting the vulnerabilities posed by remoteness and import dependency. By the following year inflation in those countries had moderated to 6.6% and 9.6%, respectively.
- In the Federated States of Micronesia, utilities-driven inflation pressures eased significantly as oil prices dropped, but food inflation remained persistently high.
- The Fijian inflation rate rose to 7.7% in 2008 — its highest since 1990. Food prices rose by 11.5% from their 2007 level, while non-food prices recorded an increase of 6.9%. Although the inflation rate moderated to 3.7% in 2009, inflationary pressures remain, reflected in the 20% devaluation of the Fiji dollar in April 2009, rising petroleum prices and the increase in the minimum wage.
- The inflation rate in Papua New Guinea swung from less than 1% in 2007 to 10.6% in 2008, then to 6.9% in 2009. In addition to fluctuation of food prices, fast growth in the money supply and credit, strong private-sector growth and Government expenditures added to inflationary pressures.
- Inflationary pressures also remain in the Solomon Islands (8%) and Samoa (6.1%) in 2009, where the respective Governments have incurred large expenditure and currencies have depreciated.
External sector affected by volatilities in commodity prices, tourism and remittances
- Apart from a handful of countries enjoy sizeable earnings from commodity exports, many island countries face by balance-of-payment deficits with disproportionately large imports compared to merchandise exports.
- Fuel and food account for a large share of the imports for many countries in the Pacific and the recent volatility in commodity prices has significantly affected their imports and thus their trade balances. For example;
- Fijian merchandise imports increased by almost 25% due to higher costs for petroleum products in 2008, followed by a fall by 30% over the first 9 months of 2009, owing to lower prices of international commodities and fuels.
- Growth of Vanuatu imports in 2008 also reflected the increase of commodity prices as well as increase in imports of capital equipment in connection with major infrastructure projects.
- Commodity exporters (Papua New Guinea, Solomon Islands and Vanuatu) benefited from high commodity prices during 2008 before declines in primary commodity prices towards the end of 2008 slashed export revenues. However, the magnitude of impact varies, for instance;
- high prices for gold, Arabica coffee and cocoa benefited Papua New Guinea, offsetting declines in revenue from other primary exports such as petroleum and copper.
- Palm oil and copra exporters such as Solomon and Vanuatu also benefited because of increases in prices for bio-fuels.
- The recent growth in visitor numbers and revenue earnings from tourism has supported economic growth in the Cook Islands, the Federated States of Micronesia, Fiji, Palau, Samoa, Solomon Islands, Tonga and Vanuatu, turning tourism into one of their most important income-generating sectors. The extent of the tourism sectoral contribution hinged on a combination of factors including:
- The economic health and pattern of consumer spending of mostly developed economies which account for the lion’s share of tourist arrivals in the Pacific;
- reduction of tourism income in the Federated States of Micronesia and Palau is largely due to the downturn in United States and Japanese consumer spending
- visitors from Australia and New Zealand, started to pick up in the latter half of 2009, supporting tourism in countries such as Fiji, Samoa and Vanuatu, and at lesser extent, Papua New Guinea, Kiribati and Solomon islands
- Price competitiveness including exchange rates against the visitors’ home currencies;
- The 25% decline in tourist arrivals in Fiji at the start of 2009 was mainly due to a sharp appreciation of the Fijian dollar against the Australian dollar. Devaluation of the Fijian dollar in April 2009 led to a rebound in tourist arrivals.
- The higher tourist arrivals in Samoa during the first seven months of 2009 likely reflect the depreciation of the Samoan Tala relative to the Australian and New Zealand dollars in the first half of 2009.
- Transportation links;
- Increased connections to major tourist source countries, accompanied by competitive airfares, have encouraged tourism in Samoa and Vanuatu in recent years. In contrast, the closure of a charter-flight operator from Taiwan Province of China to Palau slashed number of visitors from the second largest source of visitors to Palau.
- recent natural disasters; and
- political stability of the host country.
- Remittances have become a major source of income in Pacific island countries with Australia, New Zealand and the United States absorbing the largest share of workers;
- For Tuvalu and Kiribati, remittances depend heavily on seafarers’ employment in merchant shipping; the sharp downturn in global trade flows in the first quarter of 2009 have adversely affected them.
- Samoa and Tonga, with GDP ratios of remittance inflows of 25.2 and 35.8% in 2008, respectively, are particularly exposed.
- Trust funds serve as a main source of Government revenue for Small atoll countries (Kiribati, the Marshall Islands, the Federated States of Micronesia, Palau and Tuvalu), transmitting the impact of crisis to these economies. For instance, the value of the Marshall Islands Compact Trust Fund and the Kiribati Revenue Equalization Reserve Fund declined by an estimated 20% during 2008.
- Some countries employed fiscal stimulus to boost aggregate demand. For example, Samoa’s budget envisaged increases in capital expenditure in 2009 and 2010, a stimulus package focused on infrastructure, before the need for post-tsunami rehabilitation arose.
- The ability to finance a fiscal stimulus depends on a country’s capacity to borrow, which in turn depends on the size of the existing public debt and its creditworthiness. Vanuatu had paid down its public debt through the period of strong economic growth and managed to be in budget balance in 2009. Fiji, by contrast, reduction of revenue and limitation of the Government to access donor grant monies had led them to a cut back in expenditure in 2009.
- Several developing States in the Pacific effectively do not have an independent monetary or exchange-rate policy, since they use the United States dollar (Palau, the Marshall Islands and the Federated States of Micronesia) or Australian dollar (Kiribati, Nauru and Tuvalu) as legal tender.
- In countries with their own currencies (except Papua New Guinea), some form of monetary policy action was taken to boost aggregate demand. Money markets are underdeveloped, and instead of interest rates, central banks use expansion of the money supply as the major instrument in, for example, Fiji, Samoa, the Solomon Islands and Vanuatu.
- As a targeted assistance for the vulnerable, Fiji provided relief through removal of customs duties and VAT on key consumer goods while the income tax threshold was increased. Tonga removed import duties on some food items and on fuel for domestic shipping and air transport. Papua New Guinea also reduced the tax on petroleum to provide relief from higher fuel prices.
- Movement of exchange rates have important implication for Pacific island countries. Devaluation of Fiji dollar in April 2009, for instance, increased competitiveness and helped to offset the decline in the price of sugar exports, as well as induced the rebound of tourist arrivals, while it increases the cost of imports and stimulates inflation.