Fiji and Samoa
Country briefing note <download pdf file>
- The Pacific continues to face unique challenges, including small population size, resource constraints, remoteness from trading partners, frequent natural disasters and adverse impacts from global climate change.
- The economic performance of the Pacific island developing economies as a group slowed slightly in 2012. Deceleration in growth of these economies is expected to continue in 2013.
- With slower growth, inflationary pressures also subsided in 2012.
- With regard to the external sector, Pacific island developing economies face high and rising current account deficits, reflecting largely poor performance of their merchandise exports.
- Tourism revenues and remittances from overseas workers slowed in many countries in the last few years due to the weakening global economic environment.
- Unemployment, especially among youth, presents a major challenge for many economies and could have implications for social and political stability if not addressed.
Economic performance of Pacific island developing economies
- All the Pacific island economies, except the Republic of Marshall Islands, Federated States of Micronesia and Tonga, improved their growth performance in 2011, averaging an economic growth rate of 7.9%.
- In 2012, Pacific island developing economies experienced lower economic growth, averaging 6.4%; however, this was mainly due to the slowdown in growth in Papua New Guinea and Solomon Islands.
- The economy of Fiji grew by 2.5% in 2012 compared with 1.9% in 2011.
- Samoa's economy, which is heavily dependent on tourism, remittances and foreign aid, grew by just 1.2% in 2012 compared with 2.1% in 2011.
- Many of the Pacific island economies have experienced changes in their economic structure in the past decade, with declines in the contribution of the agricultural and industry sectors to GDP in some countries and the increasing and heavy reliance on the services sector.
- In Fiji, the contribution of the agricultural sector declined from 20.4% of GDP in 1990 to 12.1% in 2010 while the contribution of the services sector increased from 55.6% of GDP in 1990 to 68.6% of GDP in 2011.
- In Samoa, the contribution of the agricultural sector declined from 18.5% of GDP in 1995 to 9.8% of GDP in 2010 while the contribution of the services sector increased from 51.9% of GDP in 1995 to 62% of GDP in 2011.
Inflationary pressures subside
- Inflation in the Pacific is largely influenced by changes in external food and energy prices. Although, inflationary pressure remains a concern to be monitored, slower economic growth and relatively lower global prices of food and energy resulted in lower inflation in 2012, as compared to 2011.
- Tightening of monetary policy contributed to lower inflation in Fiji. In Fiji, inflation declined from 7.7% in 2011 to 3.5% in 2012.
- Monetary policy focused on safeguarding foreign reserves and maintaining stable prices to support growth and investment. The liquidity position of the banks has increased significantly.
- Stable wages in Fiji have helped moderate inflation in recent years.
- Samoa experienced a lower inflation rate of 2.1% in 2012 compared with 2.9% in 2011. This is due to slower GDP growth in 2012 and the winding down of tsunami-related construction. Inflationary pressures in Samoa are expected to continue to subside in 2013.
Diverse budget performance
- Budget deficits in the Pacific were generally low in 2012, except in the case of Kiribati and Samoa where they were above 8% of GDP.
- The budget deficit of Fiji increased slightly to 1.6% of GDP in 2012 from 1.4% of GDP in 2011. This is due to an increase in consumption expenditure while investment remained subdued.
- Recurrent expenditure dominated government spending, accounting for more than 80% of total expenditure.
- The budget deficit is projected to deteriorate to 2.8% of GDP in 2013 mainly as a result of increased spending on capital and infrastructure projects, especially expenditures to upgrade infrastructure.
- The deficit will be financed through domestic borrowing and loans from the Export-Import Bank of China and the Export-Import Bank of Malaysia.
- In Samoa, government revenue in 2012 increased by 9.9% while expenditure increased by 11.5%, mainly as a result of a sharp increase in current expenditures.
- The budget deficit of Samoa increasing to 8.8% of GDP compared with a deficit of 5.3% of GDP in 2011.
- For 2013, the Government expects the budget deficit to decline. Revenue and grants are expected to increase more rapidly than expenditure, especially on infrastructure.
Current account deficits remain large
- The high and rising current account deficits in some Pacific island developing economies in 2012 were largely a result of poor export performance and a slowdown in overseas workers' remittances. Remittances are a significant portion of GDP in some countries.
- Current account deficit in the case of Fiji continues to be large, but it declined to 9.8% of GDP in 2012 from 10.1% of GDP in 2011.
- Both exports and imports grew by about 5% in 2011.
- The devaluation of the Fiji dollar in April 2009 increased tourist arrivals considerably by making Fiji more attractive to tourists from Australia and New Zealand. In 2012, the tourism industry earned more than the combined revenues of the country's top five merchandise exports.
- Foreign reserves remain comfortable and sufficient to cover 5 months of imports.
- In Samoa remittances are more than 25% of GDP. In 2012, there was a downturn in private remittances.
- Samoa has only a limited number of exports. Although tourism revenues increased, higher import payments and a drop in export earnings led to a widening in the merchandise trade deficit in 2012.
- The Samoan domestic currency strengthened against the United States dollar and the Australian dollar.
- The current account deficit widened to 11.4% of GDP in 2012 from 8.6% in 2011.
- The level of international reserves was sufficient to cover 5.3 months of imports in September 2012.
Future outlook and policy challenges
- As a group, the Pacific island economies are projected to have a GDP growth of 3.4% in 2013.
- Fiji's economy is projected to grow at a slightly higher rate of 2.7% in 2013. The current constitutional process and the plans to hold general elections in 2014 could inspire confidence in the country and attract better levels of investment, thereby promoting economic growth.
- Despite the development of new tourism infrastructure, including hotels, in coming years, Samoa could face capacity constraints, which would result in higher-priced tourism products and services. The economy is expected to slow down and grow by 0.9% in 2013.
- Among the various challenges being faced by these small island economies is their narrow resource base and high dependence on subsistence agriculture and tourism. Diversification of these economies will always remain a challenge. However, the subsistence agricultural sector can be further developed, and its productivity could be enhanced.
- The tourism industry plays an important role in Pacific economies. Strategies for maximizing the benefits of tourist spending are important for these countries. Supplying agricultural products to hotels in the tourism sector could spread the impact of the money spent by tourists.
- The environment (beaches, forests, rivers, coral reefs etc.) is important for the culture and well-being of Pacific island countries, and it also provides a comparative advantage in tourism products. Managing the environment in a sustainable manner is imperative.
- Countries across the region are facing challenges with respect to youth unemployment. About 20% of the total population in the Pacific island developing economies is aged between 15 and 24. Employment opportunities for youth are often limited; many highly skilled youth migrate overseas. The effect is both a brain drain and a large number of un-skilled, unemployed youth in the region.
- Aid is a very large percentage of GDP in many Pacific island developing economies. Donor assistance for infrastructure, health and education is necessary, as many countries do not have the budgetary capacity to develop those areas. Aid is also important in helping the countries in dealing with the impacts of climate change.
- The implications of climate change and natural disasters on Pacific island economies are serious. They not only affect the short-term growth and development prospects but threaten the very existence of some countries. A policy challenge is to focus on adapting to climate change and reducing the vulnerability to its effects. Resources available to these economies to implement national adaptation programmes are scarce.
- Pacific island developing economies need to strengthen regional cooperation. Regional cooperation can reduce the cost of doing business, expand public services and improve sustainability across the Pacific.