Pacific Island

Briefing Notes for the Launch in Suva, Fiji, April 2007

Pacific Island economies experienced robust real GDP growth in 2006

With few exceptions, Pacific island countries showed positive economic growth, ranging from slightly less than 2% in Tonga to more than 6% in Vanuatu. Growth was led by the primary sector in Papua New Guinea and the services sectors in the smaller countries. Most countries in the subregion maintained trade deficits as imports, pushed higher by rising oil prices, continued to outpace exports. In many countries, the trade deficit was financed largely by aid and remittances. Increased receipts from tourism and foreign direct investment are thus essential for them to maintain their balance of payments and foreign exchange reserves. But political instability in some countries threatens not only tourism but also agriculture, construction and financial services.

Pacific Island Inflation remains a worry in 2007

High oil price was the biggest difficulty in macroeconomic management in 2006 (with oil prices hitting US$ 70 a barrel in August 2006). But inflation will be less of a problem in 2007. For Pacific economies it is projected at 2.7% in 2007, down from 2.8% in 2006.
The Pacific Islands largest economy, Papua New Guinea, is expected to see lower inflation in 2007. Lower inflation is also expected in Cook Islands. However, most Pacific island economies will see slightly higher levels of inflation in 2007.
This is partly the result of continuing pressure from high oil prices. In some of the Pacific Islands this has been moderated by tight monetary policies. Special circumstances in some Pacific islands will keep price pressures high. This is especially true in Solomon Islands – the RAMSI effect – and in Tonga which is struggling to deal with heavy demands on the Government budget.

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.

Exports and Trade Liberalisation

Despite the opportunities offered by trade liberalization, many Pacific Islands are not in a position to benefit as export sectors are facing decline.
This is especially true in Fiji where export performance in the last 2 to 3 years has been very weak. Exports declined by 6.8% in 2005 and by 11.3% in 2006. Part of this is due to the sharp decline in garments exports following the expiry of the Multi-Fibre Agreement. Partly it is due to the continuing poor performance of the sugar sector. Samoa and Tonga also faced declining exports in 2006.
The impact on the balance of payments of falling exports has been exacerbated in many Pacific Island economies by strongly rising imports. Imports in Fiji grew by 13.2% in 2006, despite a tightening of monetary policy. Imports in Samoa and Tonga also expanded rapidly in 2005 and 2006 at the same time as export performance was poor.
The smaller Micronesian countries have very little to export and are highly dependant on a narrow range of exports with imports being paid for by inflows of aid or remittances.
Against this background of poor export performance, Pacific Islands are having to deal with increased pressures for trade liberalization from PICTA, the EPA with EU and PACER.

Higher oil prices

High oil prices pose considerable challenges for policymakers in Pacific island countries.
For Papua New Guinea, which is both a producer and refiner, high oil, copper and gold prices have boosted government revenues. In previous commodity booms, revenue windfalls were seldom well managed. In this boom, however, Papua New Guinea is devoting most of its windfall revenue to investments in transport infrastructure, education, health, law and justice.
For other Pacific island countries, high oil prices have led to sharply higher import bills and to higher costs for businesses and consumers, thereby stoking inflationary pressures. The cost of international air travel is rising just as tourism was beginning to improve in several Pacific countries.
Fiji, Samoa and Tonga have absorbed the fuel price increase by reducing foreign exchange reserves, and by reducing demand for imports through tighter monetary policy. Such policies would, however, reduce the investment needed to promote economic growth. The Solomon Islands and Vanuatu have kept their reserves steady, thanks to high levels of aid inflows.
Pacific island countries have begun to focus on alternative sources of energy, such as biofuels, solar and wind power and hydropower. A coconut oil-diesel fuel blend is being promoted as a biofuel substitute for electricity generation in Samoa and Vanuatu, while bagasse, a by-product of sugar production, is being used to generate electricity in Fiji.

Policy Research Feature on the Pacific: The Challenges of Urbanisation

This year's Survey contains a Special Policy Research Feature on "The Challenges of Urbanisation" in the Pacific.
Urbanisation is part and parcel of modern economic development as towns and cities are the "engine rooms" of national economies. Pacific cities and towns are growing rapidly. Urban populations are growing at twice the rate of national populations in many Pacific island countries.
This has given rise to enormous pressure on urban environments and on the capacity of urban services to cope. The result is that in many urban centres, there is poor access to basic services - especially in squatter settlements - and rising poverty in urban areas because of limited income earning opportunities.
The causes are many, but a major factor is the lack of urban planning policy frameworks; and a lack of strong institutions - such as municipalities and town planning departments - equipped to deal with urban issues.
Governments have not developed policy or strengthened institutions including local governments to address urban planning and management. Of particular need is to strengthen the capacity of local authorities to manage urban services. In addition, there is a need for all levels of government to address the availability of land for planned urban developments.
Unplanned urban developments continue to seriously affect the environment, and makes many urban residents highly exposed to natural disasters such as floods, and storm surges in the atoll islands.
Finally, attention needs to be paid to engaging communities and local landowners in urban planning if it is to be effective in meeting people's needs.

Pacific Urban Agenda

In recognition of the importance of managing rapid urbanization in the Pacific, the 1999 Forum Economic Ministers meeting called for a plan of action to be in line with the global habitat agenda. A Pacific Urban Agenda was developed in 2003 during a regional workshop organised by ESCAP, UNDP and UN-Habitat. The Pacific Urban Agenda was adopted by the ESCAP Commission and by the Forum Leaders and was subsequently incorporated into the Pacific Plan.
A follow up workshop to consider progress is being held in Nadi next week, organised by ESCAP, the Forum and the Commonwealth Local Government Forum.