Financing Development and Fiscal Volatility - The Cowrie

To undertake investments with a long-term horizon, countries need not only have sufficient fiscal resources but also to ensure that such resources are stable and predictable. In the Pacific region, this is not always the case, which complicates the planning and execution of public investments. For instance, shocks such as natural disasters constrain the capacity of Governments to allocate sufficient and predictable flows of funds to implement development priorities over the medium term. Other impediments include the structural features of these economies: generally characterized by small population size and limited land area, remote geographic location and exposure to natural hazards, such as tropical cyclones, floods and droughts. The economies of the Pacific region are mostly open and highly dependent on the global economy, especially through remittances and aid flows, tourism, imports of basic foods and fuel, fishing license fees, employment and investment returns on trust funds and sovereign wealth funds.

These characteristics of Pacific SIDS make fiscal management particularly challenging, as national budgets are subject to several sources of volatility due to large fluctuations in GDP, terms of trade, tax and non-tax revenues, procyclical remittances or the negative impact of disasters.

Indeed, over the past decade, most Pacific SIDS have experienced considerable volatility in their fiscal balances. For instance, significant levels of volatility in the fiscal balances between 2014 and 2016 was evident in Kiribati and Tuvalu where the standard deviations in the level of their fiscal balances were 21.3 (mean fiscal balance of −0.4 per cent of GDP) and 20.9 (mean fiscal balance of 3.6 per cent of GDP) respectively.

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