The delicate balancing act that will be required is not going to make life any easier for those trying to plan business decisions.

Robert Barnes
If you have been following the ebb and flow of official comments of central banks on softening global growth and rising inflation risks, you could hardly have missed the strengthening chorus of much more concrete concerns being expressed by officials.

“The global economy, as a whole, continues to expand and the outlook is positive for further growth, supported by the containment of underlying price pressures. However, higher energy prices, growing global imbalances, and rising protectionist pressures have increased the risks to the outlook.” (G7, Sep 23)

“We are concerned that long lasting high and volatile oil prices could increase inflationary pressures, slow down growth, and cause instability in the global economy.” (G20, Oct 15-16)

“Although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on.” (Alan Greenspan, Oct 17)

The combination of (still) growing global trade imbalances and consistently high oil prices will leave the global economy in a delicate state at some point in the not too distant future.

And dealing with this upcoming period is going to be just as hard (if not harder) for the Pacific central bankers as it will be for their G7 counterparts. The delicate balancing act that will be required is not going to make life any easier for those trying to plan business decisions.

In Fiji, the Reserve Bank Governor, Savenaca Narube, has been spruiking concern on Fiji’s precarious position with regards to its economic growth and trade deficits, a sentiment undoubtedly shared by most other Pacific central bankers.

Compounding the general trade issues faced by the region are high oil prices and a strong US dollar—possibly the two greatest dangers facing Pacific economies over the next two years.

The cost of importing oil is already showing signs of weakening an already fragile balance of payments situation across the Pacific.

Even if world oil prices fall back a little and stabilise, Westpac’s forecast for a stronger US dollar for the next twelve months will only aggravate the problem in local currency terms.

Just how the smaller and import-dependent Pacific economies can plan for this is not an easy task. The recent sudden depreciation of the Indonesian rupiah has shown that government subsidies are not the best economic answer—the cost to a Government’s budget can blow out as subsidies are maintained in the face of rising oil prices for political rationale.

A lowering of taxes on fuel is a possibility. But in our economies, the loss of government revenue would have a direct impact on its services unless revenue can be re-appropriated from elsewhere in the economy.

Yet, Pacific policymakers cannot allow the issue to remain unaddressed and somewhere out there is a healthier blend of fiscal and monetary policy settings to prevent the worse.

Economic growth for many island nations is forecast to slow down next year (not unexpectedly as economic activity is subject to cycles) and any sustained threat from inflation will force further downward revisions and increase the difficulty in regaining growth on the other side of this cycle.

Later this month, Fiji’s Finance Minister, Jone Kubuabola will hand down the Government Budget for next year. 2006 is, of course, a general election year for Fiji and political expediency will have an influence on the budget contents.

Realistically, this is understandable and yet there is also an excellent opportunity for the Fiji government to play a fiscally leading role for the region to boost investment, increase employment, provide encouragement for domestic productivity to meet local demands, reduce imports and grow exports.

We started this article with a recent Central Bank commentary, but the least verbose with an unambiguous message has been saved for last. Although the reference was to Fiji, it applies equally across her neighbours and the quote was from Savenaca Narube: “We need to take action now.”

• Robert Barnes is Treasurer for Westpac Fiji & Pacific Islands. Opinions, statements, and forecasts expressed in this article are those of the writer based on information from sources which the writer believes to be accurate and they are not intended to constitute any form of financial advice or recommendation thereof. Neither the writer nor his employer, Westpac Banking Corporation issues any invitation to any person to rely on the contents of the article and this statement shall exclude liability whatsoever for opinions, statements and forecasts herein.