May 15, 2021 Last Updated 6:06 PM, May 14, 2021

A step up in engagement by the Australian and New Zealand governments, combined with regional and international economic support over the past year, has cushioned the initial blow of Covid-19. 

Moving forward, labour mobility, a fast vaccine rollout and safe travel corridors in the region, combined with the faster release of infrastructure support will be critical to its ongoing recovery.

Closed borders have hit the Pacific island economies hard. The idyllic, Covid-free beaches of the Pacific islands are empty of visitors, and the countries that rely on tourism are experiencing a disproportionate impact of the pandemic on their economies, despite not having a health emergency.

While overseas economic conditions are set to improve this year, the Pacific will require international support to see an uplift in economic conditions. Unlike many of the developed Western countries, the relatively poor Pacific island countries were not able to put a floor under demand and shelter their economies from a more severe recession.

A more severe economic downturn, pressures on payments and elevated currency and country risks are probable in 2021.

Fortunately, the Pacific has long benefitted from support provided by some of its nearest neighbours. Australia and New Zealand have been the region’s key development partners, and more recently, their step up has been encouraging when combined with international donor assistance.

In the last year alone, the World Bank and IFC announced AU$1bn investment into Fiji and the AU$2bn Australian Infrastructure Financing Facility for the Pacific (AIFFP) has become operational.   Recent Australian and New Zealand government assistance to the islands in the wake of Tropical Cyclone Yasa has been welcomed.

In the wake of COVID-19, the Pacific will continue to require international support. The most beneficial types if support are likely to include:

Steps to ensure a:

  • Fast vaccine rollout extended to the Pacific;
  • Safe travel corridors through Australia, New Zealand and the Pacific;
  • Scaled up employment opportunities under the Pacific labour mobility schemes;
  • Release of infrastructure funding quickly and the roll-out of key infrastructure maintenance projects;
  • More budget support lending to contain credit risks; and
  • Agriculture assistance programmes to encourage exports.

Tourism key to a jobs recovery

Prior to the pandemic, the Pacific’s inbound tourism was strong, helped by solid economic conditions, particularly income growth in key source markets including Australia and New Zealand. Growth in overseas arrivals averaged about 5% a year. So much so, that that in the past decade tourism became the main driver of growth for many of the Pacific island economies including Fiji, Vanuatu, Samoa, Cook Islands and Tonga.

Tourism revenue flowed directly into sectors such as accommodation and food services, retail and transport, but then also fed through to other supporting industries yielding secondary benefits to the economy.

Once you add the stimulus from employment and taxes collected, the tourism sector’s total contribution to GDP is several multiples of its direct contribution to GDP and equates to about 40 - to 60% of the region’s output. For the Cook Islands, the contribution to GDP is closer to 80%.

However, since the Covid-induced border shutdown, visitor arrivals have collapsed to virtually zero since April 2020.

Tourism-dependent businesses are experiencing negative cash flows and are struggling to meet commitments. This has resulted in the loss of many thousands of jobs. Fiji lost nearly 70,000 formal sector jobs in 2020 (21% of total employment) which saw the unemployment rate shoot up to 27% from 7% in 2019. Taking into account the informal sector of the economy, which comprise the majority of total employment in the Pacific islands, then the jobs impact is a lot higher.

The solution: A tourism-led jobs recovery.

Many Pacific island countries have not had any community transmission of the virus with some countries having gone several hundred days without a local case. In the absence of international tourism, the economic hardships will get worse.

Recreating the strong growth in inbound tourism seen in the period leading up to the pandemic will be a challenge but it is through the support of its international allies where we might see a turnaround.

GDP and jobs is not the only problem – national debt is mounting

Most Pacific island countries experienced solid growth before the pandemic. But the flipside of this is a rising trade deficit, fuelled by imports of both consumer and capital goods. Over-consumption and narrow growth raises the risk of a return to larger deficits if tourism does not recover.

The need to finance the current account deficit requires a continued inflow of funds, either debt or equity. With the latter requiring favourable economic conditions, debt is the only viable alternative for now.

However, debt has limited wriggle room given the substantial uplift in government borrowings to finance budget deficits in 2020. If the current account deficit comes to a head, then pressures on foreign reserves will emerge and currency risks could rise.

Yes, migrant remittances are holding but that is not enough because consumption does not provide for a jobs recovery.

More budget support can contain credit and country risks

Pacific island governments had to take out large loans and issue debt to offset the decline in revenues brought about by a collapse of the tourism industry. Larger budget deficits have pushed debt higher and has left limited room to borrow more.

Further, Pacific island countries are B-rated credit nations and this prevents them from accessing cheap funds from the international capital markets. The need to fund budget deficits with more expensive domestic debt will heighten credit and country risks. To contain these risks, other countries may consider providing cheaper budget support loans while the Pacific awaits a recovery in tourism and jobs.

Ramping up Pacific labour schemes can help

The Australian Government has restarted its Seasonal Worker Program (SWP) to help fill acute labour shortages in rural and regional Australia. New Zealand has also received seasonal workers.  In the 2018-19 financial year, 12,200 Pacific people worked in Australia under the SWP and remitted an aggregate nearly AUD110m back to Pacific. There are further opportunities here due to the current pool of displaced Pacific workers.

Agriculture technical expertise can reduce imports and help in economic diversification

No doubt after the pandemic we will see a shift away from the Pacific islands being so heavily dependent on tourism as a source of growth. The Pacific has great potential in agriculture with kava exports coming in leaps in bounds in recent years.

Despite this potential, the Pacific remains a net importer of fruits and vegetables when it comes to meeting tourism demand. With abundant land, the Pacific should be looking to reduce these imports and become an exporter of fruit and vegetables. There is also great potential in other areas such as fisheries and niche products like coffee, cocoa and turmeric.

The region would benefit from help with training, technical support and equipment, which could see the Pacific islands, produce high-quality produce at a scale to feed themselves and for the export market.  

Release infrastructure funding quickly and get work started

Inadequate infrastructure remains a key constraint to Pacific prosperity. Without question, the Pacific needs better roads and ports to get produce to market, electricity to drive rural development and industry and more reliable and sophisticated telecommunications. It also needs to safeguard against climate risks by reducing reliance on fossil fuels. The Asia Development Bank estimates that over US$30bn needs to be invested in Pacific infrastructure by 2030.

But the Pacific islands alone lack the resources to meet the ADB’s targets. The narrow-based economies provide limited resources for governments who have to juggle competing priorities, and infrastructure investment is often the casualty. Donor funding is critical.

The AU$2bn Australian Infrastructure Financing Facility for the Pacific (AIFFP) has built a project pipeline of about AU$300m for year ending 30 June 2021. This is exactly what the region needs, more urgently than ever. Fast roll out of this funding, along with the release of fast disbursing funds for infrastructure maintenance works, would mean projects can begin immediately, creating much-needed jobs.

Tessa Price is ANZ's Regional Executive Pacific. Kishti Sen is  ANZ's Pacific Economist

Remittance flow falling victim to the COVID-19 pandemic was anybody’s guess.  It was only a matter of time before this realisation would hit global economies, and drastically, in most cases.  It was not until late April that news of an anticipated drop-off came as the World Bank forecasted a dismal 20 per cent decline in global remittances for 2020, the largest in recent history.  But it is not known if a second wave of the pandemic, now underway in several parts of the world, had been factored into the modelling at the time, considering that this would worsen forecasts by any measure.

Pacific Island Countries are going to be especially hit hard as remittance flows in the East Asia and Pacific Region are expected to contract by 13 per cent.  A number of these countries are among the largest recipients of personal remittances relative to the size of their economies with Tonga topping the list at 40.7 per cent. In the case of Fiji, as recently noted by the Reserve Bank of Fiji Governor, Mr Ariff Ali, personal remittances constitute the second largest foreign exchange earner after tourism and it raked in just below FJ$600m in 2019; equivalent to 5 per cent of GDP.

More recent analyses based on data provided through the Reserve Bank of Fiji’s Enhanced General Data Dissemination System online showed a decline in personal remittances of about 2.4 per cent to $233.2 million cumulative to May 2020, compared to a 10.1 per cent growth in the corresponding period in 2019.  This outcome was largely driven by declines in gifts, maintenance and donations (-2.2 per cent) and personal receipts (-0.2 per cent) which more-than offset a marginal increase in immigrant transfers (+0.02 per cent).  While these trends might lend support to the World Bank’s forecasts of what is to come by the end of the year, there has been one development that surprised many—positively!

Since the height of what might be considered to have been the first wave of COVID-19 earlier this year, mobile money remittance channels took to the forefront of sustaining these lifelines as lockdowns, social distancing rules and deterrents to the use of cash catalysed a shift towards digital services on both sending and receiving ends.  For instance, inward remittances through Vodafone’s M-PAiSA—one of two mobile money service providers in Fiji—more than doubled within two months to FJ$4.5 million in April and is anticipated to grow further for the rest of the year.  In comparison, total remittances recorded a 42 per cent drop over the same period.  While inward remittances through mobile money have been among the least costly methods of sending money from Australia, New Zealand and the US, flows through these channels have long been only a fraction relative to total personal remittance flows.  The observed pandemic-induced boost to this service represents both a historic and promising development in advancing the uptake of digital financial services.

Recognising the lifeline that these digital remittance channels sustained, the Pacific Financial Inclusion Programme engaged a partnership with Vodafone to waive fees on both its international and local remittance channels for two months from mid-May which is anticipated to accelerate the growth of flows through these channels even further.  And especially where mobile money services offer recipients an ecosystem of making payments safely, such as through scanning quick response codes at a distance from merchants and bill payments remotely through mobile, a boom in the use of these services is expected to be sustained for a while as signs of a return to normalcy is shrouded by uncertainty. 

These developments in mobile money services have highlighted the importance of these digital channels in enabling access to cost effective and efficient financial services.  While the challenges that the pandemic has brought may be unprecedented, mobile money services are no strangers to crises, having been leveraged previously to provide assistance during major natural disasters and assist in disbursements of allowances to tertiary students under scholarship or loan schemes. 

The challenge for central banks going forward would be to ensure that their regulatory environment remain conducive to these services; in particular, by ensuring that risk-based due diligence measures are applied to maintain uninterrupted access to what is now becoming an increasingly essential channel.  This would require dialogue between remittance service providers and even regulators to ensure that anti-money laundering rules are appropriate to these channels and are harmonised to prevent frictions on both sending and receiving ends. 

Central banks are encouraged to address barriers to genuinely innovative solutions such as FinTech which can enable more efficient and cost-effective options for consumers.  Exploring and facilitating public-private partnerships to expand connectivity and further reduce the costs of receiving remittances are also suggested.  In addition, central banks may consider ways of raising the profile of these channels and enhance financial as well as digital literacy so as to deepen access across previously-excluded segments of society and to counter exclusion driven by increased digitisation of these services.  Now, more than ever, is a critical time to adapt these lifelines to the new normal in order to keep remittances flowing.  It would be interesting to learn about the experiences of other PICs via the Pacific Forum, among others.

Eserani Munivai is an Analyst with the Financial System Development Unit, Financial System Development Group, Reserve Bank of Fiji. The views expressed in this article are that of the author and do not necessarily represent the position of the Reserve Bank of Fiji. 

This article was originally published on the Pacific Forum, a capacity building platform for South Pacific central banks, including Fiji, PNG, Solomon Islands, Vanuatu and Timor Leste. For more on this Griffith University program visit SPCCB or email the convenor: p.sharma@griffith.edu.au

Papua New Guinea’s Treasurer, Ian Ling-Stuckey says his country has not had “an economic crisis of such complexity or magnitude since World War 2.” Samoa’s finance minister Sili Epa Tuioti calls it a “social and economic tsunami.” The language being employed by institutions and governments in responding to the economic impact of COVID-19 stresses the historic moment we are living through.

The response of international organisations and donor partners to assist Pacific island economies has been swift, although details are still to be ironed out given the pace with which the pandemic is developing and morphing, and the pervasiveness of its impacts across the globe.

Central to that detail will be the form of that assistance; and whether it’s concessional loans, grants, debt forgiveness or a complex combination of all three and more.

What does the crisis mean for tourism, remittances, digital transformation and more? Get your copy of Islands Business to find out more.

 

Growth forecasts

 

2019

2020

2021

Dependencies

Stimulus package

           

ADB Pacific member countries

 

0.3

2.7

Fiscal stimulus measures across the region of at least 10% of GDP

 

Cook Islands

5.3

-2.2

1

Fiscal stimulus measures of approx. 50% of GDP

US$34.7m

Federated States of Micronesia

3

1.6

-3 (WB)

3

0.5 (WB)

Pension fund reform

New capital projects

US$15m

Fiji

 

-4.9

-4.3 (WB)

3 (ADB)

1.9 (WB)

Improved business and investment climate

Limit debt exposure

Climate resilient infrastructure

US$500 million

French Polynesia

       

US$280m

Kiribati

2.4

1.6

1.8

Well managed, sustainable trust funds

 

Marshall Islands

3.8

2.5

-3 (WB)

3.7

1 (WB)

Pension fund reform

Easing of restrictions on travel and transport

 

Nauru

1

0.4

1.1

Well managed, sustainable trust funds

 

Palau

-3

-4.5

-6 (WB)

1.2

0 (WB)

Pension fund reform

Tourism recovery

 

PNG

4.8

0.8

0.2 (WB)

2.8

3.3 (WB)

Good management of public debt

US$1.6billion

Samoa

3.5

-3

-5 (WB)

0.8

0 (WB)

 

US$23.6milloon

Solomon Islands

2.6

1.5

-6.7 (WB)

2.7

-0.3 (WB)

Large infrastructure projects provide some buffer

Reform of tax system

 

Tonga

3

0

0.5 (WB)

2.5

3.2 (WB)

Tourism recovery

Accelerated rehabilitation and recovery post TC Gita

US$25m

Tuvalu

4.1

2.7

3.2

Well managed, sustainable trust funds

 

Vanuatu

2.8

-1

-8 (WB)

2.5

6 (WB)

Benefits of labour mobility schemes are widespread, sustainable

 

Source: ADB Outlook 2020, World Bank, national governments

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