Pacific road to recovery requires regional solutions

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 the COVID-19 pandemic.

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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.

"While overseas economic conditions are set to improve this year, Pacific economic conditions will only get worse if the Pacific countries are left to fend for themselves.”

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 relying on tourism are experiencing a disproportionate impact from 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 balance 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 International Finance Corporation (IFC) announced a $A1 billion investment into Fiji and the $A2 billion 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 sooner rather than later;
  • consideration of more budget support lending to contain credit risks; and
  • consideration of agriculture assistance programmes to encourage exports.

Tourism key to 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 per cent a year. So much so, 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 gross domestic product (GDP) is several multiples of its direct contribution to GDP and equates to about 40 to 60 per cent of the region’s output. For Cook Islands, the contribution to GDP is closer to 80 per cent.

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.

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Fiji lost nearly 70,000 formal sector jobs in 2020 (21 per cent of total employment) which saw the unemployment rate shoot up to 27 per cent from 7 per cent 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. 

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The solution is 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. But 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’s through the support of its international allies where we might see a turnaround.

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.

Budget support contains credit, 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 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

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 $A110 million back to Pacific. There are further opportunities here due to the current pool of displaced Pacific workers.

Reduce imports, help 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 growing 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.

Get infrastructure 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 (ADB) estimates over $US30 billion 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 $A2 billion AIFFP has built a project pipeline of about $A300 million for year ending 30 June 2021. This is exactly what the region need, 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 without delay, creating much needed jobs.

Tessa Price is Regional Executive - Pacific and Kishti Sen is International Pacific Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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