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