This is a difficult period for Pacific island economies. International tourism, a mainstay for several economies, has been on hold since April 2020. Gross domestic product (GDP) has fallen sharply, unemployment has shot up and many businesses are experiencing negative cash flows.
Kiribati, Solomon Islands and Timor-Leste have smaller tourism industries. They depend on commodity exports – tuna for Kiribati, logs for the Solomon Islands and oil for Timor-Leste – so they are relatively sheltered from the collapse of tourism. Nonetheless, mobility and international travel restrictions have kept COVID-19 at bay.
Domestic economy supported by record remittance flows
New government expenditure in the initial responses to the COVID crisis ranged from 1.6 per cent of GDP in Samoa to 8.3 per cent for Timor-Leste. Fiscal policy is still supporting demand and all governments are handing down large spending budgets despite taking hits to revenue.
Total borrowing requirements of Pacific island governments have lifted to fund larger fiscal deficits. However, nearly all governments have secured cheaper external loans from multilateral and bilateral development partners. This has reduced debt servicing costs as the offshore loans were negotiated at exceptional terms, both in terms of rates and tenor.
States are likely to secure more budget support loans from multilateral organisations to keep the cost of debt down. The International Monetary Fund (IMF) recently said it would top up the special drawing rights (SDR) allocation for member countries to provide liquidity support. The alternative for governments would be to tap the more expensive domestic market which would put upward pressure on the cost of debt and raise concerns about affordability. However, the risks of this are low as Pacific island states maintain good support from development partners as shown by the terms of recent loans.
The $A2 billion Australia Infrastructure Financing Facility for the Pacific (AIFFP) will also help investment and job creation. A pipeline of $A300 million will be rolled out in the second half of this year.