AlwaysFree: World Bank Pacific Economic Update, February 2023

• As we enter 2023, Pacific Island countries can cautiously look forward to improved economic conditions. 

According to The World Bank article published in February, 2023, COVID-19 and its related restrictions represented an immense challenge for the Pacific since 2020. Tourism dependent economies (such as Fiji, Vanuatu, Palau), in particular, experienced deep contractions and increased public debt as their dominant industry all but disappeared. As border restrictions eased in 2022, Pacific Island economies have begun to bounce back — but hurdles to recovery remain.  

The Pacific has not been immune to the global impacts of the war on Ukraine, with supply chain issues and increases in commodity prices driving inflation higher globally, as well as throughout the Pacific. Though inflationary pressure is expected to ease through 2023, high consumer prices will continue to impact Pacific families. 

Uncertain economic conditions around the world have also weakened demand for Pacific exports and tourism to the Pacific, adding further complications to the Pacific’s post-pandemic recovery.

The World Bank’s Pacific Economic Update also offers a comprehensive assessment of the region’s debt challenges. Pacific governments had little choice during the pandemic but to leverage fiscal policy to support their economies, but this has left Pacific Island countries with higher debts, and increased vulnerability to future crises and economic shocks. 

The report details policy measures Pacific Island governments should consider to accelerate their recovery, build sustainable investment, increase public sector efficiency, and enhance climate adaptation.

KEY FINDINGS

Growth Set to Return After Three Years 

Despite the challenges that remain, Pacific island countries will all see GDP growth return to varying degrees throughout 2023, and into 2024. This comes after three years of GDP contraction in most Pacific Island Countries. Yet for many people in the region livelihoods will still feel challenging as economic output for much of the Pacific will not return to pre-COVID-19 levels until 2024. 

Global Impacts of Russia’s Invasion of Ukraine Hampering Pacific Recovery 

The global economic effects of the war in Ukraine have been felt across the Pacific. Pacific economies, already vulnerable to shocks, have been acutely impacted by increases in global commodity prices, ongoing supply chain constraints, and associated inflationary pressures.

Tourism-dependent economies are set to grow 

After seeing almost no tourism activity in 2020, 2021 and much of 2022, tourism numbers are on the rise in many Pacific economies, already driving economic growth up to 15 per cent in Fiji in 2022, with Palau to see 18 per cent growth in 2023.  

Inflation has largely peaked and is expected to decline by 2024 

The region has not been immune from the high inflationary pressures seen globally. But inflation has generally peaked and is forecast to continue to decline through 2023 and into 2024. Further fallout from the war on Ukraine, however, could sustain inflationary pressure.

Debt risk remains a concern 

The COVID-19 pandemic led to many governments loosening fiscal policy to support their economies. These often-necessary interventions have exacerbated fiscal and debt challenges, and will need to be addressed to ensure Pacific countries are prepared to respond to any crises in the future.

Policies that improve spending efficiency, broaden revenue, and reduce debt risk, can strengthen a sustainable recovery 

The Pacific Economic Update offers policy recommendations Pacific governments should consider that are designed to accelerate growth, lower debt risk, increase public sector efficiencies, and enhance climate adaptation measures.

COUNTRY SNAPSHOTS

Fiji

Fiji was the strongest performing Pacific economy in 2022, buoyed by resurgent demand in its tourism sector that saw GDP growth increase to an estimated 15.1 per cent in 2022. This followed several years of negative growth during the pandemic. 

Fiji is forecast to continue a stable growth trajectory, and see inflation fall as low as 2 per cent through 2023. Coming out of the COVID-19 restrictions, however, Fiji saw its debt-to-GDP ratio climb to above 70 per cent — the highest in the Pacific, along with Palau. 

Palau

After another year of negative growth in 2022, Palau’s economy is set to rebound this year continuing into 2024. Tourism was low in 2022. This was primarily driven by a lack of direct flights into Palau and a continued weak recovery in Palau’s tourism source markets. As direct flight routes resume and markets improve, tourism growth in 2023 is expected to drive a strong recovery. 

Palau’s debt-to-GDP ratio, however, has climbed to over 90 per cent of GDP, limiting its capacity to respond to future shocks.

Samoa

Samoa is experiencing a slower recovery than other Pacific Island countries. Its tourism recovery was hampered as boarders remained closed for the whole of FY2022. The first community outbreak of COVID in March 2022 affected economic activity in the last quarter of FY2022. This led to an economic contraction of 6 percent. As conditions normalise, Samoa is forecast to return to growth in 2023, though the country will continue to be challenged by the highest inflation in the region, reaching 12 percent before easing by 2024.

Vanuatu’s economy is expected to grow through 2023, as tourism arrivals continue to increase throughout the year. This trajectory is set to continue into 2024, as inflationary pressure cools. 

Vanuatu entered 2023 in a better position than some other Pacific Island countries. Its COVID recession was milder than some of its Pacific neighbours, with the government increasing fiscal revenues through 2020-21 through receipts from its Economic Citizenship Program, which helped offset its COVID associated debt. 

Solomon Islands

After three consecutive years of negative economic growth, the Solomon Islands economy will return to growth in 2023, buoyed by a normalisation of borders and the resumption of major infrastructure projects. 

The economic aftermath of the November 2021 unrest in Honiara continues to be felt. Inflationary pressure is expected to ease to 3.4 percent in 2023 and remain about the same in 2024.

Marshall Islands

Due to fishing revenues, the Republic of Marshall Islands (RMI) was one of the few countries in the Pacific to see just one year of economic contraction (2020), with the economy returning to growth in 2021. The recovery is expected to continue to expand through 2023 and 2024. 

Fiscal balances are projected to remain in surplus in Marshall Islands in 2023 and 2024. While grants are expected to decline moderately reflecting a drop in COVID support funding from donors, tax and non-tax revenues are expected to rise in line with the economic recovery and fees from fishing licenses

Tonga

After years of COVID restrictions and closed borders, Tonga’s economy was struck by the Hunga TongaHunga Ha’apai volcanic eruption and tsunami in January 2022. 

In 2022, Tonga’s economy continued to contract, but is forecast to grow around 3 per cent in 2023. This is based on recovery in construction and agriculture and the resumption of tourism. Inflation remains elevated in 2023 driven by higher global prices and domestic supply disruption. Tonga’s public debt now exceeds 40 per cent of its 2021 GDP with significant debt service costs over the next few years. 

Tuvalu 

Tuvalu became one of the last jurisdictions in the world to see COVID-19 circulate in late 2022, after more than two years of strict border restrictions. Modestly sized, the Tuvalu economy continued to grow during the pandemic, largely due to its reliance on sovereign rents (such as fishing licenses) and grants as an economic driver rather than tourism. Consumer prices have increased, but less so than elsewhere in the region.

Kiribati 

Kiribati’s economy was relatively unscathed by the pandemic, helped by fiscal support that eased its impact on citizens. Fishing revenues declined in 2022 though they are expected to recover in coming years. 

Kiribati is expected to register a significant increase in its fiscal deficit through 2023 and 2024, as increases in subsidies and transfers established during the pandemic are expected to remain in place. Its economy is expected to register modest growth in 2023 and 2024.

Micronesia

Federated States of Micronesia (FSM)’s economy contracted for three consecutive years during COVID but is forecast to see a return to growth of 3 percent in FY2023. While inflation is expected to fall from FY2023 onwards.The country’s fiscal balances are expected to deteriorate slightly as grant revenue returns to more normal level. 

Nauru

Nauru was well positioned as it entered the pandemic period due to elevated fishing revenues in the previous years. Throughout the pandemic, Nauru’s economy saw modest growth each year. This is expected to continue into 2023 and 2024, though consumer prices are also expected to increase. Nauru’s economy is still assisted by the Regional Processing Centre (RPC), which is supported by Australia. However, it will need to diversify its fiscal revenues in coming years.

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