Pacific Economic Monitor

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Pacific Economic MonitorSPECIAL 10th Anniversary ISSUEMay 2019www.adb.org/pacmonitorThe Monitor provides an update ofdevelopments in Pacific economiesand explores topical policy issues.CONTENTSCountry Economic IssuesPolicy BriefsEconomics of climate change in the PacificVanuatu and Cyclone Pam: An update on fiscal, economic,and development impactsIncome—Who scores highest? Benchmarking service delivery Economic empowerment of women throughprivate sector developmentin the PacificRealizing job needs across the Pacific273036394247

2 Pacific Economic Monitor reative Commons AttributionC3.0 IGO license (CC BY 3.0 IGO) 2019 Asian Development Bank6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, PhilippinesTel 63 2 632 4444; Fax 63 2 636 2444www.adb.orgSome rights reserved. Published in 2019.Asian Development Bank ProjectionsGDP GrowthCook IslandsTimor-LesteTuvaluPapua New GuineaVanuatuPalauFSMSolomon IslandsADB does not guarantee the accuracy of the data included in thispublication and accepts no responsibility for any consequenceof their use. The mention of specific companies or productsof manufacturers does not imply that they are endorsed orrecommended by ADB in preference to others of a similar naturethat are not mentioned.By making any designation of or reference to a particularterritory or geographic area, or by using the term “country” in thisdocument, ADB does not intend to make any judgments as to thelegal or other status of any territory or area.This work is available under the Creative Commons Attribution3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, youagree to be bound by the terms of this license. For attribution,translations, adaptations, and permissions, please read theprovisions and terms of use at https://www.adb.org/termsuse#openaccess.This CC license does not apply to non-ADB copyright materialsin this publication. If the material is attributed to another source,please contact the copyright owner or publisher of that sourcefor permission to reproduce it. ADB cannot be held liable for anyclaims that arise as a result of your use of the material.Please contact pubsmarketing@adb.org if you have questionsor comments with respect to content, or if you wish to obtaincopyright permission for your intended use that does not fallwithin these terms, or for permission to use the ADB logo.Corrigenda to ADB publications may be found :In this publication, “ ” refers to United States dollars unlessotherwise stated.ADB recognizes “Fiji Islands” as Fiji; “Hong Kong” as Hong Kong,China; “Solomon” as Solomon Islands, and “Timor” as Timor-Leste.On the cover: Children enjoying a day at the beach in Fiji(photo by ADB).Cover design by: Cecil Caparas and Rommel Rabanal.6Marshall Islands4Kiribati2Tonga0The views expressed in this publication are those of the authorsand do not necessarily reflect the views and policies of the AsianDevelopment Bank (ADB) or its Board of Governors or thegovernments they represent.Pacific regionPacific islands8Samoa2015 161718 19p 20p(1.0)Nauru(8.0)0.1(4.0)0.0Change in real GDP (%)Inflation4.05.35.3Tonga4.2Papua New Guinea3.0Tuvalu3.0Timor-LesteNauru2.0Solomon IslandsKiribatiVanuatuSamoa1.0Cook Islands0.7FSMPalau0.5Marshall ISBN 978-92-9261-602-1 (print), 978-92-9261-603-8 (electronic)ISSN 2521-6066 (Print), 2521-6074 (e-ISSN)Publication Stock No. TCS190129-2DOI: http://dx.doi.org/10.22617/TCS190129-2This edition of the Monitor was prepared by Ananya Basu, RobertBoumphrey, Jacqueline Connell, Prince Cruz, Noel Del Castillo,Edward Faber, David Freedman, Rommel Rabanal, Shiu Raj Singh,and Cara Tinio of the Pacific Department. Publishing productionassistance was provided by Cecil 2.22.02.02.01.51.5Pacific regionPacific islands64201.52015 161718 19p 20p1.02.0Change in consumer price index (%, annual average)4.06.02019p8.02020pFSM Federated States of Micronesia, GDP gross domestic product, p projection.Notes: Projections are as of December 2018 and refer to fiscal years. Regional averages ofGDP growth and inflation are computed using weights derived from levels of gross nationalincome in current United States dollars following the World Bank Atlas method. Averages forPacific islands exclude Papua New Guinea and Timor-Leste. Timor-Leste’s GDP is exclusiveof the offshore petroleum industry.Source: ADB estimates.Printed on recycled ralia-Pacific Technical Collegedeveloping member countryFederated States of Micronesiagross domestic productInternational Monetary FundPapua New GuineaPeople’s Republic of ChinaRepublic of the Marshall Islandsstate-owned enterpriseNotesThis Monitor uses year-on-year (y-o-y) percentage changes to reduce theimpact of seasonality, and 3-month moving averages (m.a.) to reduce theimpact of volatility in monthly data.Fiscal years end on 30 June for the Cook Islands, Nauru, Samoa, and Tonga;31 July for Fiji (starting 2017); 30 September for the Marshall Islands, theFederated States of Micronesia, and Palau; and 31 December elsewhere.

This special issue of the Pacific Economic Monitor celebrates the 52nd ADB Annual Meeting (1–5 May 2019) in Fiji—the first time thisyearly gathering is held in the Pacific. The first section on Country Economic Issues contains the latest near-term economic outlook forthe Pacific, as well as medium- to long-term policy challenges, as presented in Asian Development Outlook 2019.Further, from its first edition published in May 2009, the Monitor has explored topical policy issues critical to development discourse inthe subregion. The second section features a selection of Policy Briefs from the first 25 regular issues of the Monitor published over thepast decade, with short updates highlighting latest trends and developments. Selected briefs examine climate change, disasters, high coststructures, social service delivery, gender, and labor—topics that remain highly relevant to Pacific development today.COUNTRY ECONOMIC ISSUESFijiLead author: Shiu Raj SinghNote: Shortly after the data cutoff for Asian Development Outlook 2019, the FijiBureau of Statistics released a new national accounts series, with data rebased to2014. This new series will be used as the basis for ADB’s projections for the Fiji economystarting with the next regular issue of the Pacific Economic Monitor in July 2019.Estimated growth in 2018 is unchanged from 2017, sustainedby continued expansion in visitor arrivals, increased agriculturalproduction, and continuing reconstruction of cyclone damageincurred in 2016. Inflation rose and the current account deficitexpanded. Growth will accelerate in 2019 and 2020 as inflation andthe current account deficit ease. Government policies supportingtourism growth need to ensure that development is appropriate andsustainable.The economy grew by 3.0% in 2018 with contributions fromagriculture, forestry, and construction, and particularly withcontinued growth in tourist arrivals (Figure 1). Despite two cyclonesthat caused flooding, sugarcane production increased to 1.7 milliontons, up by 4.0% from 2017, though cane quality suffered and millingefficiency declined. Timber harvested from pine and mahoganyplantations increased substantially for higher forestry output. Goldproduction declined, but food, beverages, tobacco, sawmilling, andthe manufacture of wood products all experienced growth.6Impact 4Agriculture20152016Industry900600ServicesSources: Fiji Bureau of Statistics; ADB estimates.02014AustraliaNew Zealand20152016North AmericaEurope2017AsiaPacific Islands2018OthersSource: Fiji Bureau of Statistics.Despite frequent disasters, economic growth in Fiji has beenuninterrupted since 2010. In 2018 the national statistics officeincreased its estimate of growth for 2016 but reduced the estimatefor 2017.Figure 1: GDP growth5.6Figure 2: Visitor arrivalsThousands300Economic performancePercentage pointsPrivate construction grew strongly in 2018 with increased newconstruction augmenting maintenance and repair. Visitor arrivalsgrew by 3.3%, bringing tourism earnings to the equivalent of 20%of GDP and boosting employment in the industry (Figure 2). Japancontributed the most to this increase with the resumption of directflights. Visitor arrivals were higher as well from Europe, New Zealand,and parts of Asia, notably the People’s Republic of China.20192020ForecastGross domestic productConsumption continued to grow in 2018, with new vehicle salesup by 7.2%, second-hand vehicle sales up by 11.5%, and collectionsof value-added tax up by 6.1%. Commercial bank lending forconsumption grew by 9.2%.Inflation rose to 4.1% in 2018, the largest category increase beingbeverages, tobacco, and other intoxicants mainly because of higherduties on alcohol and tobacco but also because production of kavadeclined. Prices for food and nonalcoholic beverage rose by 3.4%.Prices fell for household goods and health care.

4 Pacific Economic MonitorThe fiscal deficit in fiscal year 2018 (FY2018, ended 31 July 2018)was equal to 5.3% of GDP, more than double the deficit of 2.3% inFY2017, as operating and investment expenditures both rose (Figure3). Government debt increased from the equivalent of 46.4% ofGDP in FY2017 to 50.0%.Monetary policy remained accommodative, with the policy interestrate unchanged at 0.5%. Financial system liquidity declined in 2018along with foreign exchange reserves as imports expanded butremain adequate because the Reserve Bank of Fiji, the central bank,eased controls on external flows. Broad money increased by 3.1%.Average rates for time deposits of more than 36 months remainedstable at 3.73%, just 1 basis point lower than 12 months earlier. Theweighted average lending interest rate charged by commercial bankswas also stable despite lower liquidity, increasing only marginallyfrom 5.66% to 5.68%.The current account deficit fell from the equivalent of 5.8% of GDPin 2017 to an estimated 5.2% as the surplus in services expanded onrecord visitor arrivals. Foreign currency reserves stood at 1.0 billionat the end of the year, sufficient to cover 4.5 months of retainedimports of goods and nonfactor services.% of GDPFigure 3: Fiscal deficit and public debt% of tFiscal DeficitTable 1: Selected economic indicators (%)20192020GDP growth3.23.5Inflation3.53.0Current account balance(share of GDP)-4.7-4.2Source: ADB estimates.Agriculture and forestry are important suppliers of exports withsignificant domestic value added. They are expected to continuegrowing, assuming no weather shocks, and contribute to economicgrowth. Fiji’s largest sawmill has undertaken significant upgrades thatpromise to boost timber and wood chip production. Governmentpolicies supporting the sugar industry and mill improvements shouldencourage sugar output. Mining and quarrying are also expectedto contribute to growth. A new iron sand mine slated to becomeoperational this year has invested in dredgers and port facilitiestoward extracting 750,000 tons of magnetite concentrate annuallyto be sold to steel mills in the People’s Republic of China. Tourism ison track for another record year and likely to benefit from reducedtravel costs as fuel prices fall. Expanded private investment intourism will contribute to continued growth in construction. Inwardremittances are expected to continue growing in 2019 on increasedseasonal employment in Australia and New Zealand.Inflation is expected to ease to 3.5% in 2019 and 3.0% in 2020 asinternational prices remain low, but domestic tax measures andstrengthening demand will prevent further deceleration (Figure 4).Public debtNote: Calendar year data for 2014; new fiscal year (August-July) data for 2015onward.Source: Fiji Ministry of Economy.Economic prospectsPlanned investments in transportation and in water supply andsanitation in the greater Suva area are expected to contribute togrowth in construction over the medium term. In addition, publicinvestment in flood control structures in urban areas of Nadi shouldimprove confidence in the tourism industry and encourage moreinvestment.Growth is projected to improve to 3.2% in 2019. All sectors areexpected to grow, with tourism in the lead, but construction willlikely contribute substantially, considering high bank lending for realestate and the number of projects in progress. Tourism will continueto drive growth higher to 3.5% in 2020, with other contributors alsostrong. Growth forecasts assume that public resources will go intoproductive investments in infrastructure, but growth is unlikelyto reach the trend that existed before Cyclone Winston in 2016because the government plans to ensure that public debt does notexceed the government-set ceiling equal to 50.0% of GDP.Figure 4: stSources: Fiji Bureau of Statistics; ADB estimates.

Country Economic Issues 5Exports of goods are expected to grow as shipments of magnetiteconcentrate commence, and as the sugar and timber industriescontinue to recover. This, together with higher earnings fromtourism, is expected to result in a narrowing of the current accountdeficit by 0.5 percentage points in 2019 and again in 2020 (Figure 5).Figure 5: Current account balance% of GDP3015Papua New GuineaLead author: Edward FaberAn earthquake disrupted production from major resource projectsin 2018, slowing growth. However, economic circumstancesimproved with higher commodity prices, easier access to foreignexchange, and the government’s continued commitment to fiscalconsolidation. Inflation eased, and the current account postedanother large surplus. Sustained adoption of market-orientedpolicies and ongoing structural reform are needed to attract foreigncapital.0Economic astGoodsServicesIncomeTransfersCurrent account balanceSource: Reserve Bank of Fiji.Policy challenge—ensuring a sustainabletourism industryLike many other Pacific island nations, Fiji depends increasingly ontourism to drive growth and provide employment. Visitor arrivalsincreased from 2010 to 2018 at an average annual rate of 5.5%.With tourism earnings now providing a fifth of GDP, the businessis central to employment, incomes, and poverty reduction. Moretourists now insist on authentic cultural experiences and pristinenature, which is likely to continue benefiting Fiji in the future.Fiji’s tourism industry depends crucially on the environment, andany degradation threatens to undermine it. Tourism growth needs tobe managed to minimize its environmental impacts. As the industrymatures and moves into a more complex phase of development,greater coordination of policy and the regulatory environment willbecome necessary to ensure both maximal development impactand continuing sustainability. Fijian Tourism 2021, which providesa cohesive tourism strategy and plan, is a step in the right direction.However, the formulation and implementation of a broadersustainable development framework is still critically needed, as isthe implementation of Fiji’s Green Growth Framework and bettercompliance with existing environmental laws and policies.In addition to public sector efforts to improve planning andregulations, Fiji needs a business environment conducive toappropriate private investment and commitment to sustainabletourism initiatives. Finally, public infrastructure must do morethan facilitate private investment. It must be able to withstand theimpacts of climate change and heightened weather variability.A large earthquake in February 2018 undermined growth, but theimpact was somewhat mitigated by higher commodity prices, activityassociated with the Asia-Pacific Economic Cooperation (APEC)summit in Port Moresby in November 2018, and reconstructionin the earthquake-affected zone. Accordingly growth for the yearremained positive at 0.2%. Credit to the private sector pickedup by about 7% in 2018, and employment ceased to decline. Theavailability of foreign currency improved with greater inflows, thoughprivate businesses continued to be stymied by delays in accessing it.The oil and gas industry, which constitutes 20.2% of GDP, contractedin 2018 primarily because of damaged facilities and lost outputcaused by the earthquake. Output of liquefied natural gas (LNG),which provides an estimated 14.9% of GDP, fell by 8.8% in 2018.Production of oil and condensate, which together account for morethan 4% of GDP, were also lower (Figure 6).Figure 6: Contributions to growthPercentage reServicesConstructionManufacturingGross domestic product2018Estimate20192020ForecastMining & petroleumElectricity, gas, & waterSources: Papua New Guinea national budget documents, various years; ADBestimates.

6 Pacific Economic MonitorGold production from Porgera, a large mine in the highlands, washit by the earthquake, but this loss was largely offset by increasedproduction from the country’s largest gold mine on the island ofLihir, New Ireland. Production from the Lihir mine, which has thethird-largest reserves of gold in the world, grew by 6.2% in 2018, withtotal output equal to 5.0% of GDP. Production from some mediumsized mines, including the Kainantu gold mine, was also higher in2018. An estimated 80,000 small-scale alluvial miners increasedproduction by over 7% in 2018, earning combined revenues of about 120 million.The Bank of Papua New Guinea, the central bank, maintained aneutral monetary policy in 2018, with the main policy rate, calledthe kina facility rate, maintained at 6.25%, a slight premium over therate of inflation. There is no transmission of the policy rate to banks’lending or deposit rates because commercial banks can sourcecheap local currency deposits. This is largely due to excess liquidity,arising in part from a tough lending environment. Although there isample liquidity in the system, broad money contracted by 8% in 2018as statutory authorities transferred their deposits from banks intogovernment coffers in accordance with revenue reform measures.The economy apart from mining and petroleum is estimated to havegrown by 3.1% in 2018. The APEC summit in 2018 boosted growthto some extent, channeling business to hotels, restaurants, andtransportation providers, and accelerating growth in construction.Higher government spending and the improved availability offoreign exchange also supported growth.The current account posted a large surplus in 2018 equivalent to26.7% of GDP in 2018 (Figure 8). Oil and gas prices lifted the surplusand helped to overcome the effects of the earthquake. LNG exportswere the largest contributor to the surplus. Foreign currency reservesincreased by 33.6% to 2.3 billion at the end of 2018, providing coverfor 11.6 months of imports. The main source was 940 million in newexternal sovereign borrowing.The agriculture, forestry, and fisheries sector, which makes up about17.0% of GDP, had mixed results in 2018. Farm production, includingvegetables and fruit for the domestic market, continued to expandsteadily on increased demand from population growth and withimproved access to markets thanks to new infrastructure such asroads and bridges. Palm oil is the largest agricultural export, providing1.3% of GDP, but export volume in 2018 fell below that of 2017because of a carryover effect from the 2016 El Niño event. Cocoaproduction was lower in 2018, but coffee production was higher.Forest products, largely logs for export, increased in 2018.Inflation eased to 4.5% in 2018 as foreign exchange became morereadily available and the money supply contracted (Figure 7). Pricesfor food, betel nut, and beverages, which had earlier spiked due todrought, increa

Edward Faber, David Freedman, Rommel Rabanal, Shiu Raj Singh, . “Hong Kong” as Hong Kong, China; “Solomon” as Solomon Islands, and “Timor” as Timor-Leste. . considering high bank lending for real estate and the number of projects in progress. Tourism will continue

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