pacific economic monitor - february 2010

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Pacific Economic Monitor

The Pacific EconomicMonitor provides an updateof developments and policyissues in the Pacificeconomies.

February 2010 www.adb.org/pacmonitor

ContentsHighlights 1The economic setting 3The state of the Pacific 5The human face of the

global economic crisis 19Economic policy andmanagement 34Data 40

How to reach usE-mail

[email protected]

Asian Development BankPacific Department

ApiaLevel 6 Central Bank of Samoa Bldg.Apia, SamoaTelephone: +685 34332DiliADB World Bank Bldg., Avenida dosDireitos Humanos, Dili, Timor-LesteTelephone: +670 332 4801 HoniaraMud AlleyHoniara, Solomon IslandsTelephone: +677 21444Manila6 ADB Avenue, Mandaluyong City1550 Metro Manila, PhilippinesTelephone: +63 2 632 4444Nuku'alofaFatafehi StreetTonga Development Bank BuildingNukualofa, TongaTelephone: +676 28290Port MoresbyLevel 13 Deloitte TowerPort Moresby, Papua New GuineaTelephone: +675 321 0400/0408Suva5th Floor, Ra Marama Building91 Gordon Street, Suva, Fiji IslandsTelephone: +679 331 8101SydneyLevel 18, One Margaret StreetSydney, NSW 2000, AustraliaTelephone: +612 8270 9444

The wide-ranging expansionary fiscal and monetary measurestaken by authorities worldwide appear to have succeeded.Growth forecasts for 2010 for advanced economies have beenupgraded, and developing Asia has entered a V-shaped recovery.Authorities now face the challenge of shifting the focus of theirmacroeconomic policies from economic rebound to sustainedrecovery.

Building on the better prospects for the global economy, mostPacific Island economies are expected to perform slightly betterin 2010 than in 2009. The Pacific Islands are expected to expandby 0.5% in 2010, after contracting by an estimated 1.4% in2009. Vanuatu is expected to remain the best-performing PacificIsland economy, bolstered by the benefits of its recentimprovements to economic policy. Only the Fiji Islands and Palauare expected to contract in 2010, an improvement on thecontraction of five Pacific Island economies in 2009.

Growth is expected to increase slightly in 2010 in resource-richPapua New Guinea (PNG) and Timor-Leste. This will help lift theoverall growth rate for the Pacific region (the Pacific Islands plusPNG and Timor-Leste) to 3.7% in 2010, up from 2.4% in 2009.Inflation is expected to remain relatively high in the Pacificregion in 2010 at 5.4%.

As for the global economy, the risks in the Pacific are weightedto the downside. Many key economic indicators eased in late2009, warning of a potentially slow start to 2010.

As elsewhere, it is too early to consider the Pacific to have

completed its response to the global economic crisis. The fragilityof the world economy and the time it will take for householdsand businesses to return to normal suggest caution in relaxingpolicy efforts.

Many Pacific governments are still feeling the impact of theeconomic slowdown on their tax revenue. Fiscal pressures areparticularly intense in the Fiji Islands, Kiribati, the MarshallIslands, Samoa, Solomon Islands, Tonga, and Tuvalu.

The budget areas typically most at risk during times of fiscalpressure are goods and services used in delivering essentialservices, and infrastructure investment and maintenance. Thepriority now is to avoid cuts to services, as such cuts would placeadditional pressure on vulnerable members of the community.There is some encouraging news on this front, with a number ofgovernments budgeting for higher social sector spending in2010. Budget analysis finds that development partner support isneeded to ensure the additional spending is achieved.

Analysis of Pacific labor markets suggests the 'working poor' arethe most exposed to the effects of the global economic crisis.Starting from a position of vulnerability, their incomes are likelyto have declined further wherever construction, manufacturing,retail, and wholesale activity have weakened. Low-incomefamilies dependent on overseas remittances are also likely tohave been among those hit hardest by the global economiccrisis.


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HIGHLIGHTS

2

A b b r e v i a t i o n s

$ US dollars, unless otherwisestated

ABS Australian Bureau ofStatistics

ADB Asian Development BankADO Asian Development OutlookA$ Australian dollarb budgetCPI consumer price indexe estimatef forecastfas free along sidefob free on boardFSM Federated States of

MicronesiaFY fiscal yearGDP gross domestic productIMF International Monetary Fundlhs left hand scaleLNG liquefied natural gasm.a. moving averageNZL New ZealandPNG Papua New Guinearhs right hand scaleRMI Republic of the Marshall IslandsUS United Statesy-o-y year-on-year

Latest Asian Development Bank forecasts

Real GDP growth

-1 0 1 2 3 4 5 6 7 8 9

Palau

Fiji Islands

Tonga

Marshall Islands

FSM

Samoa

Kiribati

Cook Islands

Tuvalu

Nauru

Solomon Islands

Vanuatu

PNG

Timor-Leste

Change in real GDP (%)

-3

0

3

6

9

2007 08 09e 10f 11f

Pacific Region

Pacific Islands

20102011

Inflation

0 2 4 6 8 10

FSM

Solomon Islands

Papua New Guinea

Samoa

Palau

Cook Islands

Marshall IslandsKiribati

Vanuatu

Tuvalu

Fiji Islands

Timor-Leste

Nauru

Tonga

Change in consumer price index (%, annual average)

0

4

8

12

2007 08 09e 10f 11f

Pacific Region

Pacific Islands

2010

2011

Note: Forecasts are for fiscal years. Regional averages of GDP growth and inflation are computedusing weights derived from levels of gross national income in current US dollars following the WorldBank Atlas method. Averages for the Pacific Islands exclude PNG and Timor-Leste.Source: ADB estimates.

NotesThis Pacific Economic Monitor uses year-on-year percentage changes and3-month moving averages. The use of year-on-year percentage changesreduces the impact of seasonality. The use of 3-month moving averagesreduces the impact of volatility in monthly data.Fiscal years are end of June for the Cook Islands, Nauru, Samoa, andTonga (e.g., FY2010 is the year ended 30 June 2010); end of Septemberin the Marshall Islands, the Federated States of Micronesia (FSM), andPalau; and calendar year elsewhere.

2010 Asian Development Bank

All rights reserved. Published 2010.Printed in the Philippines.Publication Stock No: RPS090535

Cataloging-In-Publication DataAsian Development Bank.Pacific Economic Monitor, February2010. Mandaluyong City, Philippines:Asian Development Bank, 2010.

This edition of the Pacific EconomicMonitor was coordinated by CraigSugden and Raquel Tabanao. Theresearch team comprised VivianFrancisco, Joel Hernandez, AdolfMoises Nicolas, and Rommel Rabanal.Layout by Cecil Caparas. The analysisof vulnerability was undertaken jointlywith David Abbott of the UnitedNations Development Programme.

The views expressed in thispublication are those of the authorsand do not necessarily reflect theviews and policies of the AsianDevelopment Bank (ADB) or its Boardof Governors or the governments theyrepresent.

ADB does not guarantee the accuracyof the data included in this publicationand accepts no responsibility for anyconsequence of their use.

Use of the term "country" does notimply any judgment by the authors orADB as to the legal or other status ofany territorial entity.

ADB encourages printing or copyinginformation exclusively for personaland noncommercial use with properacknowledgement of ADB. Users arerestricted from reselling,redistributing, or creating derivativeworks for commercial purposeswithout the express, written consentof ADB.


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3

THE ECONOMICSETTING

Developments overseasGDP growth(%, annual)

-5

0

5

10

2007 08 09e 10f

AustraliaNZLUSDeveloping Asia

Source: Latest ADB Asia Economic Monitor and latest IMF.World Economic Outlook and updates.

Unemployment in key economies(% of labor force; quarterly)

0

3

6

9

12

Jun09 Dec Jun09 Dec Jun10 Dec

Austr aliaNZLUS

Note: Figures for 2010 are the projected annual average.Sources: ABS, Reserve Bank of New Zealand, US Bureau ofLabor Statistics, and latest IMF World Economic Outlook andupdates.

Pacific Islanders in New Zealand(quarterly)

0

30

60

90

120

Sep08 Dec Mar09 Jun Sep Dec0

5

10

15

20Employed persons ('000, lhs)Unemployment rate (%, rhs)

Source: Statistics New Zealand.

This section draws on the latest ADB Asia Economic Monitor and latest IMF World Economic Outlook and updates.Lead author: Joel Hernandez.

Global economy emerging from the downturn

Large and timely liquidity support, unprecedentedmonetary easing, and substantial fiscal stimulus havehelped advanced economies begin to emerge fromthe economic downturn. Global financial marketshave stabilized, credit has eased, stock markets arerecovering, and public confidence in the financialsystem is gradually returning.

The International Monetary Fund (IMF) forecasts thatadvanced economies will grow by 1.3% in 2010 aftercontracting by 3.4% in 2009.

Leading indicators suggest the US economy willcontinue to recover in 2010. The eurozone is alsoentering a recovery phase. After a steep downturn,the Japanese economy is expected to post a modestrecovery in 2010.

The improved external environment and swift policyresponses helped developing Asia to weather thecrisis. Early indicators show the region in a V-shapedrecovery and leading the global rebound.

With global recovery now in sight, world trade isslowly picking up after the sharp drop in late 2008and early 2009.

Prospects for recovery, however, remain fragile anddependent upon management of the exit fromexpansionary macroeconomic policy. Households inmany advanced economies are expected to try torebuild savings. This could see private consumption,

a key driver for tourism and remittances to thePacific, recover slower than the overall economy.

Inflation low, unemployment high

Despite the recent rise in oil and commodity prices,inflation is low globally.

The US lost over four million jobs in 2009. Aroundhalf of these job losses were in construction andmanufacturing, industries that are particularlyimportant to workers from the Pacific. It will takesome time for jobs to be regained. In New Zealand,unemployment of Pacific Islanders is very high at14.0%. This is almost double the national average.

There has, however, been an easing in the pace oflabor market decline in the US and Australia. USmanufacturing overtime hours, a leading indicator oflabor demand, rose from a year low of 2.6 hours inMarch to 3.4 hours per week by the end of 2009. InJanuary 2010, the US unemployment rate easedslightly to 9.7%.

Nevertheless, the IMF expects US unemployment toremain high at 10.0% in 2010. Jobless rates in 2010are forecast to also be high in Australia (7.0%) andNew Zealand (7.9%).


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4

THE ECONOMICSETTING

A view from neighboring economiesCommodity prices rising

After declining sharply following the onset of theglobal crisis, international commodity prices aregradually trending up. For 2010, the IMF has forecasta 14% increase in average commodity prices, comingfrom a 32% decline in 2009. Petroleum prices areexpected to increase by about 24% to an average of$76.50 per barrel in 2010.

While the IMF projects that international food priceswill rise by only 1.2% in 2010, delivered prices arelikely to rise much more in the Pacific due to highertransport costs. Commodity price increases willreduce the real value of household incomes for netbuyers of food, and hence their consumption. Remoteareas are particularly exposed.

Pacific demand for imports mixed

Non-fuel exports from Australia to the Pacific haveheld up for most of the year, driven primarily bysustained demand from PNG. Some slowdown isevident, however, in the Pacific's imports from NewZealand. Non-fuel exports from New Zealand to theFiji Islands, Palau, and (more recently) the CookIslands all dropped sharply in late 2009. Thisindicates some lingering weaknesses in theseeconomies.

Coming from a sharp decline of almost 50% in late2008, the Fiji Islands' imports of motor vehicles fromJapan showed some early signs of improving in late2009. Demand for cars remains weak in the CookIslands, PNG, Solomon Islands, and Tonga.

Tourism to slow in 2010

Australian tourism to the Pacific had been rising overthe second half of 2009, but the growth had largelydissipated by the years end. The Fiji Islands retaineda moderate rate of growth, but this was almost fullyoffset by a weakening in departures to other majorPacific destinations. The latest forecasts fromTourism Research Australia project growth of totaloutbound travel from Australia of 4.1% in 2010,down from 7.6% in 2009. Growth in Australiandepartures to the Fiji Islands is expected to moderate

to 3.6% in 2010. Departures from New Zealand to the Pacific rose

slightly in 2009, with the growth achieved late in theyear. This result was driven primarily by a rise intourism to the Fiji Islands. The New Zealand Ministryof Tourisms latest projections are for a 1.1% declinein New Zealand's outbound travel in 2010, withtourism activity projected to switch from internationalto domestic tourism. Departures to the Fiji Islandsare forecast to be lower by about 4.3% in 2010,while no growth is forecast in tourism to the CookIslands.

Commodity prices(Index: 2005=100)

0

50

100

150

200

2000 02 04 06 08 10f

Food

Fuel / Energy

Source: IMF World Economic Outlook database, October2009.

Non-fuel exports to the Pacific ($ million)

-20

-10

0

10

20

Jun08 Sep Dec Mar09 Jun Sep Dec

AustraliaNZL

Sources: ABS and Statistics New Zealand.

Departures for the Pacific(persons; monthly y-on-y % change)

-20

-10

0

10

20

30


Australia

NZL

Sources: ABS and New Zealand Ministry of Tourism.

Lead author: Joel Hernandez.


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5

THE STATE OF THE P ACIFIC

Cook Islands Visitor arrivals (persons; y-o-y % change, 3-month m.a.)

-20

-10

0

10

20


Austr alia and NZL

NorthernHemisphere

Source: Cook Islands Statistics Office.

Key imports (y-o-y % change, 3-month m.a.)

-100

-50

0

50

100

150

200

250

Dec07 Apr08 Aug Dec Apr09 Aug Dec

Cement imports (NZ$)

Vehicle imports from NZL andJapan (number)

Sources: Japan e-Stats website and Statistics New Zealand.

Key indicators(NZ$ million, quarterly)

100

125

150

175

200

Sep06 Mar07 Sep Mar08 Sep Mar09 Sep0

5

10

Loans to business(end of period)Net VAT revenue(rhs)

NZ$=New Zealand dollar; VAT=value-added taxSource: Cook Islands Statistics Office.

Recent developments

The real value of net value-added tax was down by7.9% in the first nine months of 2009, compared to the

same period in 2008. Despite the high growth in tourism, the economy

contracted by an estimated 0.1% in 2009. Specialevents provided a boost to tourism for much of thesecond half of the year. There was growth of 7.8% inarrivals from Australia and New Zealand in 2009 whilearrivals from the Northern Hemisphere were down by2.2%. Overall, total arrivals grew by 6.7% in 2009.

Outlook

Increased seat capacity on the Rarotonga to LosAngeles route and the expected commencement of adirect link to Sydney will be positives for tourism in2010. However, these routes are dependent ongovernment subsidies. Because the provision of asubsidy means increased taxes, and higher taxes canimpair an economy, the gains would be at the expenseof other areas of the economy that are taxed to fundthe subsidy.

ADB expects growth of 1.0% in 2010 as infrastructureactivities financed by development partners stimulatethe economy. Inflation is forecast to average 6.3% in2010, down slightly from the 7.4% recorded last year.

Key issues

The fiscal deficit for FY2009 is estimated at 11% ofGDP, a result of a large increase in capital expenditure.The expenditure offered little stimulus to aggregatedemand or to the economy's productive capacity, asmost funds were spent on the construction of sportsfacilities by overseas operators. A large budget deficit isalso planned for FY2010, to be financed by loans thatwill increase government net debt to 25% of GDP. Caremust be taken to ensure the new loans are spent onpriority investment needs as set out in theInfrastructure Master Plan.

An attempt to replicate the Samoan model of publicownership of fuel farms ended in a NZ$1.75 millioncompensation payment by the government to fuelimporters. This experience reiterated the importance of

transparency and openness in government activitiesand demonstrated that government is poorly suited toengagement in business activities.

The Government has recently extended the practice ofdirectly negotiating airline subsidies for the Rarotongato Sydney route. The Economic Recovery SupportProgram adopted by the government in October 2009provides for the adoption of open, competitiveprocesses for allocating any subsidies. Such processesoffer better prospects for ensuring the best value formoney from any essential subsidies.Lead authors: Emma Ferguson and Laisiasa Tora.


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Fiji IslandsReal GDP (% change, annual)

-4

-2

0

2

2005 06 07 08 09e 10f 11f

Sources: ADB estimates and Reserve Bank of Fiji.

Departures to the Fiji Islands ('000 persons; monthly)

0

10

20

30

Jul08 Nov Mar09 Jul Nov

From Australia

From NZL

Sources: ABS and New Zealand Ministry of Tourism.

Merchandise export growth (F$; y-o-y % change, quarterly)

-30

-20

-10

0

10

20

30

Mar08 Jun Sep Dec Mar09 Jun Sep Dec

F$= Fiji dollarNote: Figure for December 2009 quarter is an ADB estimate.Source: Reserve Bank of Fiji.

Recent developments

Government estimates show the economycontracted by 2.5% in 2009. This is a significantlyworse outcome than previously forecast. Theimpacts of the January floods and the globaleconomic recession substantially reduced revenuesfrom exports, tourism, and remittances. Underlyingstructural constraints, which have long remainedunresolved, also served to deepen the economicdownturn.

All sectors performed poorly. Underperformancewas pronounced in the sugar industry, where thefailure of costly mill upgrades contributed toworsening performance. Sugar production isprojected to have fallen by 11.2% in 2009 on ayear-on-year basis, and was below target by

31.0%. Tourist arrivals are estimated to have fallen by

4.0% from 2008 to 2009. While the financialimpact of this decline was ameliorated by thecurrency devaluation in April 2009, tourismrevenue is estimated to have declined by 6.0% in2009 due to aggressive price discounting.

Contractions were reported in wholesale and retailtrade, agriculture and forestry, manufacturing,public administration and defense, education, andhotels and restaurants. However, the size of thesecontractions is uncertain due to a lack of data.

Exports declined by 17.6% on an annual basis in2009. Earnings from re-exports, sugar, otherdomestic exports, timber, and garments alldeclined. Timber exports dropped by 1.9% andgarment exports by 1.3%. These declines morethan offset increases in gold and fish exportearnings.

Imports contracted by 19.0% in 2009 in nominalterms, with falls in most major categories includingmineral fuels and manufactured goods.

Both imports and exports are expected to grow in2010, driven by improved global conditions.However, the scale will depend on a number of

factors, including progress with structural reforms.ADB expects only modest growth in both importsand exports.

Government estimates show an increase inremittances in 2009 (albeit on the very low base of2008). Estimated remittance levels in 2009 are stillaround 15% below the trend set prior to 2006,despite the devaluation.

Foreign reserves were recorded at around $568million in late 2009, almost double that of 12months earlier.


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7


Fiji Islands The improved foreign reserve position has resulted

from reduced imports and $188 million inadditional special drawing rights allocations by the

IMF in August and September. The 20%devaluation in April 2009 increased the value ofreserves in Fiji dollars, but had no immediateimpact on the underlying value of the reserves(which is measured in foreign currency terms).

The net fiscal deficit was close to target in 2009 asa result of aggressive expenditure cuts, particularlyin operating expenditures, and slow capital projectimplementation (which remains a problematicissue). In 2009, for example, only around 50% ofthe capital budget was spent.

Outlook

ADB projects the economy will contract by afurther 0.5% in 2010. The economy is held back byan expected absence of growth in tourism receipts(driven by a projected easing in Australianoutbound travel to the Fiji Islands and a decline inNew Zealand outbound travel) and the continueddecline of the sugar industry.

Rising oil prices, slow progress in structuralreforms (in particular, land tenure reforms), andconstrained capital project implementation createrisk for further drag to economic performance.Other key risk areas to monitor are rising levels ofgovernment debt and financial sector stability.

Key issues Restrictions on publicly available economic

information, including budget data, are hamperingthe monitoring of economic conditions.

However, it is clear that a short-term fiscalconsolidation is essential. It will be important toavoid achieving the consolidation by reducing thequality and implementation rate of thegovernment's capital spending program. Thecapital program is essential to avoiding orminimizing a contraction in 2010.

Structural reforms set out in the 2010 budget needto be managed to minimize adverse impacts and toensure sustainability. For example, civil servicereforms are best undertaken in parallel with effortsto create private sector jobs, and any land reformneeds stakeholder ownership.

Rising public debt is a concern. Public debt isestimated to have exceeded 50% of GDP in 2009and, along with rising government contingentliabilities, poses a threat to fiscal sustainability andmedium-term growth.

Poverty is growing and only strong and sustainedeconomic growth can turn this around.Lead authors: Emma Ferguson and Laisiasa Tora.

Net budget position (% of GDP)

-6

-4

-2

0

2

2005 06 07 08 09e 10f

Government target Ac tual

Note: The net budget excludes loan repayments.Sources: Economic and Fiscal Update: Supplement to the2010 Budget Address ; Reserve Bank of Fiji quarterlyreviews.

Foreign reserves (months of import cover)

0

1

2

3

4

Dec08 Apr09 Aug Dec

Source: Reserve Bank of Fiji.

Monetary indicators(monthly)

0

5

10

15

20


Credit growth (y-o-y % change)

Inflation rate (y-o-y % change)

Lending rate (% per annum)

Source: Reserve Bank of Fiji.


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8


Kiribati

Nauru

The economy is projected to have contracted by0.7% in 2009 as global demand weakened andaffected the demand for seafarers, copra prices andreturns on offshore investments held in the RevenueEqualization Reserve Fund (RERF). Expectations for2010 is more positivegrowth of 0.8% is forecastas conditions in major source markets improve.

Unsustainable fiscal deficits in previous years havenecessitated large drawdowns from the RERF.Coupled with the global decline in asset values, theRERF has dropped below the 1996 benchmark levelof A$4,500, in real per capita terms.

Inflation moderated to 6.6% in 2009 (y-o-y) as fueland food prices eased.

Latest ADB estimates, based on the 2010 budgetreleased in November 2009, show a small budgetsurplus. However, this surplus is too small to offsetthe reduction in the market value of the RERF, andits real per capita value remains on a downwardtrend.

Often-discussed improvements to governancearrangements for RERF have not progressed. Puttingthese in place remains critical to improved medium-term economic prospects. The issues are soon to beexplored through an Australian-funded study of theRERF.

Lead authors: Emma Ferguson and Laiassa Tora.

Fiscal balance (% GDP)

0

3

6

9

2006 07 08 09e 10f

ADB estimate

IMF es timate

Note: Budget balance estimates treat Revenue EqualizationReserve Fund (RERF) income as a revenue item.Source: ADB estimates based on Kiribati 2010 Budget andIMF Article IV staff report on Kiribati.

RERF closing balance(A$ per capita, real)

0

2000

4000

6000

2006 07 08 09e 10f

Note: Per capita RERF balance deflated by CPI.Source: ADB estimates based on Kiribati 2010 Budget.

Export values and prices(% of 2007 GDP and $ per ton, quarterly)

0

100

200

300

400

500

Jun07 Dec Jun08 Dec Jun09 Dec

$

0

5

10

15

20

25

% 2007GDP

Rock phosphate prices (lhs)Export to Australia, % of GDP (rhs)

Note: Exports mostly consist of phosphate.Sources: ABS and World Bank Pink sheets.

Lead author: Milovan Lucich.

While the 2008 spike in world demand for phosphatehad helped Nauru increase export prices andvolumes, lower demand and port damage severelyrestricted phosphate exports in 2009. Thisturnaround put a brake on economic activity.

The economy did, however, receive a boost in 2009from Digicels introduction of mobile telephonyservices in the second half of the year. Within 2weeks of the services introduction, more than 40%of residents had a mobile phone, marking one of thefastest take up rates of telephony in the world.

No overall growth was expected in 2009, as theboost from the introduction of mobile telephony wasoffset by the fall in phosphate exports. Growth of2.0% is expected in 2010 following an anticipatedrecovery in phosphate demand, although the rate ofgrowth will be restrained by poor infrastructure. In2011, 4.0% growth is projected as infrastructurerepairs alleviate the constraints and exports rise.

Inflation fell sharply in the second half of the year asthe lagged effects of fuel price changes passedthrough. Inflation is estimated to have been 2.2% in2009. Slightly higher inflation is projected for 2010and 2011 on the back of higher fuel prices.

Lead authors: Emma Ferguson and Laiassa Tora.


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9


Northern Pacific StatesFederated States of Micronesia

The economy is forecast to grow by about 0.5% in2010, following four consecutive years of contraction.Growth will be supported by large donor-fundedinfrastructure projects, notably in fisheries andtransport. However, weak industry linkages and privatesector participation mean these projects will have onlya small effect on the local economy in the short term.

A new financial management information system andtighter controls helped rein in spending in 2009, and asmall deficit was achieved. However, more work needsto be done to secure long-term fiscal sustainability.Delays in tax reform and an annual decline of $0.8million in grants under the Compact of Free Associationwith the US are making it difficult to achieve fiscalsurpluses. Surpluses are necessary to build up thepublic trust fund to the target level before the compactexpires in 2024.

Marshall Islands

The IMF projects a gradual recovery over 2010, withgrowth expected to reach 0.5% for the year. Weakdomestic demand is still evident from an easing in thegrowth of food imports from the US.

Annual fiscal surpluses of about 5.0% of GDP arerequired over the long term to build up the public trustfund as a replacement for Compact grants ending in2024. Achieving these surpluses would require largefiscal adjustments notably reduced expenditures andincreased revenue collections through a more efficient

tax system. These required adjustments will constraingrowth prospects for the medium term.

Palau

Tourism is showing signs of a turnaround. Arrivals fromTaipei,China increased sharply in September andOctober 2009 on a year-on-year basis.

Domestic demand remains subdued. The reduction inpublic infrastructure outlays from recent high levels hasdampened economic activity. Consumption spending islow, as reflected in the declining value of monthly foodimports from the US, and government revenues arefalling.

The improvement in Asian economies is positive newsfor the tourism-dependent Palauan economy. Theturnaround in Japan is particularly important as Japanis Palau's major market.

However, reductions in government spending areforecast to lead to an overall economic contraction ofabout 1.0% in 2010. The 2010 budget cuts spending byabout 10.0% to initiate an adjustment to sustainablelevels. Measures to streamline the public service arealso underway to help stabilize the fiscal position overthe longer term.

FSM real GDP growth(annual % change)

-4

-2

0

2

4

2005 06 07 08 09e 10f

FSM=Federated States of MicronesiaSource: ADB estimates.

RMI fiscal adjustment(fiscal balance, % of GDP)

-3

0

3

6

2006 08 10 12 14 16 18 20 22 24

Annual fiscal surplusesrequired to of fset expiring

Compact grants.

RMI=Republic of the Marshall IslandsSource: International Monetary Fund.

Palau visitor arrivals(persons; y-o-y % change, monthly)

-60

-30

0

30

60

90

Jun08 Oct Feb09 Jun Oct

Total arrivalsFrom JapanFrom Taipei,China

Source: Palau Visitors Authority.

Lead author: Rommel Rabanal.


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10


Papua New GuineaRecent developments

ExxonMobil Corporation and its partners have agreed toproceed with the $16 billion liquefied natural gas (LNG)project, conditional on clinching further binding salesagreements. This would be the biggest resourcedevelopment project ever undertaken in PNG and couldgrow to contribute as much as 20% of annual GDP onceoperational.

Merchandise exports declined by 26% in 2009 innominal dollar terms. Lower export income in turnreduced government revenue and slowed privateconsumption. In real terms, government revenues weredown by more than 20% in 2009.

Despite the lower revenue outturn, real publicexpenditure increased by 3% as the government drewdown heavily on savings accumulated during the recentcommodity boom. A near-balanced budget wasanticipated for 2009, but the deficit-to-GDP ratioprobably exceeded 10% after including off-budget trustfund account payments.

Net expenditure from trust funds in the 9 months to theend of September 2009 was equivalent to about 6% ofGDP and represents almost two-thirds of total trust fundpayments since 2005.

The surge in government consumption probablyexplains a significant pick-up in import demand sincethe second quarter of 2009. Real kina imports fromAustralia increased by more than 20% in the secondhalf of 2009 compared with the same period in 2008.

In response to lower inflation, the Bank of PNG reducedits monetary policy indicator rate by 1 percentage pointto 7.0% in December 2009. Inflation has sinceincreased slightly to 5.7% in December 2009 (yo- y).Year average inflation was 6.9% in 2009.

Outlook

The government expects the benefits from the LNGproject to begin to flow in 2010, and is now factoringthe project into the macroeconomic framework of thenational budget. Official forecasts are for economicgrowth of 8.0% in 2010 and 6.2% in 2011.

ADB growth projections are more cautious than officialestimates. Project offtake deals, along with theoutstanding financing, must be finalized and there arerisks that construction works will take some time toramp up, even if final go-aheads are secured very soon.Using its experience with similar LNG projects, ADBprojects that the major impacts on GDP are likely tocommence in 2011. The ADB growth projection is 5.5%in 2010 and 7.7% in 2011. Inflation is expected to trendup in 2010 to 7.1% and reach 7.7% in 2011. Bothdomestic and external factors will contribute toinflationary pressures.

Real growth(% change, annual)

0

2

4

6

8

10

2004 05 06 07 08 09e 10f 11f

Growth impact of LNG Project

LNG=liquefied natural gasSources: PNG Department of Treasury and ADB estimates.

Exports(index: Dec 2003=100, quarterly)

0

100

200

300

400

Dec03 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09e

Volume (agriculture and log)Price (agriculture and log)Volume (mining and oil)Price (mining and oil)

Sources: Bank of PNG and ADB estimates.

Fiscal impulse(% of GDP, annual)

-4

0

4

8

12

16

05 06 07 08 09e

Sources: PNG Department of Treasury; ADB estimates.


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11


Papua New GuineaKey issues

The large fiscal stimulus of 2009 was unnecessarygiven solid private sector activity associated with the

LNG project. The 10% budget deficit was also notablefor being substantially above the maximum level of4% set under the medium-term fiscal strategy.Deviations from the medium-term fiscal strategy runthe risk of undermining macroeconomic stability, andtighter fiscal discipline is now needed.

The 2010 budget will bring the deficit, inclusive oftrust fund account movements, to under the 4%maximum. It is important that this planned fiscalconsolidation is achieved.

The central bank needs to retain a forward lookingperspective. It must continue to closely monitor theeconomy and be prepared to tighten monetary policyquickly should the economy overheat and inflationbegin to rise. Recent minimum wage increases are anadditional source of inflation risk that will need to bemonitored during the year.

A recent erosion of transparency in financial reportingpresents further key challenges for 2010. The currentpractice of reporting fiscal balances exclusive of trustfund movements hinders macroeconomicmanagement by obscuring the government'scontribution to aggregate demand. The situationcould be quickly corrected by adopting internationalpractice and reporting the fiscal balance inclusive oftrust fund movements.

Addressing the lack of transparency and infrequentreporting on how trust fund monies are spent wouldalso be constructive. Notably, this would assist effortsto monitor the alignment of government expenditurewith development priorities. There is likely to havebeen slippage on this front in 2009, given therelaxation of constraints on trust fund drawdowns andthe rapid pace at which these monies were spent.

A further issue is a lack of information on location anduse of $1.1 billion in funds raised to help pay for thestate's equity in the LNG project. In March 2009, thegovernment issued a 5-year $1.1 billionexchangeable bond to the International Petroleum

Investment Corporation. The bond was issuedthrough its nominee, a subsidiary of the IndependentPublic Business Corporation, against thegovernment's holdings of shares in Oil Search.

Establishing an offshore sovereign wealth fund for themanagement and maintenance of natural resourcerevenues would do much to enhance transparencyand accountability. It would also help reduce the riskof macroeconomic instability. As shown by the recentexperience, the domestic financial system is tooshallow to absorb large inflows of mining and oilrevenue.

Trust Fund drawdowns(cumulative kina million, quarterly)

0

500

1000

1500

2000

Q1 Q2 Q3 Q4

2008 2009

Note: Data are not available for Q4 2009.Sources: PNG Department of Treasury and ADB estimates.

Central government balance(% of GDP, annual)

-15

-10

-5

0

5

10

2004 05 06 07 08 09e 10f 11f

Official estimates

Adjusted for trust fund

account movements

Source: PNG Department of Treasury and ADB estimates.

Imports from Australia(real kina million, quarterly)

0

500

1000

1500

Mar08 Jun Sep Dec Mar09 Jun Sep Dec

In-Country data

Out-of-Country data

Note: Deflated by the CPI.Sources: Bank of PNG and ABS.

Lead author: Dominic Mellor.


12/44

12


SamoaRecent developments

The government deepened the response to theSeptember tsunami with release of a S$95 million

($38 million) supplementary budget in December.S$78 million is to be spent on tsunami relief andassociated expenditure, with an emphasis on therehabilitation of infrastructure in tsunami-affectedareas. Additional funds are also provided to supportsocial services, including fasttracking a targetedschool fee relief scheme originally prepared as aresponse to the economic slowdown. The budget alsoprovides for relief for affected businesses. Notably, acredit line is to be established for the reconstructionof tourist facilities, and additional support is availablefor agriculture and fishing.

Around 70% of the additional expenditure will befunded by grants, with only a slight increase in thebudget deficit.

Tourist arrivals increased by 7.7% in the first 10months of 2009 with the share of "family and friends"rising. However, arrival growth is expected tomoderate to 3.9% in 2010, with tourist receipts alsoexpected to slow in the wake of the tsunami. Acontributing factor is that many family reunion visitsappear to have been brought forward in response tothe tsunami, which will create a lull in visits nextyear.

Remittances had fallen by 18% in real terms inSeptember 2009 (y-o-y). While the tsunami response

is likely to temporarily buoy remittances, this is likelyto be at the expense of remittances in 2010. Highunemployment rates elsewhere means remittancesare likely to take some time to rebuild.

Foreign exchange reserves remain at comfortablelevels, assisted by $9.3 million in balance ofpayments support provided by the IMF.

Outlook

Growth of 0.5% is expected in FY2010 on the back ofpost-tsunami rebuilding and reconstruction efforts,and should improve thereafter as economic conditionsnormalize. Inflation is projected to moderate slightlyto around 7.0% in FY2010.

Key issues

A series of highly expansionary budgets of close to10% of GDP are planned. These will need to be debt-financed, and will raise public debt above the targetlevel of 40% of GDP. While large deficits arenecessary to fund reconstruction, the fiscal positionwill only be sustainable if the deficit is quickly reinedin to around 3% of GDP. The supplementary budgetacknowledged the issue, while foreshadowing thatfiscal consolidation may not be achievable untilFY2013.Lead authors: Emma Ferguson and Laisiasa Tora.

Tourism (y-o-y % change, 3-month m.a.)

-30

0

30

60

90

120

Oct08 Jan09 Apr Jul Oct-20

-10

0

10

20Visitor arrivals (persons)Visitor arrivals for holidays (persons)VFR (p ersons, rhs)Tourism receipts ( Tm, real)

VFR=Visiting friends and relativesNote: Deflated by the CPI.Source: Central Bank of Samoa.

Remittances(y-o-y % change, 3-month m.a.)

-20

0

20

40

Jul08 Sep Nov Jan09 Mar May Jul Sep

Nominal terms

Real terms

Note: Deflated by the CPI.Source: Central Bank of Samoa.

Key imports from US and NZL (Tala, y-o-y % change, 3-month m.a.)

-40

-20

0

20

40

60

80


Food

Machinery and transport

Sources: Statistics New Zealand and US Census Bureau.


13/44

13


Solomon IslandsRecent developments

The Solomon Islands economy has been among themost affected in the Pacific by the global economiccrisis. The global economic crisis brought forwardthe sharp economic slowdown that was expectedbetween 2009 and 2015 because of the end ofnatural forest logging. Preliminary estimates are ofzero economic growth in 2009.

The value of goods and services exports fell sharplyover 2009. This was driven by a decline in exportvolumes of logs (33%), copra (39%), and fish(25%) over the first 11 months of 2009 comparedwith the same period in 2008. However, palm oilexport volumes continued to rise, while cocoavolumes were at around the same level as in 2008.The current account deficit is projected to have

reached 11% of GDP in 2009 and to reach 18% ofGDP in 2010.

Despite deterioration in the merchandise tradebalance, foreign reserves are above the centralbanks comfort level. Boosted by an allocation ofspecial drawing rights by the IMF and a one-offinternal transaction by one of the commercialbanks, reserves were 4.8 months of imports by theend of 2009.

Reflecting the weakening economy, net credit to theprivate sector has slowed markedly. As of mid-February 2010, net credit to the private sector wasdown by 1.1% on a year-on-year basis, compared

to a growth rate of 21.6% the same time last year. Inflation has eased from its peak of 25% (y-o-y) in

August 2008, averaging around 8.0% in 2009.

Outlook

A number of positives for the economy are expectedto result in growth for 2010, albeit at a low 2.0%.The improvement in international commodity pricesis expected to produce a small recovery in export-based agriculture in 2010, and a recent pick-up inbuilding approvals points to a likely improvement inconstruction. The real value of governmentexpenditure is expected to rise, helped by additional

support from development partners, and this will liftaggregate demand. In addition, a lower rate ofdecline in logging will reduce the industrys drag onthe economy. Inflation is expected to remainrelatively high in 2010 because of the recentincrease in world oil prices and is forecast toaverage 7.0% in 2010 and 7.5% in 2011.

GDP growth(annual % change)

0

2

4

6

8

10

2004 05 06 07 08 09 10f 11f

Sources: IMF and ADB estimates.

Building activity(quarterly)

0

200

400

600

Mar07 Sep Mar08 Sep Mar09 Sep Mar100

20

40

60

80Cement imports(tonnes, lhs)

Building permits('000, rhs)

Note: Building permits are lagged by 3 quarters.Sources: Central Bank of Solomon Islands and ABS.

Inflation and domestic credit(y-o-y % change)

-20

10

40

70

100

Apr07 Aug Dec Apr08 Aug Dec Apr09 Aug Dec

%

0

10

20

30%Domestic c redit (lhs)

CPI (rhs)

Source: Central Bank of Solomon Islands.


14/44

14


Solomon IslandsKey issues

The 2010 Budget is based on a 10.0% real increase inrevenue. This includes an assumed 6.3% increase inthe real value of tax revenues, and a large increase innon-tax revenue as new penalties, fees and revenue-saving administrative measures come into play.Additional budget support is also factored in, includinga grant of SI$40 million (around $5 million) to beprovided by ADB, and an additional SI$35 million(around $4.5 million) in sector budget supportprovided by Australia and New Zealand in January2010.

The expected increase in revenue allows for asubstantial increase in the real value of governmentexpenditure in 2010. Prudent use of the additionalfunds will be critical to helping the economy recover

from the slowdown and begin a needed diversificationaway from dependence on logging and foreign aid.

A key concern is the need to reverse large cuts toboth recurrent and development spending in 2009.The wage and salary bill is given priority, which roseby more than 5% over the year. In contrast, largecuts have been made to non-payroll items vital to thedelivery of essential health and education services andinfrastructure maintenance.

The 2010 Budget does make some progress incorrecting for last years cuts. Priority will be given tofunding for education (notably for implementation ofthe fee free policy for basic education), health, law

and order, funding of the 2010 election (e.g., viafunding for the Ministry of Home Affairs), and supportfor income-earning activities. The additional budgetsupport has allowed for an increase in funding fornon-payroll costs. The government's contribution tothe development budget has also increasedsubstantially.

Key risk factors in the 2010 budget will need to bemonitored. First, there is potential for an over-estimation of domestic revenue; the projectedincrease in revenue is at the upper end of plausibleestimates for the latest GDP forecast. Second, thereare specific risks on the expenditure side, includingthe need to fund yet-to-be determined increases inentitlements for members of Parliament for 2009 and2010, and the expenditure pressures that will arisefrom the 2010 national election.

Some early slippage is already evident. The 2010Budget provided for a 5.0% general increase in publicservice wage rates, but the independent TradeDisputes Panel issued a 7.5% pay raise in December,after the budget was tabled in Parliament. Tightexpenditure management will be required if such alarge pay increase is to be absorbed by the budgetwithout compromising service delivery.

Real revenue

0

200

400

600

800

2004 06 08 10f

-10

0

10

20

30

Level in million SI$ (lhs)

Growth in percent (rhs)

SI$=Solomon Islands dollarNote: Revenues deflated by using CPI (2000 prices).Sources: Ministry of Finance and Treasury Budget papers(various) and ADB estimates.

Real recurrent budget expenditure

0

200

400

600

800

2004 06 08 10f

-20

-10

0

10

20

30Level in million SI$ (lhs)

Grow th in percent (rhs)

SI$=Solomon Islands dollarNote: Deflated using CPI (2000 prices)Sources: Ministry of Finance and Treasury budget papers(various) and ADB estimates. Recurrent budget non-payroll costs(annual by Ministry, SI$ million)

0

50100

150

200

250

Education andHuman

ResourceDevelopment

Health andMedicalServices

InfrastructureDevelopment

2008 2009 2010

SI$=Solomon Islands dollarSources: ADB staff estimates from Ministry of Finance andTreasury budget papers (various).

Lead authors: Milovan Lucich and Craig Sugden.


15/44


16/44

16


TongaPrivate remittances(pa'anga million, 3-month m.a.)

-20

-10

0

10

20

Mar08 Jun Sep Dec Mar09 Jun Sep-30

-15

0

15

30Real pa'anga million (lhs)y-o-y % change (rhs)

Sources: National Reserve Bank of Tonga and TongaMinistry of Finance and National Planning. Private sector credit(y-o-y % change, monthly)

-30

-10

10

30

50

Jul08 Oct Jan09 Apr Jul Oct

To households

To business

Source: National Reserve Bank of Tonga.

Motor vehicles(number, monthly)

0

50

100

150

200

250


New registrations of motor vehiclesMotor v ehicle imports fromJapan and NZL

Sources: Japan e-Stats website, National Reserve Bank ofTonga, and Statistics New Zealand.

Lead authors: Emma Ferguson and Laisiasa Tora.

Recent developments

Tonga's economy contracted by 0.4% in FY2009 asthe impact of the global economic crisis reduced thereal value of remittances and household income.Drop-offs in bank lending and bank profits associatedwith past over-lending contributed to the downturn.

The overall weakness in the economy is evident inthe decline in key economic indicators: electricityconsumption, new registration of motor vehicles, andimports. Imports in nominal terms fell by 10% in thefirst half of 2009 compared with the same period in2008, with a more pronounced decline recorded inthe imports of fuel, and machinery and transportequipment.

Remittances have remained weak into FY 2010. Inreal terms, remittances were down by almost 20%over calendar year 2009.

Tourist arrivals moderated in the first 9 months of2009 due to a sharp decline in visitors from NewZealand (which make up 35% of total touristarrivals).

Inflation eased to 0.4% on a year-on-year basis byNovember.

Outlook

Slight growth of 0.4% is expected in FY2010, assistedby the injection of US$10 million in budget supportfrom an ADB economic recovery program and a smallimprovement in tourism.

Key issues

The government collected T$55 million in revenue,exclusive of grants, over the first 6 months ofFY2010. This is only a third of total collectionsprojected for the year. The drop-off in revenue isplacing considerable pressure on public programs.The government is committed to maintaining socialexpenditures, and has begun making spending cutsto relieve the fiscal pressure and minimize reductionsin service delivery. Rigorous expenditure control andprioritization will be required, coupled with efforts toimprove revenue enforcement and overcome the

unexpectedly poor revenue performance. Public debt levels were estimated at 31.3% of GDP in

September 2009. This and other debt indicators areabove threshold levels set by the IMF and WorldBank. Further borrowing would add to the risk of debtdistress, which is already high. This restricts thegovernment's options for managing the rising fiscaldeficit threatened by the revenue shortfall.

Ensuring that the loans secured for reconstruction areused to increase productive capacity of the economywill help ease the debt situation. Continuing publicsector reform will also help by improving theeconomic capacity to service public debt.


17/44

17


Tuvalu

VanuatuImports from Australia(A$; y-o-y % change, 3-month m.a.)

-25

0

25

50


A$=Australian dollarSources: ABS.

Recent developments

Vanuatu is estimated to have grown by 3.8% in2009, an unprecedented 7th consecutive year ofgrowth. This growth, however, was well down fromthe average 6.5% growth experienced in theprevious 5 years. Growth in 2009 was driven mainlyby tourism services and construction. Agriculture andretail were relatively weak.

Import demand weakened in 2009. This reflectsweakness in the economy outside of the tourism andconstruction sectors, as well as the savings offeredby lower oil prices. The current account deficit isestimated to have narrowed from 6.9% in 2008 toaround 3.7% in 2009 due to higher tourism receipts.

The economy grew by around 1.5% in 2009, in linewith the historical averagea noteworthyperformance given the global slowdown. Growth was

driven by public administration, health and education,and construction. ADB expects growth to be around1.6% in 2010.

Household dependence on declining remittanceincome from Tuvaluan seafarers is likely to haveproduced a fall in real income over the past 2 years.Although full data on the extent of job losses isunavailable, one agent alone reported a steadydecline in the number of active seafarers to just 110in 2009, from a peak of 165 in 2001.

High fish license revenues in 2008 and 2009, alongwith donor contributions, provided relatively favorablefiscal outturns. A budget surplus, around 4.6% of

GDP, is estimated for 2009. In 2009, the Tuvalu Trust Fund market value was

13.3% below its maintained value, which meansthere was no distribution to the 2009 budget.Distributions are unlikely for several years.

In 2010, revenue collections are forecast at A$24.9million, and the government's core expenditureprogram at A$32.5 million (an increase of 0.6% overthe 2009 level). A budget deficit of A$7.6 million(excluding financing from the ConsolidatedInvestment Fund) is anticipated.

The volatility of fish license revenue and the lack ofcontrol in big-ticket budget items, such as thescholarship and medical schemes, present underlyingrisks to the fiscal position. These must be addressedto ensure macroeconomic stability.

The lead author of the section is

Budget balance(% of GDP)

-12

-6

0

6

2008 09e 10f 11f 12f

Source: Tuvalu Ministry of Finance and Economic Planning,2010 Budget Speech.

Imports from Australia(tonnes; y-o-y % change, 3-month m.a.)

-200

0

200

400


Chicken

Flour

Source: ABS. Lead authors: Emma Ferguson and Laisiasa Tora.


18/44

18


Vanuatu In 2009, revenue declined in real terms as value

added tax and import duty collections slowed.Development spending also declined in real terms.

After averaging 5.8% in 2008, inflation moderatedin the second half of 2009 to average 4.5% for theyear. This was above the Reserve Bank ofVanuatu's target of under 4.0%.

Outlook

Economic growth of 4.6% is expected to acceleratein 2010, driven by continued strength in tourismand construction. Agriculture and retail areexpected to recover modestly. However, emergingcapacity constraints in tourism are expected to seegrowth ease to 4% in 2011.

The current account deficit is expected to widen in2010 and 2011 as the recovery in domesticdemand increases imports.

Inflation is expected to remain above target levelsin 2010 and 2011, kept up by higher fuel prices.

The government has forecast a near-balancedbudget for 2010, compared with the smallsurpluses it has run in recent years. Totalrecurrent revenue is forecast to increase by morethan 12% in real terms. Donor budget support hasalso increased, allowing an almost 20% realincrease in total spending including a doubling ofdevelopment expenditures. These increasesinclude a record number of spending proposals,such as the phased introduction of fee-freeeducation.

Key issues

The budget papers describe both the expenditureand revenue estimates as being at the "limits ofthe level consistent with fiscal prudence," giveninternal targets of balanced or surplus budgets.

Fiscal pressures may rise over the medium term asvarious free trade agreements come into force.This would place future expenditure increases indoubt, unless the government takes early action.Such action could include replacing import duties

by excises which are not affected by tradeagreements. In addition to providing revenuestability, this would have the benefit of lesseningprotection for local producers.

With public debt now below 20% of GDP andeconomic prospects firm, Vanuatu arguably nowhas the fiscal capacity to increase borrowing forinvestment in sound public projects. This wouldallow Vanuatu to accelerate its progress towardthe Millennium Development Goals, progress thathas tended to lag behind the recent gains ineconomic growth.

Real revenue(vatu millions, annual)

0

5000

10000

15000

20000

25000

2005 06 07 08 09 10f 11f 12f

Grants Recurrent Revenue

Note: Deflated using CPI (2000 prices).Source: Vanuatu government budget papers.

Real government expenditure(Vatu millions, annual)

0

4000

8000

12000

16000

2005 06 07 08 09 10f 11f 12f

Recurrent Development

Note: Deflated using CPI (2000 prices)Source: Vanuatu government budget papers.

Budget balance and public debt(% to GDP, annual)

0

10

20

30

2005 06 07 08 09 100

1

2

3

4Debt Surplus (rhs)

Source: Vanuatu government budget papers.

Lead author: Milovan Lucich.


19/44

19

THE HUMANF ACE OF THE GLOBALECONOMICCRISIS

Impacts on i nformal sector workersSources of employment(% of labor force, latest estimate)

0% 25% 50% 75% 100%

Kiribati

PNG

Vanuatu

Solomon Is.

FSM

Samoa

Tonga

Tuvalu

Marshall Is.

Fiji Is.

Cook Is.

Palau

Wage and own-account workOther workUnemployed

Sources: ADB estimates based on the latest population andhousing census, household income and expenditure surveys,and labor force surveys of Pacific countries.

FSM: Sources of income(% of total income, by income decile)

0

20

40

60

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Wages and salaries

Own produce

FSM=Federated States of MicronesiaNote: The 1 st group is the lowest income group.Source: FSM Household Income and Expenditure Survey2005.

The economic slowdown triggered by the globaleconomic crisis has added to hardship in the Pacific.Broad estimates suggest an additional 50,000 Pacific

Islanders will be living below the poverty line by theend of 2010 because of the global economic crisis(see Rising Hardship in the November 2009 PacificEconomic Monitor ). This section looks to betterunderstand who these people are likely to be andwhen impacts are likely to end, via a study ofemployment and income data.

Most Pacific labor is engaged in subsistence andinformal sector activities. The latest estimates showthat 70% to 80% of the labor force in Kiribati, PNG,Solomon Islands, and Vanuatu is engaged in theseactivities (often described in population census andhousehold surveys as wage and own-account work).The share is lower at higher incomes, reflecting thestronger formal economies at higher income levels.For example, the share of subsistence activities isalmost zero in Palau, which is dominated by theformal sector.

Household income and expenditure surveys supportthe conventional view that those more dependent onsubsistence activities are more likely to bevulnerable. That is, income from subsistenceactivities is more important to those in the lowerincome groups than to those in the higher incomegroupsthe income from subsistence activities isequal to the estimated market value of their ownconsumption/production. This is despite the access to

land and other resources enjoyed by those who earnsubsistence income.

For example, households in the third lowest incomedecile in the FSM report that around 45% of theirincome is earned from their own production. Incomparison, the highest income deciles report thatonly around 10% of their income is from their ownconsumption.

A subsistence worker is independent of market-basedactivities, so although they are often among the mostvulnerable, they would not be directly affected by theeconomic slowdown.

However, with the monetization of economies, manyareas that once were largely subsistence-based arenow more diversified. Workers are earning cash andare well into the transition to the informal sector.Subsistence-based farmers are increasingly lesscommon. It follows that the safeguards provided bytraditional lifestyles is in decline.

Not surprisingly, household income and expendituresurveys show a high representation of those engagedin informal sector activities such as those earningcash from agriculture, fishing, and small scale andhome-based activities among the lower incomegroups.


20/44

20


Impacts on i nformal sector workersSamoa: Own produce consumed(% total expenditure, by income decile)

0

10

20

30


Note: The 1 st group is the lowest income groupSource: Samoa Household Income and Expenditure Survey2002.

Vulnerable by activity(% that are vulnerable)

0

20

40

60

80

Self employed inSolomon Islands

Agriculture workers inFiji Islands

Note: The vulnerable are those living below the nationalpoverty lines.Sources: Solomon Islands Household Income andExpenditure Survey 2006 and Fiji Islands Household andIncome Survey.

PNG households selling tree crops(probability that the average householdis selling at least one tree crop; bypoverty decile)

0

20

40

60

80


Note: The 1 st group is the poorest group.Source: ADB staff estimates from district level data of thePNG 2000 Census and World Bank poverty estimates.

This section prepared jointly by staff of ADB, PacificEconomic Management Technical Assistance project,and United Nations Development Programme.

There are exceptions to the observation that those inthe informal sector are more likely to be among thevulnerable. For example, areas that grow export treecrops can be relatively high-income areas. The lastPNG census found that households in relativelybetter-off districts are about as likely to be engagedin selling export tree crops as their counterparts inpoorer areas.

Those that are close to major urban markets and canthus sell food may also not be vulnerable. While manypeople engaged in agriculture are vulnerable, someare not.

Nonetheless, it appears reasonable to conclude thatthe situation of many of those in the informal sectorhas deteriorated. The general decline in economicactivity would have reduced the demand for many

small scale activities, such as selling fish, meals, andbetel nut by the roadside. Service providers, such astaxi and bus operators and small building contractors,likely would have faced lower demand asdiscretionary spending power eroded. Those doingcasual work, either paid or provided on an in-kindbasis, to supplement other sources of income haveprobably found it harder to secure work. These effectswould have deepened existing vulnerability andplaced more people at risk of becoming vulnerable.

A key concern is that these adverse impacts followthe very high inflation in 2008 and 2009 brought onby the surge in international commodity prices. Thehigh inflation would have substantially reduced realincomes. It is unclear if coping mechanisms haveenough reserve capacity left to handle the stress ofadditional shocks.

Those exporting tree crops have been affected by thefall in international prices for tree crops. As discussedin the next section, the combined effect of lower treecrop prices and high inflation probably mean manysmall holders are now worse off than they were 5 orso years ago.

It is difficult to quantify the depth and breadth oftheses impacts on the informal sector, given the lackof up-to-date data. The shortage of information is atroublesome barrier to the formulation of a soundresponse to the economic slowdown.

It is important to keep in mind that the news is not allbad. Notably, there is considerable anecdotalevidence of an expansion in food gardens in manyparts of the region as households switch consumptionfrom imported to locally produced foods. This wastriggered by the rapid rise in prices in 2008, but wasgiven further impetus by the economic slowdown (inmuch the same way gardens expanded around PortMoresby in the 1990s as conditions worsened). Thiscreates opportunities for some. So while the informalsector is likely to be weaker overall, some participantsmay be benefiting.


21/44

21


Kiribati: Household income distribution by source(% of total income)

0

10

20

30

40


Income deciles

% o

f t o t a l i n c o m e

Homemade produce

Cash based agriculture and fishing

0

20

40

60

80


Income deciles

% o


Imputed rent

Own consumption

0

1

1

2

2


Income deciles

% o


Casual services to the householdBusiness income

0

1

1

2

2


Income deciles

% o


PensionWelfare

0

5

10

15


Income deciles

% o


Other income

Remittances and gifts

0

20

40

60


Income deciles

% o


Wages and salaries

Note: The 1st group is the lowest income group.Source: Kiribati Household Income and Expenditure Survey 2006.


22/44

22


Household income distribution by source(% of total income)

Samoa

0

10

20

30

40

Vulnerable At risk Better of f

% o f

t o t a l i n c o m e

Ow n produce used

0

6

12

18

24


% o f


Gifts receivedRemittances received

0

20

40

60

80


% o f


Other incomePrimary income

0

2

4

6

8


% o f


Ow n produce given aw ay

Tuvalu

0

4

8

12


% o f t o t a l

i n c o m e

Small scale activities

Handicrafts

0

1

2

3


% o f


Agric ulture Fishing

0

15

30

45


% o f


Other incomeRemittances

0

30

60

90


% o f t o t a l

i n c o m e

BusinessWages and salaries

Note: The vulnerable are those living below the national poverty lines. Those at-risk have incomes only just above the national poverty line.Sources: Samoa Household Income and Expenditure Survey 2002 and Tuvalu Household Income and Expenditure Survey 2005.


23/44

23


The exporting smallholder

Lead authors: Dominic Mellor and Craig Sugden.

The global economic crisis offered one benefititrelieved the pressure on international commodityprices. This in turn reduced inflationary pressures

in the Pacific and halted the deterioration inspending power borne by net buyers of foodnotably urban dwellers with formal employmentwho no longer rely on their own food gardens.

But for many living in rural areas it meant a declinein income as prices for their agriculturalcommodities fell. While this was most pronouncedin the agriculture-intensive Melanesian economies,it was also felt elsewhere. The extent of the declineis evident in the large drop in incomes fromagricultural exports, which are mainly exports oftree crops.

The recent decline in prices followed a period ofhigh international prices. It is possible that thesegood times meant some were well prepared to copewith the price drops. However, the global economiccrisis has largely, if not completely, unwound theincome gains that many agricultural exportersenjoyed from 2005 to early 2008.

This is shown by a recent study of PNGssmallholders, which provided a longer termperspective on real incomes in the agriculturesector. The study analyzed detailed commodity andconsumer price data between 1977 and 2009across the countrys key cash crop regions. Theincome gains from higher kina prices for

agricultural commodities were compared with localprice increases for consumer items. Calculationswere made of the extra income from higher exportprices less the extra cost of consumer items.

Producers of palm oil, coffee, cocoa, and coprawere all found to be worse off by March 2009compared with late 2007. Importantly, palm oilproducers still enjoyed the benefits of good incomegrowth since the mid-1990s. But copra and cocoaproducers were found to be no better off than theywere 10 years ago, while coffee producers aresubstantially worse off.

So even though PNG is growing well overall, large

population groups are facing extra stress becauseof recent global developments. This includes coffeegrowing areas of the highlands, and island andcoastal areas that do not produce palm oil. Copraand cocoa producers elsewhere in the Pacific areprobably also facing extra stress. As discussedpreviously, the impacts of lower revenue from treecrop exports are probably being felt across incomegroups, and not just among the vulnerable.

As a generalization, it is unlikely that other groupsof workers would have borne such a large reversalof income.

Agriculture exports(% of GDP, first three quarters)

0 5 10 15

Papua NewGuinea

Solomon Is.

Vanuatu

Fiji Is.

Samoa

Tonga

2007

2008

2009

Source: ADB estimates based on quarterly reports of PacificDMC statistical agencies and central banks .

Cumulative impact of pricemovements for PNG smallholders

-100

-50

0

50

100

150

200

D e c - 9

3

D e c - 9

5

D e c -

9 7

D e c -

9 9

D e c -

0 1

D e c - 0

3

D e c - 0

5

D e c -

0 7

I n c o m e m

i n u s e x p e n d

i t u r e

( % c

h a n g e

)

CoffeePalm OilCocoa and Copra

Sources: ADB estimates.


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Impacts on formal sector workersSamoa: Contribution to real GDPgrowth(percentage points, quarter-on-quarter)

-4 -2 0 2

Manufacturing

Transport andcommunication

Agr iculture

Construction

Wholesale andretail trade

Hotels andrestraurants

Finance

Other

Q108

Q208

Q308

Q408

Q109

Q209

Sources: ADB estimates based on data from the SamoaMinistry of Finance.

Cook Islands: Contribution to netvalue added tax growth(percentage points, quarter-on-quarter)

-16 -8 0 8 16

Wholesale andretail trade

Hotels andrestaurants

Transport andcommunication

Finance

Agriculture

Manufacturing

Construction

Other

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Source: ADB estimates based on Cook Islands StatisticsOffice. 2009. Quarterly Statistics Bulletin . September.

Local employment

The effects of the global economic crisis on the formalsector are probably larger than those on the informal

sector. Key concerns to workers and businesses inthe formal sector are the decline in remittances andincome from offshore investments, impacts ontourism, and the impact of fiscal correction requiredin response to weakening government revenue. Thedecline in world prices for agricultural products hasalso fed through to the formal sector. Jobs have beenlost, hours worked have been reduced, wage growthhas slowed, and many businesses have borne a fall inincome.

While the ways the global economic crisis will impactthe formal sector are readily identified, a shortage ofdata makes the breadth and depth of these impacts

difficult to monitor. For example, only Samoaproduces quarterly GDP data, and only Samoa andPNG produce sector employment data between majorlabor force surveys (and then with a lag of around 6months). The data gaps are not as severe as for theinformal sector, but they are a barrier to theproactive management of Pacific economies.

A key insight is that some workers are, or are at riskof becoming, the working poor.

Those working in the formal sector tend to be betteroff. This can be seen from the higher share of incomeearned from wages and businesses in the higherincome groups. This means that many of the impacts

on the formal sector fall on those that are better ableto cope with the shocks.

But not all formal sector workers enjoy relatively highincomes. This is reflected in the data from SolomonIslands, which is probably indicative of patternsacross the region. While highly paid workers can befound in most industries in Solomon Islands, they areconcentrated in the finance industry, transport,communications, and public administration. The keyextractive industry (forestry) and real estate andbusiness activities also are weighted toward higherincome earners. Teachers and public servants makeup much of the middle class of wage earners(although a sizeable number of education and healthworkers are also in lower income groups).

The lowest paid workers tend to work in agriculture,construction, trade, and some personal services. Thisreflects the presence of many low-skilled jobs inthese industries. These industries also tend to have a

double peak, a group of lower paid workers and asmaller group of higher paid workers (presumably thehigher skilled professionals or managers).


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Solomon Islands: Household income by industry of employment(% of total income, for those employed in the formal sector)

0

5

10

15

20


Fishing

Forestry

Agriculture

0

10

20

30

40

50


Health and social work

Education

0

10

20

30

40

50

60


Other community, social and personal servicesactivities

Transport and communications

Public administration

0

5

10

15


Manufacturing

Finance

0

5

10

15

20

25

30


Real estate, renting and businessactivities

Trade

0

5

10

15


Hotels and restaurants

Construction

Note: The 1 st group is the lowest income group.Source: Solomon Islands Household Income and Expenditure Survey 2006.


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Impacts on formal sector workersRemittances in total income(% of total income, latest estimate)

0

3

6

9

12

1st 2n d 3rd 4th 5th 6 th 7th 8th 9th 10th

Income deciles

Kiribati

0

5

10

15

20

25

Vulnerable At risk Better off

Samoa Tuvalu

Note: The 1 st group is the lowest income group. Incomeincludes the value of own produce. The vulnerable are thoseliving below the national poverty lines.Sources: Kiribati (2006), Samoa (2002) and Tuvalu (2005)household income and expenditure surveys.

Remittances($, latest estimate)

0

1,000

2,000

3,000

4,000

1st 2nd 3rd 4th 5thIncome quintiles

Fiji Islands Tonga

Note: The 1 st group is the lowest income group. The steadylevel of remittances reported across income groups impliesthat remittances are a higher share of incomes at lowerincome levels.Source: World Bank. 2006. At Home and Away: Expanding

job opportunities for Pacific Islanders through labor mobility .

The lowest paid workers in these industries are themost likely to comprise the vulnerable wage andsalary earners identified in the household surveys,

(see the charts for Samoa and Tuvalu on page 22). A second key insight is that industries that employ

lower paid workers are among those most exposedto the impacts of the global economic crisis.

For example, much of Samoa's economic contractionin FY2009 was caused by a decline in manufacturing(largely a result of cutbacks at Yazaki Samoa). Taxdata from the Cook Islands suggest the economiccontraction there was felt mainly as a decline inwholesale and retail trade. These activities probablybore the brunt of the slowdown in tourism.Elsewhere in the region, these same activities wouldhave been negatively affected by the decline inremittances.

The construction sector is also exposed to theeasing of domestic and foreign private investmentthat is expected in a weakening economy. Somecountries have planned to increase publicinvestment to help offset a decline in privateconstruction. However, with the possible exceptionof PNG, the increase in public investment is still inits infancy.

Overseas employment

The reduction in international trade volumes arisingfrom the global crisis weakened the demand for

(and hence the income of) seafarers from thePacific. This is particularly important to Kiribati andTuvalu.

In Tuvalu, seafarers remittances form a significantportion of the incomes of poor households. Many ofthese lower income families are in the outer islands,where other forms of income (e.g., formal sector

jobs) can be scarce. Therefore, the contraction inemployment for seafarers tended to hit the mostvulnerable members of the community hardest. Incontrast, seafarers remittances in Kiribati appear tobe skewed toward higher income households.

The global crisis also reduced other job opportunities

overseas, both for temporary workers and familiesthat have moved abroad. The adverse impact onremittances is clear; the latest estimates are for anannual decline of about 20% in real terms in Tongaand in Samoa.

Impacts are likely to have been relatively higher forlower income groups. Those who lost their jobsoverseas are more likely to be in lower skilled work,and have lower income families at home. Becauseremittances tend to be a larger share of income forlower income groups, this suggests the vulnerablehave been hardest-hit by the decline in remittances.

This section prepared jointly by staff of ADB, the PacificEconomic Management Technical Assistance projectand the United Nations Development Programme.


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Are females at higher risk?Sources of income of vulnerablehouseholds(% of total income, latest estimate)

Kiribati

Tuvalu

Samoa

0

20

40

60

80

100

Male Female

Wages and salaries Remittances and gif ts

Agriculture and fishing Subsistence activitiesOther

0

20

40

60

80

100

Male FemaleWages and salaries Remittances Other

0

20

40

60

80

100

Male FemaleWages and salaries Remittances and gif tsOw n produce Other

Note: Gender of household head shown. The vulnerable arethose living below the national poverty lines.Sources: ADB estimates based on Kiribati Household Incomeand Expenditure Survey 2006; Samoa Household Incomeand Expenditure Survey 2002; and Tuvalu HouseholdIncome and Ex enditure Surve 2005.

Economic impacts by gender are also potentiallyimportant. A key concern is whether the economicslowdown has affected female workers more thanmales. If so, the response to the global economiccrisis should pay extra attention to the needs ofwomen. Again, the likely impacts can only beinferred indirectly. The data point to effects on bothwomen and men.

Women often carry a higher share of the burden ofsmall-scale activities in the informal sector, such astending family vegetable gardens, preparing foodfor sale, and selling at roadside shops, kiosks, andmarkets. This burden is likely to have risen, as theweakening in formal sector labor markets requiredpeople to find alternative sources of livelihood in theinformal sector.

At the same time, men may be required to make alarger contribution through other activities. Forexample, men have undertaken more agriculturalwork, such as growing the root crops needed toreplace imported staples that are no longeraffordable.

Within the formal sector, women account for alarger share of manufacturing employment inSamoa and Tonga. The latest surveys reported that61% of working women in Tonga and 34% inSamoa have manufacturing jobs; these includesmall-scale production activities, many of whichwould be home-based. These women would have

borne the brunt of cutbacks in manufacturingactivity, notably at Yasaki's operations in Samoa.

Men account for a larger share of manufacturingworkers in the Fiji Islands, where the region'smanufacturing activity is concentrated.Construction, another industry highly exposed tothe economic slowdown, is also male-dominated.Therefore, some of the impacts of the globaleconomic crisis may have affected male workersmore than female workers.

Significantly, employment in the trade industry,comprising retail and wholesale trade, is reported asdistributed fairly evenly among women and men.

Analysis of income sources for vulnerablehouseholds show a similar pattern acrosshouseholds headed by women and men. However,remittances appear to be more important to female-headed households. This is expected, as manyremittances are from absent male partners workingoverseas.

Where males employed overseas earn less income,the stress of coping with declining remittanceswould fall on the women at home. The stress ispotentially even higher if men put out of workreturn home to unemployment.

This section prepared jointly by staff of ADB, the PacificEconomic Management Technical Assistance project,and the United Nations Development Programme.


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Employment by gender by industry(% share of employment)

Tonga (total employment)

0

10

20

30

Agr i Mfg EGW Con s THR TCS Fin Pub Oth

Female

Male

Kiribati (formal sector)

0

20

40

60

Agri Mf g EGW Cons Trd TCS Fin Pub HR Oth

Female

Male

Fiji Islands (total employment)

0

10

20

30

Agr i Mfg EGW Con s TCS Fin HR Oth

FemaleMale

Samoa (total employ ment)

0

10

20

30

40

Agri Fshg Mfg EGW Cons Tr d TCS Fin Pub HR OOD Oth

Female

Male

Palau (total emplo yment)

0

10

20

30

Agr i Fsh g Mfg Cons Trd TCS Fin Pub HR Oth

Female

Male

Vanuatu (form al employment)

0

10

20

30

40

Agri Mfg EGW Cons Trd TCS Fin Pub HR Oth

Total formalemployment

Agri=agriculture, Cons=construction, EGW=electricity, gas and water, Fin=finance, Fshg=fishing, HR=hotel and restaurant, Mfg= manufacturing,OOD=owner-occupied dwelling, Oth=others, Pub=public service, TCS=transport, communications, and storage, Trd=tradeNote: Gender disaggregated data are not available for Vanuatu.Sources: Kiribati National Statistics Office, Fiji Islands Bureau of Statistics, Palau Office of Planning and Statistics, Samoa Ministry of Finance, VanuatuNational Statistics Office, and Tonga Department of Statistics.


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Impacts on workers: key observations There is little real-time data on the human impact of the global economic crisis. Indirect analysis is

possible, however, by studying sources of income, the structure of labor markets, and changes ineconomic activity.

Support is found for the view that the global economic crisis has added to hardship in the Pacific.This is because those facing hardship are overrepresented in the areas of the economy hit hardestby the economic slowdown. This adds further weight to the case for reorienting public policy in thePacific toward the needs of the vulnerable.

The working poor are probably the most exposed group. Starting from a position of vulnerability,their incomes are likely to have declined as construction, manufacturing, and retail and wholesaleactivity weakened.

Many countries face the problem of a decline in remittances from overseas. This is likely to haveaffected the vulnerable members of the community the most.

The global economic crisis follows the stress arising from high inflation in 2008 and 2009. Whilehigh inflation affected everyone, its consequences hit the vulnerable (such as the elderly, single-parent households, and the urban unemployed) particularly hard. While these groups are not themost exposed to the global economic crisis itself, their needs are likely to remain high.

Public sectors have been relatively less affected than other parts of the economy. Public sectorworkers tend to be among the better paid, public sector employment cuts have been avoided todate, and a number of countries have provided pay increases (e.g., 10% in Tonga in 2009, and12.0% in Solomon Islands over 2009 and 2010). Although government workers have as a groupbeen the least affected directly, they are bearing indirect effects. Anecdotal evidence indicatesthat those whose incomes have fallen are turning to family members with secure public sector

jobs for financial help.

This leads to a key observation. Where remittances from overseas have fallen or other eventshave left a hole in household budgets, these i

pacific economic monitor - february 2010

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