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The Pacific: getting out of COVID, slowly

The impact of COVID-19 on the economies of the Pacific island region has been far more severe than on any other region or group of countries. The Pacific contracted by 5.4% between 2019 and 2021; other regions or groups, at worst, remained immobile and some managed to grow despite the pandemic.

Pacific countries dependent on tourism – Fiji, Palau and Samoa – have suffered staggering double-digit growth losses due to COVID-19. While other Pacific countries did not experience such extreme contractions, most of them still recorded negative or no growth.

The IMF projects that the Pacific will experience an average growth of 5.3% over the next two years, bringing the region back almost to its pre-pandemic GDP level. This means that the Pacific will have fallen back in per capita terms and will have been outperformed by the rest of the world.

In addition, there can be no assurance that the projected growth will be realized. In our new policy brief, we identify key risks to growth as the Pacific, like the rest of the world, enters a post-pandemic or “living with COVID” era.

Our analysis shows that most Pacific island countries have done well to contain rising debt and maintain strong external positions over the past two years – thanks to strong remittance flows, rapid growth fishing fees and increased foreign aid. However, Pacific economies remain vulnerable to exogenous shocks related to potential COVID-19 outbreaks, inflationary pressures and the prospect of a global slowdown.

Further outbreaks of COVID-19, both at home and abroad, could derail the economic recovery. While half of the countries and territories in the Pacific had reached the WHO vaccination target of 70% in August 2020, three countries still show worrying vaccination rates: Papua New Guinea (3%), the Solomon Islands (26%) and Vanuatu (42%). This puts a combined population of more than 10 million people at high risk for further community outbreaks. Recurring outbreaks and COVID-19 policies outside the Pacific could also disrupt the Pacific tourism recovery. An example is Palau. Despite the reopening of borders as early as April 2021, Palau’s tourism industry is still struggling to recover as tourists from East Asia, its main market, have been restricted or reluctant to travel.

Although domestic price levels in most Pacific countries increased only slightly in 2020 and 2021, inflationary pressures have begun to be reflected in domestic price levels: prices of most major commodities soared due to global stimulus policies and the Russian-Ukrainian war. While commodity exporting industries in some Pacific countries such as PNG and Timor-Leste have benefited from rising resource prices, most Pacific countries are commodity importers and therefore are suffering.

Global inflation and other disruptions could cause the ripple effect of a global slowdown as central banks raise interest rates to fight inflation. Large organizations such as the world Bank, IMF, OECD and AfDB have all lowered their growth forecasts and are warning of a global recession. Pacific trade, tourism and remittances would all suffer if these risks materialized.

However, the biggest risk to post-COVID economic development in the Pacific is a return to slow growth. As shown in Figure 2, current projections show no real growth in per capita income in the Pacific from 2019 to 2027, much worse than in any other region. This raises the prospect of a “lost decade” for many Pacific countries, such as Alexandre Dayant and Roland Rajah of The Lowy Institute was the first to know back in December 2020.

Timor-Leste, Vanuatu, Solomon Islands, Samoa and Nauru are expected to have lower GDP per capita in 2027 than they had before the pandemic (2019). For Kiribati, Palau, Federated States of Micronesia and PNG, 2027 and 2019 levels are expected to be nearly identical. The Marshall Islands are expected to post only 6% per capita income growth, and Tonga and Fiji 9%. Only tiny Tuvalu is expected to grow as much over this period as the average for all developing countries, 22%.

The prospect of Pacific countries being left behind again should be a wake-up call for policy makers in the region. Given the dire outlook, household relief will be important to help cushion the ongoing blow of COVID, and labor mobility strategies will continue to make a lot of sense.

Above all, it is clear that the longer-term challenge of raising trend growth rates through domestic economic reforms and sound public investment has become more important than ever for the Pacific.

Read Devpol policy brief no. 22, “Emerging from COVID, slow: a Pacific update” by Stephen Howes and Huiyuan Liu.

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This research was supported by the Pacific Research Program, with funding from the Department of Foreign Affairs and Trade. The points of view engage only the authors.