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Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia

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Cook Islands

GDP increased by an estimated 3% in 2001, and tourism was again the leading sector. Medium-term growth prospects have been clouded by the loss of some international air services in late 2001. The major policy issues are devolution of power to the outer islands, development of human resources, environmental management, and infrastructure development.

Macroeconomic Assessment

GDP in 2001 grew by an estimated 3%, after strengthening by slightly over 4% in 2000 (Figure 2.27). Tourism continued to be the leading sector, though the events of September 11th had a dampening effect on tourism growth in the last quarter of the year. International air services were curtailed for some airlines and visitor numbers fell by 17% in November 2001. Black pearl production fell from 2000’s record high, with exports in the first three quarters of 2001 down 17.6% on the corresponding period in 2000. Commercial agriculture and fishing activity also declined from 2000’s levels. In contrast, the finance and business sector grew rapidly, with gross turnover in the first three quarters of 2001 rising by 17.6% from the corresponding period in 2000. The inflation rate accelerated from 3.2% in 2000 to 8% in 2001.

The operating budget surplus in fiscal year 2001 was NZ$6.9 million, or 4.2% of GDP, compared with an original budget estimate of NZ$1.4 million. This outcome reflected unexpectedly strong revenue growth at 10.6% above the budget estimate. Continued economic and import expansion led to increased receipts of VAT and import levies. Expenditures were kept close to the budget estimate, which allowed for a 14.4% rise compared with the previous fiscal year. The Government increased its spending on physical infrastructure to support tourism, education, health, welfare, cultural development, and environment protection. Net debt stood at NZ$128.7 million, or about 72% of GDP, with the Government maintaining a reserve for future debt repayment. This represented a fall from 77% of GDP in fiscal year 1999 and 76% of GDP in fiscal year 2000.

The budget for fiscal year 2002 estimated that revenues would be relatively static at around NZ$64.7 million, but that expenditures, would rise by 12.2% to NZ$64.2 million, leaving a modest operating surplus of NZ$0.5 million. The outstanding debt was projected to rise to NZ$129.9 million, but to fall as a proportion of GDP to approximately 68.3% by the end of fiscal year 2002.

A drop in pearl exports in the third quarter largely accounted for a decline in total merchandise exports in 2001. Imports grew by 14% during the first 9 months compared with the corresponding period in 2000. Consequently, the trade deficit rose from NZ$58.7 million in the first three quarters of 2000 to NZ$71.2 million in the corresponding period of 2001. Tourism growth, supplemented by private remittances and official transfers, ensured that the current account remained in surplus. The use of the New Zealand dollar as the domestic currency and its 8.5% depreciation against the US dollar in 2001 enhanced international competitiveness, though the acceleration in inflation eroded some of this gain.

Net foreign assets in the banking system at the end of September 2001 were 41.6% higher than at the end of 2000. Net domestic credit grew at the more modest rate of 6.5%, but this aggregate concealed the fact that government deposits with the banking system had increased and that credit to the private sector had grown by 11.3%. The latter was concentrated in tourism, agriculture, and fisheries. On 1 July 2001, the Cook Islands Development Bank and the Cook Islands Savings Bank merged to form the Bank of the Cook Islands, becoming the third commercial bank in the banking system. Nominal interest rates on deposits ranged from 1% to 2%, and were thus significantly negative in real terms. Nominal lending rates were in the range of 9.25–19%, with the new Bank of the Cook Islands adopting a higher interest rate structure.

Policy Developments

The principal issue of economic management is to consolidate and build on recent improvements in fiscal governance, in order to maintain a stable macroeconomic environment that supports private sector growth.

The budget policy statement for 2002 stressed five strategic priorities: economic sustainability, outer island empowerment, social cohesiveness, infrastructure advancement, and good governance. It also affirmed the Government’s commitment to fiscal responsibility, including meeting all debt obligations, and to building an enabling environment for private sector development. Formulation and implementation of this budget was disrupted somewhat by a period of political instability in the latter half of 2001, beginning with the dismissal of the deputy prime minister in early July. Resolution of political uncertainties is essential for effective continuation of the economic, public sector, and governance reform process begun in 1996. A new Government was formed in February 2002.

A major policy issue arising in the context of public service reform is the need to improve service delivery, both on the main island of Rarotonga and on the outer islands. Public service downsizing in the late 1990s was successful in aggregate terms, but led to migration to New Zealand of some skilled and qualified workers. The outer islands were particularly hard hit by emigration. Implementation of the Government’s devolution policy is crucial to reversing the decline in service delivery. This involves assigning greater service delivery responsibility to outer island administrations, capacity building in these administrations, and improving the provision of technical support from the central administration.

The devolution policy is to be complemented by public investment in roads, ports, and airstrips, and in health and education. Human resources development, in both the public and private sectors, is essential if the country is to improve the match between the skills needed in the civil service and the economy, and the skills available. Another major issue is the need to improve environmental management, particularly waste management on Rarotonga, as this is fundamental to sustainable tourism development.

Outlook for 2002–2003

The official medium-term economic forecast made prior to the events of September 11th was that GDP would grow at annual rates of 3.3% in 2002–2003, with tourism and black pearl production acting as the primary drivers. The gloomier global economic outlook after September 11th, the loss of some international air services to the Cook Islands, and recent concerns over pearl oyster mortality rates call for a downward revision to these forecasts. In addition, continued emigration would further reduce the domestic economically active population. On the other hand, growth could be boosted by several large aid-funded infrastructure projects that were not factored into the official forecast, and by the fact that the Cook Islands retains its appeal as a safe tourist destination. Overall, GDP can be expected to grow at an annual rate of around 2.5% in the next few years. Inflation could fall back to the 2–3% range.

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