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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia
Cook Islands Tourism was the driving force in the continuing modest economic expansion, though economic development and the fiscal position, while improving, are still affected by political instability. Growth is forecast to remain at current levels over the medium term. Economic Assessment Overall GDP estimates have been revised due to an improvement in data collection and a rebase from 1990 to 2000 prices. According to these revised estimates, economic growth declined from 3.9% in 2002 to 3.1% in 2003. The tourism sector remains the main element in growth. The industry recovered from a drop in visitor arrivals triggered by the September 11 events, with visitor arrivals rising by 8.7% for the first 3 quarters of 2003 compared with the same period in 2002 (Figure 2.26). Tourism-related subsectors, such as hotels, restaurants, transport services, and wholesale and retail trade witnessed moderate strengthening. The increased number of tourist arrivals also resulted in higher demand for locally produced fruits and vegetables. Preliminary results of the 2001 census suggest continuing migration to New Zealand, particularly from the outer islands. The decline in the resident population, combined with the economic recovery after the 1996 Economic Reform Program (ERP), has led to a significant increase in GDP per capita from NZ$8,349 in 1996 to NZ$14,377 in 2003. However, the continuous out-migration of skilled personnel creates particular challenges for the Government in maintaining basic health and education services on the outer islands. Overall, the incidence of poverty is probably rather low. The country has already achieved several of the Millennium Development Goals, such as universal primary education, low and decreasing child and maternal mortality rates, and almost universal access to safe drinking water. The fiscal position is continuing to improve. Significant operating surpluses have been achieved, mainly due to better revenue management. Tax revenues have increased from NZ$37.4 million in FY1997 to NZ$61.9 million in FY2003 (ended 30 June 2003). The operating surplus is expected to turn out higher than the budgeted NZ$4.8 million, equivalent to 2.1% of GDP, due to an upward revision in taxation forecasts. Capital expenditures remain low, representing only 6.7% of total expenditures in FY2003. Consistent with previous years, the FY2004 budget policy statement outlines several priority areas: economic sustainability, good governance, infrastructure support, outer island development, and environmental management. Inflation follows the levels in New Zealand since the country uses the New Zealand dollar as its domestic currency. Year-end inflation decreased to 2.4% in FY2003, with the food index group showing the highest rise, and low inflation or deflation in most of the other categories. Net foreign assets in the banking system at end-June were NZ$19.5 million compared with NZ$26.2 million a year earlier. Maintaining the previous year's strong growth trend, net domestic credit rose from NZ$75.5 million at the end of 2002 to NZ$107.3 million in September 2003 due to a continuing increase in claims on the private sector. The greatest share of lending went to tourist accommodation projects followed by lending to the wholesale and retail sector. Money supply growth accelerated to 9.9% in FY2003 from 3.2% in FY2002 due to an increase in demand deposits. Nominal interest rates changed marginally during the year, ranging from zero to 3.0% for deposits and from 8.9% to 16.5% for loans. In the mid-1990s, government debt reached unsustainable levels, culminating in a fiscal and economic crisis. The Manila Agreement, signed in 1998, led to the restructuring of debt and reduced the face value of government debt by more than 30% and provided for concessions on interest rates. As of end-FY2003, total foreign debt stood at NZ$109.7 million, representing 48.6% of GDP, most of it held on concessional terms. The Government is gradually building up its loan repayment reserves, which are budgeted to climb from NZ$11.8 million in FY2003 to NZ$15.1 million in FY2004. Total merchandise exports in FY2003 recorded a year-on-year 12.9% fall (in US$ terms), attributable mainly to a continuing drop in sales of pearls. Pearl exports, constituting approximately 90% of commodity exports, continued to be affected by a disease outbreak in 2000 and a general slump in market prices. In contrast, exports of other marine resources, in particular fish, soared from a modest NZ$288,000 to NZ$2.9 million. Total imports rose by 9.2% in FY2003 (in US$ terms) resulting from the New Zealand dollar’s appreciation. As in previous years, there is a large trade deficit. However, the significant surplus on the services account, with tourism receipts representing the bulk of service income, has helped the country achieve a positive current account balance over the last few years. Policy Developments Political instability continued in 2003 with a new Government formed in February and a major cabinet reshuffle in November. Despite an overall improvement of fiscal management since the ERP, the frequent changes in government coalitions impact adversely on the consistency and strategic directions of economic and fiscal policies. Economic planning is frequently improvised, with little coordination among ministries, and focuses on the annual budget, with little regard for long-term prioritization for public investment. Now that the economy is shifting out of a recovery mode, the lack of a coherent development strategy has been recognized as an important priority issue that needs to be addressed. The Government held a National Economic Planning Forum in November 2003 and has set up a National Planning Task Force to develop a national economic development framework for the medium and long term in consultation with a wide range of stakeholders. The forum provided a first platform for discussions of the main challenges confronting the country, particularly the impact of the continuous out-migration of skilled people. The relatively lax fiscal discipline in the FY2003 budget, several continuing tax and customs exemptions introduced as "transitional" measures, and the granting of new exemptions with inadequate consideration of their longer-term impact on government revenues are signs that the continuing political instability affects economic reform measures. Additionally, political intervention in operational public service management, poor performance by public service managers, and ineffective enforcement all highlight the need for improved governance. A marked increase in the public sector wage bill has reversed some of the savings and efficiency gains made during the ERP. Nevertheless, overall revenue management has improved with the introduction of VAT, which represents 43% of tax revenues, and increased efficiencies in tax enforcement and audits. The 2003/2004 Budget Statement recommended the establishment of a reserve trust fund representing 2% of tax revenues to enable greater fiscal flexibility in the long term and to set aside NZ$319,000 for the first year. Income from fees of offshore company registrations are now used to administer the newly established Financial Supervisory Commission; surplus funds are to be returned to the Government. The commission is charged with licensing and regulating all trustee companies and banks that provide domestic and international trustee and banking services in, or from, the Cook Islands. As a party to the Cotonou Agreement with the EU, the Cook Islands will receive NZ$1 million a year over the next 5 years. The assistance has been earmarked for education and health sector improvements on the outer islands. The heavy emphasis on operating, rather than development, expenditures affects the country's ability to implement the capital projects required for the development of the private sector, especially tourism. The Cook Islands Investment Corporation is currently reviewing the deferred maintenance of all government assets and there are plans to increase the provision of maintenance and investment over the next few years particularly with regard to power generation, water supply, wastewater treatment, and waste disposal. The Cook Islands remains on the list of Non-Cooperative Countries and Territories of the OECD Financial Action Task Force (FATF) and has been placed under sanction. Although the Government has made efforts to comply with the FATF recommendations, including new offshore banking regulations and the establishment of the Financial Supervisory Commission, there is further need for early and effective implementation. Outlook for 2004-2005 GDP is forecast to grow by 2.7% in FY2004 and by 2.9% FY2005, on the assumption of modest expansion in the tourism industry and in pearl and fishing exports. The economy remains heavily reliant on tourism, and thus is extremely vulnerable to global developments. However, the tourism industry in the Cook Islands is likely to continue to benefit from the view of the Pacific region as a relatively safe destination. Visitor arrivals are expected to continue to edge up over the next few years. The main constraints confronting the tourism industry are a shortage of skilled and unskilled workers exacerbated by the continuous out-migration, and inadequate flight connections. While there are several projects to increase accommodation facilities, further expansion of tourism capacity will depend on investment to maintain and expand infrastructure, especially power, sewage, and water facilities. In an effort to develop the domestic fishing industry, the Government has introduced an exemption of levies for the fishing sector for fuel, bait, and equipment. Even with these exemptions, and despite the significant increase in fish exports, high import costs for inputs are likely to significantly limit the potential of the industry. Labor shortages also remain a constraint on the expansion of the commercial fishing industry. The recovery of the pearl industry is likely to take a few more years, with export earnings staying at less than half of those in FY2002 in the forecast period. Inflation is projected to stabilize at an average of 2.0% over the next 2 years. Parliamentary elections are due in September 2004. Efforts to follow up the proposals suggested at the National Economic Planning Forum have been postponed because of recent staff turnover and are likely to be affected by the preparations for the elections. For long-term economic growth to continue, it is important that a consensus is reached among all stakeholders and political parties through a renewed commitment to the national economic development framework, especially the medium- and long-term public investment program.
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