Home 
Publications Catalog Online Publications Document
Asian Development Outlook 2006 Update : 1. Developing Asia and the world : Subregional summaries
The PacificTrends in 2006 and 2007Subregional growth projections for 2006 and 2007 are revised up from those in ADO 2006, primarily because of improved growth prospects for the larger economies, Papua New Guinea and the Fiji Islands (Figure 1.4.13). Aggregate GDP for the Pacific economies is now projected to expand by 3.3% this year and 3.4% in 2007, both raised by 0.4 percentage points from the ADO 2006 forecast. Rising global oil prices in 2006 continue to benefit the two oil-exporting economies (Papua New Guinea and Timor-Leste), but have increased inflationary and balance-of-payments pressures in other Pacific countries that depend on imported fuel. Timor-Leste’s short-term outlook has been seriously damaged by civil unrest, but it is not yet possible to estimate reliably the extent of the setback to the country’s 2006 non-oil GDP. A major challenge for governments of the Pacific islands, acting individually and collectively through regional initiatives like the Pacific Plan approved in October 2005, is to facilitate faster, private sectorled economic growth that will both provide employment, especially for youth, and generate government revenue for use in public service delivery and investment. Youth unemployment, crime, and drug abuse are increasing throughout the subregion, and young unemployed people have been involved in sometimes violent civil unrest. While implementing the requisite microeconomic policies, governments must maintain macroeconomic stability. Fiscal management should stand firm in the face of increased pressures to spend, and monetary policy effectiveness will be tested by rapid credit growth and consequent balance-of-payments pressures. Papua New Guinea
Oil production and export volumes increased because, contrary to earlier projections, higher extraction rates from the Kutubu and Moran oil fields and the start of production at the South East Mananda oil field more than offset declines from the Gobe fields. Palm oil production and exports also rose substantially. Employment in the formal private sector grew by 2.8% during the first quarter. Inflation is forecast to average 2.4% in 2006 (Figure 1.4.14), steady with ADO 2006. A strong first quarter export performance and a drop in imports increased the current account surplus which, combined with a narrowing on the capital and financial account deficit, led to a lower overall balance-of-payments deficit. Gross foreign exchange reserves were $757 million at the end of the first quarter, equal to 5.5 months of total imports. The central bank maintained a neutral monetary policy stance, but remained watchful of the pace of domestic credit growth and the high level of liquidity in the banking system. A small overall budget surplus is projected for 2006. Revenue collections benefited from high commodity prices through the first half, to such an extent that provision was made in an August mini-budget for additional expenditure on priority areas such as law and order and health. The growth forecast for 2007 is raised to 4.0% from 3.0% in ADO 2006. Mining will benefit from new investment and the exploitation of higher-grade ore bodies, while construction activity is expected to accelerate as residential, commercial, and mineral sector projects commence. Inflation in 2007 is projected to be 3.0%, on the twin assumptions that exchange rate stability will remain underpinned by sound fiscal management, and that this in turn will be maintained after general elections in the second half of 2007. Timor-LesteThe petroleum fund, established by the Government in September 2005 to conserve oil and gas revenues in an effort to provide perpetual support for the budget, more than doubled its starting balance to over $640 million by 30 June 2006. The offshore Bayu-Undan oil and gas field is fully operational, an agreement for equal sharing of revenue from the Greater Sunrise field was signed by the Australian and Timor-Leste governments in January 2006, and the legislative framework for nearshore oil exploration is now in place. 
Non-oil GDP, the preferred measure of the economy, continues to grow slowly, rising by 2.3% in 2005 as a result of expansions in agriculture and the public sector. The ADO 2006 forecast of 5.0% growth in nonoil GDP in 2006 no longer applies, however, because of the economic consequences of civil unrest that started in April and continued at a low level into the second half of the year. The unrest involved armed clashes between the army and the police, and widespread violence and property destruction in the capital, Dili. This led to the Government calling in a multinational intervention force that remains in the country, and to the resignation and replacement of the prime minister. There is at present no reliable basis on which to revise non-oil GDP projections. However, adverse short-term effects are expected on agricultural production (as a result of population displacement), on nonfarm private sector activity (especially in Dili), and on implementation of public investment projects. Inflation is projected to accelerate to 5.0% this year as food and transport prices rise. Actual budget outlays in FY2006 (ended 30 June 2006) fell short of targeted levels, largely because only a very small percentage of planned capital expenditure was pushed through, although spending was substantially higher than in FY2005. The budget for FY2007 projects an increase of 122% in total planned spending, but this is unlikely to be fully achieved, even with further improvements in budget execution. Nonetheless, the 2007 non-oil GDP growth forecast is revised up from 4.0% to 5.0% in the expectation that there will be reconstruction of buildings damaged or destroyed in the unrest, some improvement in the implementation of the capital development program, and stronger agricultural production as transport infrastructure improves. Inflation is projected to moderate to 3.0% in 2007. A key assumption is that elections scheduled for 2007 will lead to the peaceful formation of a new government. Fiji IslandsThe GDP growth forecast for 2006 is revised up from 2.0% in ADO 2006 to 3.1% on the basis that there will be stronger than expected growth in agriculture and the services subsectors of transport and communications, finance, insurance, real estate, and business services. Manufacturing is projected to register weak growth, with the clothing industry contracting substantially for the second year in succession after the ending of US quotas at end-December 2004 and in the face of stiffer competition from Asian producers in the Australian and New Zealand markets. Tourist arrivals are forecast to rise to 576,000 from 500,000 in 2005, which will stimulate the hotel and restaurants subsector. Inflation is projected to rise over the year as higher oil prices feed through the cost structure, to average 2.7% for 2006. Merchandise imports are projected to rise much faster than exports this year as strong, credit-fueled domestic demand growth has spilled over into imports. Although tourism receipts and private remittances continued to support the balance of payments (Figure 1.4.15), the level of foreign exchange reserves fell from $484 million at end-December (4.0 months of import cover) to $366 million at end-April 2006 (2.8 months). In order to restrain domestic credit growth and protect foreign reserves, the Reserve Bank of Fiji tightened monetary policy in the first half of the year. Budget estimates for 2006 projected an overall deficit of 4.7% of GDP, but that could be an underestimate since the budget did not allow for increases in the wage bill that will result from an April 2006 agreement between public sector unions and the Government. The Government’s intention is to use the pay rise agreement as the foundation on which to contain the public service wage bill (by eliminating automatic cost-of-living adjustments) and lower the budget deficit and public debt levels, thereby reducing crowding-out pressure on the private sector and freeing public resources for capital expenditure. Economic growth is projected to slow to 2.2% in 2007, down slightly from ADO 2006, because construction will decline from record levels in 2006, the clothing industry is expected to contract further, and government spending will be constrained by the need to rein in the budget deficit. Solomon Islands and Vanuatu
The Melanesian economies of Solomon Islands and Vanuatu are on track to reach the ADO 2006 growth forecasts of 5.0% and 3.4%, respectively, with agriculture playing a leading role in both cases. In Solomon Islands, 2 days of riots in Honiara that followed the general election in April 2006 involved serious damage to property in the Chinatown area, but a new coalition government was formed quickly and the negative shortrun macroeconomic impact is likely to be small. Export growth will be outpaced by import growth in response to strong domestic demand and implementation of externally funded projects. The forecast average annual inflation rate is raised to 10.0%. Samoa and TongaIn the larger Polynesian economies of Samoa and Tonga, growth is slowing from 2005, as expected, but not as sharply as projected in ADO 2006. The Samoan economy is now forecast to grow by 4.0% in 2006, helped by construction for the 2007 South Pacific Games and by increased tourism and private remittances. Samoa’s inflation rate is expected to rise to 6.0% in 2006, in part reflecting rising fuel prices. Tonga’s growth is damped by an 18.5% downsizing of the civil service in June 2006, a response to the awarding of civil service wage rises ranging from 60% to 80%. Higher oil prices and upward pressure on private sector wages flowing from the civil service pay deal are likely to accelerate inflation to 9.9%. An overall budget deficit of 5.7% of GDP is projected, which will place a heavy burden on monetary and exchange rate policy as the instruments for ensuring macroeconomic stability. Other Pacific economiesSlow growth and rising inflation characterize most of the other Pacific economies. Growth rates of about 1% are likely for Kiribati, Federated States of Micronesia, and Tuvalu in 2006, with inflation in the 2–3% range. Growth in the Marshall Islands will be stimulated by public construction projects, but is revised down to 3.0% from ADO 2006 because of the impact of higher oil prices, while inflation is projected to reach 3.0%. Nauru has little prospect of growth, since resumption of commercial phosphate mining now appears unlikely. Cook Islands and Palau are benefiting from growth in tourism, though their 2006 growth forecasts are revised down from April.
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
Accounting for about two fifths of Pacific production, the economy is
expected to grow by 3.5% in 2006, up from the ADO 2006 projection
of 3.2%. The revision reflects a strong supply response to higher world
prices for minerals and some agricultural exports, supplemented by an
acceleration in construction activity. In the first quarter of 2006, exports
of coffee and of minerals (mainly crude oil, copper, and gold) surged from
a year earlier.
Back