Countries and Regions

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p. 3 of 9 BACK | NEXT I. Development Situation A. Recent Political and Social Developments B. Economic Assessment and Outlook C. Implications for the Country Strategy and Program II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Lending Level

Country Strategy and Program Update 2002-2004: Cook Islands : I. Development Situation

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B. Economic Assessment and Outlook

6. The Cook Islands economy is recovering from a significant downturn in the mid-1990s, and recovery is expected to continue in the medium term. Real gross domestic product (GDP) grew by 2.7 percent in 1999 and 4.1 percent in 2000, and is projected to grow by 4 percent in 2001, clearly indicating that the rebound from the negative growth of 9.3 percent experienced over 1995-1998 has continued (Appendix 1).

7. Tourism, the black pearl industry, and commercial agriculture led the growth in 2000. Tourism receipts amounted to above 51 percent of GDP in 2000. Visitor numbers increased sharply to about 73,000 in 2000 from about 56,000 in 1999, reflecting the impact of the improved marketing efforts of the Cook Islands Tourist Corporation, the weak currency, and a shift in Pacific tourist destinations due to political instability in the Fiji Islands. The black pearl industry also continued its strong growth despite an epidemic among pearl-bearing oysters that the industry faced around the end of 2000. Employment expanded significantly in 2000, as increased tourist arrivals stimulated demand in the retail, commercial agriculture, and restaurant and hotel sectors. Public sector employment showed signs of expansion in 2000, which has been maintained since its contraction of nearly 60 percent in 1996.

8. The Cook Islands Government recorded a budget surplus of NZ$1.0 million, equivalent to 0.6 percent of GDP in FY2000, with Government expenses at NZ$62 million, amounting to 40 percent of GDP. Tax revenue is the principal source of revenue and it constituted about 70 percent of the total revenue in FY2000. In the current FY2001, the budget surplus is projected to increase to NZ$3 million, equivalent to 1.8 percent of GDP. A rise in Government expenses largely reflects higher spending on infrastructure to support the tourism industry, debt repayments, and policy spending on the social sector, health, education, and the environment. Most of the rise in total revenue reflects improved tax revenue caused by a rise in visitors, and settlement of many large tax assessments. The value added tax is the largest part of the tax revenue and is projected to account for about 42 percent of the total tax collection in FY2001. In terms of percentages of GDP both Government expenses and total revenue are maintaining a rising trend in the last few years and are projected to reach 46 and 44 percent respectively in FY2001.

9. Net Government debt stood at 77.2 percent of GDP in FY1999, and is projected to fall to 76 percent of GDP in FY2001, 71.8 percent in FY2002, and 68.5 percent in FY2003. However, the projected improvement reflects the projected growth in GDP rather than a fall in net debt. Net debt is projected to increase to NZ$118 million in FY2001, compared with NZ$117 million in FY2000. The Government is committed to maintaining manageable debt levels and meeting all its current and past obligations and has a policy of setting aside a reserve of NZ$1 million per year for future debt payments. In the FY2001 Appropriation Amendment Bill the reserve was increased to NZ$2 million for that year, bringing the total to NZ$3 million. The Government is committed to continue working within the framework of affordability for all future debt commitments, and to meet all current and past obligations where, when, and as they fall due. However the debt burden is expected to remain high, even with the Government's commitment.

10. Inflation in 2000 increased to 3.15 percent compared with 1.35 percent in 1999 reflecting rising fuel prices, weak currency, and the buoyant demand. Although the currency in use is the New Zealand dollar, inflation reflects factors in the Cook Islands, rather than in New Zealand. It takes some time for global inflationary factors to be reflected throughout the Cook Islands. Oil price rises in 2000 are being felt only now in the outer islands. The domestic financial sector is small and underdeveloped. There is no central bank. A Monetary Board, which effectively comprises the Cook Islands cabinet, is the licensing authority for banks. There is therefore no effective banking supervisory function.

11. Two commercial banks are foreign owned. The two locally owned banks, the Cook Islands Development Bank (CIDB) and Cook Islands Savings Bank, are being merged in consultation with the stakeholders, with assistance from ADB's Third Cook Islands Development Bank Project. The merger is to (i) provide economies of scale, (ii) establish a larger resource base,¹ (iii) create an opportunity to eliminate services that are no longer critical, (iv) upgrade information systems, and (v) create comprehensive banking services based on sound commercial principles. The merger is consistent with the Government's strategy for promoting private sector development. A major Government policy is to support a general increase in the level of credit available for business development, as well as promote the development of a sound partnership between government and business. In this regard, the vision, purpose, and mandate of the new bank will help the Government meet its private sector development initiatives. The new bank, to be called the Bank of the Cook Islands, will begin services on 1 July 2001.

12. During FY2000 aid assistance was equivalent to 6.4 percent of GDP. The Government expects to maintain this level on the average in the medium term. In June 2000, the Cook Islands became party to the partnership agreement between the African, Caribbean, and Pacific states, and the European Union (EU). This may improve access to the EU's trade and tourism market.

13. Projections of economic growth are conservative. Factors that led to conservatism include the following.

1. Labor supply. Outward migration has caused a steady decline in the resident population over the last few years. The result is a serious manpower shortage, particularly in the clerical, trades, and semiskilled occupations. The resident population was estimated as 14,600 in mid-2000-a 6 percent decline from 15,500 in 1999. By 1 April 2001, the number was estimated to have fallen to 14,000. The figure stood at 18,800 in 1996.
2. Construction industry. Projections do not include several large projects that may be implemented during the next 2-3 years (completion of the Vaima'anga Hotel, expansion of the Rarotonga Beach Resort, and development of the Rapae Hotel in Aitutaki) and a number of potential aid-assisted projects, including the construction of ports, airports, and roads in the outer islands.
3. Shifts in consumption and production patterns. Imported goods are becoming more of a way of life for communities in Rarotonga and in the outer islands.

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