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p. 16 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Developing Asia and the Pacific: Performance and Prospects Prospects for the World Economy in 2006-2007 Subregional Summaries Central Asia East Asia South Asia Southeast Asia The Pacific Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers The Doha Development Agenda: Asian Challenges and Prospects after the Ministerial Meeting in Hong Kong, China II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006 : I. Developing Asia and the World : Subregional Summaries

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The Pacific

Economic performance

Economic growth picked up in about half the Pacific developing member countries in 2005, though the aggregate growth rate slipped to an estimated 2.7% from 3.1% in 2004. This was the result of a slowdown in the Fiji Islands (the second-biggest subregional economy accounting for a quarter of output). Hurt by the end of clothing quotas in the US and slower growth in some other industries, growth in the Fiji Islands decelerated to 1.7% in 2005 from 4.1%.

Papua New Guinea, the biggest subregional economy, recorded marginally improved growth of 3.0%, consolidating its better performance of the previous 2 years. Agriculture performed particularly well, assisted by stronger global prices for commodities such as coffee and rubber. Growth would have been stronger still but for a landslide at the large Porgera gold mine, which reduced mineral production. Political stability and supportive fiscal, monetary, and trade policies have helped to revive this economy, reflected in a buildup of foreign reserves, fiscal consolidation, a stable exchange rate, and lower interest rates and inflation. The surge in global oil prices is a factor, too, given that Papua New Guinea is an oil exporter. So is Timor-Leste, the number three economy in the Pacific. Its growth rate stepped up to 2.5% from 1.8% a year earlier as the country recovered from an earlier steep contraction in the economy. Growth is supported by rising government income from the country's share of oil and gas production in the Timor Sea.

Many of the smaller Pacific economies rely on fishing (including license fees from fishing fleets) and on income from remittances, tourism, aid flows, and trust funds. The continuing strength of international capital markets boosted the market value of trust funds in Kiribati, Marshall Islands, Federated States of Micronesia, and Tuvalu. Income from remittances remained at high levels in Samoa, Tonga, and Tuvalu. For the Fiji Islands, remittances have become the second biggest source of foreign exchange. International aid continued to be a key factor in underpinning economic activity. The Marshall Islands and the Federated States of Micronesia benefited from funds provided by a renewed Compact Agreement with the US. Compact funds also underwrote development in Palau, while aid projects provided important support for infrastructure in Papua New Guinea, Solomon Islands, Timor-Leste, and Tuvalu.

Fish products and fishing license fees are sources of income for many Pacific countries. However, fish harvests were generally low in 2005, raising concerns about falling stocks, particularly of some species of tuna. Prices for some subregional export commodities, such as coconut oil and copra, weakened later in the year, but are still considerably higher than the low points of several years ago. One industry doing well across much of the Pacific is tourism, helped in part by the entry of budget airlines into the subregion. Tourism stimulates the construction industry and a range of services including hotels, restaurants, and transport. In the Fiji Islands, tourist arrivals have increased for 4 years and this industry is a pillar of the economy. Tourism also is important to the Cook Islands, Palau, Samoa, Tonga, and Vanuatu, but provides limited income for Kiribati and Solomon Islands. Australia and New Zealand are the two major source countries, but Japan, United Kingdom, and US are also important, while organized tours from the PRC are beginning to generate revenues for some island economies. Tourism has strong potential for further growth, provided that it does not ruin the natural environment, which is a major pull for many tourists.

High world oil prices continue to have an adverse impact (other than on the two oil exporters). Most of the subregion relies on imported petroleum products for air and sea connections and for generating electricity. The increased oil prices led to a pickup in inflation in some countries, though for the subregion as a whole inflation moderated to 2.6% in 2005, down nearly 1 percentage point from 2004. (Inflation was much higher in Samoa, Solomon Islands, and Tonga than elsewhere.)

Budgetary positions were relatively stable in 2005, though several countries need considerable fiscal consolidation. Tonga faces the largest adjustment, following a decision to increase civil servants' salaries by some 60—80%. The fiscal position of Timor-Leste has been bolstered by income from petroleum production; it has more of a problem with disbursing funds. Several countries made strides in implementing structural reforms last year: Papua New Guinea continues to implement a tax and tariff reduction policy; Solomon Islands established an economic reform unit in the Ministry of Finance; and Vanuatu is developing an economic regulatory framework to improve efficiency and lower costs of utilities.

Prospects for 2006 and 2007

In 2006—2007, subregional growth is forecast to pick up to 2.9—3.0% (Figure 1.3.5). Growth is expected to edge higher in most countries, for varying reasons. The Fiji Islands will benefit from growth in tourism, but it faces major adjustments in its clothing and sugar industries because of declining preferential trade concessions in major markets. Papua New Guinea has a building growth momentum, and government spending could rise ahead of 2007 elections. Timor-Leste's government spending, financed by oil revenues, will support growth. Cook Islands and Vanuatu are forecast to lift earnings from tourism. Palau, Marshall Islands, and Tuvalu will see more public investment, and Solomon Islands is still pulling out of its deep decline. Weaker growth is seen in Tonga, because of fiscal adjustments, and in Samoa, partly because of weakness in manufacturing. Kiribati is likely to record marginal GDP growth, but GNP should continue to receive support from buoyant capital markets in Australia where trust fund assets are invested. The Federated States of Micronesia is forecast to grow at a similar rate to 2005. Nauru is expected to remain in a vulnerable condition because of its very limited sources of income and lack of arable land for food production.

Inflation over the next couple of years should remain in the 2—3% range for most countries, if oil prices are fairly steady. However, Solomon Islands and Tonga are expected to record inflation of about 7—8%, mirroring recent trends and ongoing fiscal and current account pressures. Inflation should abate in Samoa to about 4% in the next 2 years.

Medium-term outlook

External conditions are projected to remain favorable, and transport and telecoms costs have fallen over a long period. This setting should offer the subregion an opportunity to accelerate economic development and improve social indicators. Despite this, the environment for rapid private sector development is unfavorable in most of the Pacific, and governments dominate many of the economies. Key constraints to the private sector include traditional communal land-ownership arrangements; governance problems, including in some cases those of law and order; government aversion to privatization; and policy uncertainty and investment restrictions, especially for foreign investors. The recently formulated Pacific Plan for strengthening cooperation and integration may facilitate better policies. However, it will take some time to raise economic growth so that per capita incomes improve significantly, particularly as population growth of around 2.4% is likely to continue in the medium term.

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