Global Financial Instability Shows Need for Fiscal Discipline in the Pacific - ADB

News Release | 14 December 2011

MANILA, PHILIPPINES - The eurozone crisis is expected to have only limited impact on the Pacific because the region's growth prospects are more closely tied to the economies of Australia and New Zealand.

However, the latest issue of the Asian Development Bank's (ADB) Pacific Economic Monitor says the region may feel some indirect impacts through trade and investment links between the European Union and the Pacific's economic partners, declining values of the Pacific's trust funds, and declines in tourism. Governments in the Pacific should make sure that their finances are in good shape in case they need to act to counter the impact of slower global growth in the future.

The report, a tri-annual economic review of ADB's Pacific developing member countries, shows that many governments exceeded their revenue targets in 2011 and that tax collections were generally higher than in 2010. Expenditures were also higher in many countries, but were more than offset by revenue increases. This contributed to a general improvement in fiscal balances in the region.

"The Pacific economies' progress in fiscal consolidation is commendable," said Robert Wihtol, Director General of ADB's Pacific Department, "But it is important that governments sustain these efforts to increase their ability to maneuver in case of shocks arising from the eurozone situation."

A review of 2012 budget releases indicates that revenue increases will again exceed expenditure growth. Several countries are developing new revenue measures to strengthen government finances.

Fiji, Samoa, and Tonga are targeting smaller budget deficits in 2012, stepping back from higher deficits incurred due to fiscal stimulus or disaster recovery efforts. The resource-rich economies of Papua New Guinea and Timor-Leste are using high revenues to pursue expansionary policies and high levels of economic growth.

Political instability is causing delays and rising uncertainty regarding national budgets and fiscal planning in Kiribati, Solomon Islands, and Vanuatu. The Northern Pacific countries, facing the expiration of long-standing financial assistance arrangements, are making progress towards longer-term fiscal self-sufficiency. However, they still need to strengthen reforms and reduce their dependence on aid.

The report includes four articles discussing financial market issues affecting the Pacific. The analysis of sovereign investment funds in the Pacific shows that despite considerable volatility, declines in value have been smaller than in 2008, but it cautions that substantial downside risks remain. The second article considers the economic and financial benefits of developing a domestic bond market in PNG.

An article by the Pacific Financial Technical Assistance Centre argues against taking short-term measures to control interest rates or regulate bank profits in the region. A special article from Standard and Poor's provides an update on the sovereign credit ratings of selected Pacific economies in light of the prospect of weaker global growth and volatility in financial markets.

The Pacific Economic Monitor provides an update of recent developments in the region and explores topical policy issues. The ADB publication uses data from Australia, New Zealand, US, and Asia to supplement data from the region and to provide up-to-date assessments and better understanding of the Pacific Island economies.