Pacific Economies Set for Higher Growth in 2006-2007, ADB Says

HONG KONG, CHINA – As a group, ADB’s 14 Pacific developing member countries are forecast to grow 2.9% in 2006 and 3% in 2007 on generally favorable conditions for exports, tourism, remittances from overseas workers, and trust funds, according to a major ADB report released today. The Pacific economies grew 2.7% in 2005.

“A modest improvement in growth in Fiji, Papua New Guinea, and Timor-Leste will lift the regional outlook in 2006,” said ADB Chief Economist Ifzal Ali in launching the 2006 edition of ADB's flagship annual economic publication, Asian Development Outlook (ADO).

“To consolidate growth going forward, it will be important for governments to work on creating an environment in which the private sector can prosper,” he said.

ADO 2006 forecasts overall growth for the 43 countries of developing Asia of 7.2% in 2006 and 7% in 2007.

Economic growth in Fiji Islands slowed to an estimated 1.7% in 2005 after average growth of 3.4% in 1999-2004, though tourism and related hotel activity continued to expand. Production of clothing and gold, two important export industries, fell from 2004 levels. The sugar and clothing industries, losing their preferential benefits in overseas markets, need major adjustments to remain viable. GDP growth is expected to edge up to 2% in 2006 and 2.4% in 2007, largely a consequence of gains in tourism as the entry of budget airlines into the market supports the industry. Construction, financial services, fisheries, timber, and transport are projected to record some growth.

Consolidating the performance of the previous two years, the economy of Papua New Guinea grew 3% in 2005, given favorable external conditions, political stability, and supportive fiscal, monetary, and trade policies. Agriculture performed particularly well, especially coffee, copra, copra oil, and rubber. Construction recorded strong growth, a result of low interest rates and solid demand for residential and commercial buildings. However, mining production (which includes oil and natural gas) contracted by 4.5%, primarily on a 6% reduction in gold production due to a landslide at the large Porgera mine. GDP growth is projected at 3.2% for 2006 and 3.0% for 2007 as industries including construction, manufacturing, and wholesale and retail trade are expected to grow at stronger rates than in 2005. However, law-and-order problems, governance issues, land-tenure arrangements, limited infrastructure, and basic service delivery are long-standing drags on growth and higher living standards.

A recovery in the economy of the Democratic Republic of Timor-Leste that began in 2004 continued into 2005. Growth was supported by a rise in government income from the country’s share of oil and natural gas production in the Timor Sea, estimated at $265 million in fiscal year (FY) 2005. Non-oil GDP, the preferred measure of the economy, was estimated at $350 million, up 2.5% from FY2004. A pickup in agriculture, which employs about 74% of the labor force, and an expansion of bank lending also played their part. High population growth, weak infrastructure, and limited institutional capacity are major hurdles to development. Non-oil GDP is expected to grow by around 5% in 2006 and 4% in 2007. Growth would have to accelerate to make significant inroads into widespread poverty.

Modest growth in the 2%–5.5% range was recorded for most of the smaller Pacific island economies in 2005, reflecting contributions from aid flows, commodity exports, fishing, remittances, tourism, and trust funds. The rise in global oil prices reduced gains from these favorable influences, as these mostly remote and import-dependent economies rely on oil products for their air and sea transportation as well as power generation.

International aid remained a key factor for several economies. The Marshall Islands and the Federated States of Micronesia benefited from funds provided by a renewed Compact Agreement with the United States. Compact funds also supported economic development in Palau and aid projects provided significant support for Solomon Islands and Tuvalu.

The strength of international capital markets boosted the market value of trust funds that provide income for a number of countries, namely Kiribati, Marshall Islands, Federated States of Micronesia, and Tuvalu. Income from remittances remained at high levels in Samoa, Tonga, and Tuvalu.

Fish products are important exports for Samoa, Solomon Islands, and Tonga, and fish license fees are sources of income for Kiribati, Marshall Islands, and Tuvalu. However, fish harvests in 2005 were below usual levels in some countries, especially Cook Islands, Kiribati, and Tuvalu, generating concern about falling stocks of certain species.

Tourism provides significant income for Cook Islands, Palau, Samoa, Tonga, and Vanuatu, and they recorded robust growth in arrivals.

Slightly higher growth rates are expected for most of the economies in 2006, based on a continuation of the favorable environment for international tourism, commodity prices, financial markets, aid, and remittances. Weaker growth is expected for Samoa and Tonga.