Pacific Economy to Follow Global Economic Trend

News Release | 6 April 2005

MANILA, PHILIPPINES (6 April 2005) - Economic growth in the Pacific subregion is forecast to slow slightly to around 2.0% in 2005-2007, according to a major ADB report released today.

In this context, the Asian Development Outlook 2005 (ADO), the annual ADB flagship publication that forecasts economic trends in the region, stressed the importance of governments being able to implement structural reforms necessary to stimulate private sector development.

Modest growth is expected in most Pacific countries in the medium term. Papua New Guinea, the largest economy in the subregion, is expected to continue its moderate growth but at a slightly slower average annual rate of 2.4% as depletion of mineral reserves continues and logging is curtailed.

A major growth slowdown is forecast in the Fiji Islands, the subregion's second largest economy, as the garment industry loses concessionary access to export markets and the sugar industry confronts structural adjustment.

Inflation in the subregion is expected to remain in the 3.4-4.0% range in the medium term.

In 2004, aggregate gross domestic product (GDP) growth of the Pacific developing member countries was unchanged at an estimated 2.6%, with increases in GDP ranging from 1.5% for Timor-Leste to 4.6% for Solomon Islands. Meanwhile, the Federated States of Micronesia, Republic of the Marshall Islands, and Tuvalu registered contractions because of reductions in public sector activity.

The Solomon Islands' second year of relatively rapid growth was led by agriculture, forestry and fisheries, though this entailed harvesting of the natural forest at an unsustainable rate.

Primary production also led a mild acceleration of growth in Vanuatu and contributed to a pickup in growth in the Fiji Islands.

The agriculture and mining sectors of Papua New Guinea expanded at around 3.0%, but the oil and gas subsector contracted significantly because of the depletion of oil reserves. As a result, growth decelerated slightly to 2.6%, from 2.8% in 2003.

Tourism continued to grow across the subregion, partly because of lower airfares that resulted from increased competition in airline services to several destinations. Consequent stimulation of the services and construction sectors was important to the economies of Cook Islands, Fiji Islands, Samoa, and Vanuatu. Tourism and construction are expected to drive Palau's economic growth in 2005-2007.

In contrast, tourism contracted in the Federated States of Micronesia where the lack of sustained competition in airline services provision left airfares at a high level compared with other subregional destinations.

On the up side, the recovery in international capital markets improved returns for the long-established Kiribati and Tuvalu trust funds and for the newly established trust funds in the Federated States of Micronesia and the Republic of the Marshall Islands.

While economic growth at modest rates generated an increase in employment levels across the subregion, growth in labor supply continued to outpace labor demand.

The past year saw progress in formulating and implementing economic and public reform strategies aimed at improving public service delivery and the enabling environment for private sector development, a key aspect of ADB's new Pacific strategy. However, the report notes that reforms need to be extended and consolidated.

Political uncertainty continues to be a concern in a number of Pacific developing member countries, and corruption and poor governance remain as major obstacles to improving development outcomes in the subregion. The development of physical infrastructure and the creation of an effective legal and regulatory environment for business remain a major challenge.

The subregion includes Cook Islands, Fiji Islands, Kiribati, Marshall Islands, Federated States of Micronesia, Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu.