- The strengthening of the Pacific’s tax base and the push for greater revenues is helping to move the Pacific countries toward stronger fiscal positions.
- These ocean-rich but land-constrained Pacific countries are facing unique threats and challenges, particularly due to their isolation, size, and the increasing threat of climate change and disasters.
- It is incumbent upon development and international partners to keep working to help build capacity and invest in important infrastructure in the Pacific.
On 9 September 2019, the Asian Development Bank (ADB) approved a proposed $62.3 million grant to rehabilitate and upgrade Apia Port, Samoa’s main maritime gateway to the rest of the world. Besides climate-proofing the port and developing a multi-hazard disaster preparedness plan, the project will also enhance safety and border management, and pilot gender-responsive green port initiatives. When completed, the project will open up trade channels particularly in Asia and North America, with the potential to transform the Samoan economy.
This is a necessary investment for Samoa. With a population of about 200,000 and a gross domestic product (GDP) of just over $800 million, the country is small and geographically isolated, with limited access to global value chains and financial markets, and exposed to disaster risk. Despite strong efforts to improve revenue collection and cap spending to limit budget deficits, the International Monetary Fund (IMF) still rates Samoa as at high risk of distress. This does not reflect poor financial management, rather it shows the Catch-22 faced by the Pacific: the small slow-growing economies are unable to access the very investment funds needed to raise economic performance and drive development.
The Pacific region's enormous investment needs
Samoa’s situation is indicative of the broader Pacific Islands region. The region has enormous investment needs, in the range of $2.8 billion a year until 2030, on top of an additional $300 million a year over the same period for climate mitigation and adaptation. Despite doing much to rein in expenditures and boost revenues, the small and isolated nature of the Pacific Islands provides them with limited options to mitigate exposure to shocks from international price fluctuations, as well as natural hazards and climate change.
"Investment on critical infrastructure like ports, bridges, roads, and connectivity is something that the Pacific cannot meet on its own."
“Investment on critical infrastructure like ports, bridges, roads, and connectivity is something that the Pacific cannot meet on its own,” says Emma Veve, the Director of Social Sectors and Public Sector Management in ADB’s Pacific Department. “The economies of these countries are too small and too isolated. So continued grant and concessional assistance from development partners will remain absolutely critical to supporting sustainable, inclusive, and resilient development in the region.”
Among numerous other vital development projects, ADB is also supporting the climate-proofing and rehabilitation of the sole seaport in Nauru, a country that relies almost totally on maritime transport; as well as the construction of a seawater desalination plant and rehabilitation of the water distribution network in Kiribati, to increase the local supply of fresh water and access to the same in a major urban area. As these economies are even smaller—each less than a quarter the size of Samoa’s—the costs of these projects alone reach the equivalent of about two-thirds of annual GDP in Nauru, and one-fifth of GDP in Kiribati.
A closer look at the Pacific's debt picture
Funding from international partners will be vital for investments such as these. But countries in the Pacific have a small amount of fiscal space to provide tax incentives and exemptions to boost these projects thanks to their stable fiscal footing and public debt profile. In 2018, the average debt-to-GDP ratio for ADB’s Developing Member Countries (DMCs) in the Pacific stood at 35%, well below the emerging and developing Asia average of almost 52%. In fact, only one country in the Pacific had a debt-to-GDP ratio higher than that regional average. Debt-to-GDP ratios of eight of ADB’s 15 Pacific DMCs are also currently below the subregional average. And none are actually in debt distress, according to IMF ratings.
The broader trend line is also encouraging. The Pacific’s average debt-to-GDP ratio stood at over 53% in 2009 but fell to just over 36% in 2014. It is on the rise again, forecast to exceed 44% of GDP by 2024, precisely due to the necessary investments to bridge remaining gaps in access to basic services, such as health care and education; expand land, sea, and air transport networks; and climate-proof, maintain, or repair disaster damage to public assets.
“This trendline shows two key things,” Ms. Veve said. “That the broader debt situation in the Pacific countries has improved impressively over much of this decade. But the projected rise in average debt-to-GDP is the result of spending that is absolutely critical to the long-term economic stability of these countries.”
Tools for fiscal stability
This improving debt picture has been aided by two things—managing expenditures and building and strengthening revenues. On the expenditure side, Pacific countries are now working to reform state-owned enterprises (SOEs), either in terms of streamlining operations or moving toward privatization. Kiribati and Tuvalu recently improved their SOE policies and regulations and adopted laws to improve corporate governance, while ADB recently funded reviews of water tariffs in the Federated States of Micronesia and Palau. With the help of ADB and the Green Climate Fund, countries are also investing more in operations and maintenance to help avoid costly repairs and outages down the line. They are also working to reform procurement processes and governance that will help to build capacity and achieve more efficient spending on goods and services. Finally, the Pacific countries are planning and prioritizing expenditures as a way of expanding access to essential services without risking debt distress. Most of ADB’s Pacific DMCs have adopted medium-term budgeting systems and planning mechanisms that not only employ a longer-term perspective in the budgeting process, but also strategically link public spending with national development plans. For example, the Federated States of Micronesia adopted a 10-year development plan for 2016-2025 which outlines top-level infrastructure priorities in line with strategic development objectives. The plan is split into three implementation periods with funding sources identified for each period.
The situation has also been helped by a focus on building and strengthening new revenue streams. Reforms and strengthening of existing systems have helped drive the region’s tax revenues to 19.6% of GDP, well above the average of the Asia Pacific region’s other DMCs (13.5% of GDP). The tax base has been boosted by increased fishing revenues in the Pacific, whose waters yield some 30% of the world’s tuna catch. Six countries—Kiribati, the Federated States of Micronesia, the Marshall Islands, Nauru, Palau, and Tuvalu—have quadrupled their fishing license revenue since the start of the decade.
“The strengthening of the Pacific’s tax base and the push for greater revenues is helping to move the Pacific countries toward stronger fiscal positions,” Ms. Veve said. “So that is extremely encouraging. But, at the same time, their revenue bases are still too small to cover wide-ranging expenditure needs, such as climate-proofing infrastructure and expanding public services to more remote communities.”
The Pacific’s efforts to manage debt and spending—while building or strengthening new streams of revenue—are being helped by ADB’s ongoing technical assistance and policy support. The countries are working to strengthen checks and balances, which includes ensuring that budgets are reviewed by Parliament while simultaneously improving audit and economic reporting functions. ADB is also helping the Pacific expand and strengthen the private sector. ADB’s Private Sector Development Initiative, for example, is helping countries like Papua New Guinea (PNG), Samoa, and the Solomon Islands make business registration easier and financing more accessible. ADB and the Pacific Financial Inclusion Programme are helping the region overcome the limited financial systems and access to capital exacerbated by the region’s isolation and geographical dispersion. For example, a program in PNG to provide mobile financial services is helping to expand financial inclusion and support sustained economic growth. Finally, ADB is also working with the Pacific to combat money laundering and the financing of terrorism, by helping countries comply with relevant Financial Action Task Force recommendations.
Meeting the challenges of tomorrow
All these measures—stronger expenditure and debt management, increasing revenues, and improved capacity and administrative oversight—are helping to put the Pacific Islands on the path toward a stronger and more stable fiscal position. But the large-scale investment and infrastructure that will drive sustainable, inclusive growth and boost living standards is a journey they can’t make on their own.
“The new decade will be a key period for the Pacific countries,” said Ms. Veve. “These are countries of enormous strategic and geographical importance facing unique threats and challenges, particularly due to their isolation, size, and the increasing threat of climate change and disasters. So it’s incumbent upon development and international partners to keep working to help build capacity and invest in important infrastructure. That will help these countries to build the diverse, inclusive economies their people need and help to prepare the region to meet the challenges of tomorrow.”
