Vaccine Rollouts to Spur North Pacific Economic Recovery — ADB

News Release | 29 April 2021

MANILA, PHILIPPINES (29 April 2021) — The economic decline in the north Pacific is forecast to end in 2022 as the coronavirus disease (COVID-19) vaccine rollout allows travel and trade to resume, says a new report by the Asian Development Bank (ADB) released today.

The economies of the Marshall Islands, the Federated States of Micronesia (FSM), and Palau contracted by 5.5%, 5.4%, and 10.3%, respectively, in 2020 as the pandemic closed borders, paused international tourism, and impeded trade. According to the Asian Development Outlook (ADO) 2021, ADB’s flagship economic publication, these contractions are projected to improve in 2021 to -1.4%, -1.8%, and -7.8%, respectively, before a return to positive growth in 2022.

“Due to the small size of the north Pacific economies, their people are particularly vulnerable to the economic impacts of travel and mobility restrictions that have left them free of COVID-19,” said ADB Public Sector Economist and ADO report author Rommel Rabanal. “For these countries to recover sustainably, it’s critical that targeted assistance is made to protect those most affected and facilitate the revival of key productive sectors.”

The ADO projects the economies of the Marshall Islands, the FSM, and Palau will grow by 2.5%, 2%, and 10.4%, respectively, in 2022. However, that hinges on the return of tourism and fishing fleets to the north Pacific which, in turn, is dependent on effective vaccine rollouts in larger countries. If these major economic partners continue to experience COVID-19 disruptions after 2021, the projected recovery will be weaker.

In the Marshall Islands, quarantine requirements reduced fishing output and demand for associated services, while travel restrictions harmed hospitality and trade. The reduced economic activity diminished government revenue, while the Marshall Islands’ response to COVID-19—which included assistance to businesses, fishing and farming equipment and food for remote communities, and support for essential services—required a spending increase.

Low revenue amid weak economic activity significantly widened the Marshall Islands’ financing needs in 2020. COVID-19 grants from development partners—including $23 million from ADB—are helping to bridge near-term financing needs arising from the pandemic’s impacts.

The ADO projects ongoing vaccinations will allow for a cautious reopening of the Marshall Islands’ economy in late 2021.

In the FSM, border closures and restrictions aimed at ensuring public safety led to reduced activity in transport and communications, hotels and restaurants, and wholesale and retail trade, as well as construction. The ADO expects restrictions will continue to constrain the FSM’s transport and tourism sectors through most of 2021 before vaccination progress allows economic activity to increase.

Previous budget surpluses enabled by fishing fees and corporate taxes allowed the Government of the FSM to promptly roll out a $58.7 million economic stimulus package, comprising business subsidies and rebates, unemployment assistance to migrant workers, concessional business lending, a food security program, and financial support to low-income households. Development partner grants in support of COVID-19 response, including $20 million from ADB, has allowed the FSM to maintain a fiscal balance despite increased spending and reduced tax revenue.

In Palau, one of the most tourism-driven economies in the world, global travel restrictions saw arrivals fall rapidly in February and March 2020 before effectively ceasing in April. The 53% decrease in arrivals in 2020 led to a double-digit economic contraction.

The Government of Palau provided a $20 million economic response program offering unemployment benefits, temporary employment schemes, a household utility subsidy, and interest-free business loans. This program, coupled with a 25% fall in tax revenues, led to a fiscal deficit—Palau’s first in a decade—equal to 11.2% of GDP in 2020. ADB supported Palau’s COVID-19 response with $35 million in loans in 2020.

The likelihood of Palau being one of the first countries to be fully vaccinated is unlikely to prevent a further decline in arrivals this year, says the ADO, with pre-COVID-19 tourism levels not expected until 2023 at the earliest.

The ADO recognizes that the brunt of the economic impact of COVID-19 in these countries has fallen on private businesses, which do not have the stable funding of the public sector, and on women and informal workers, who tend to have less access to social safety nets. It also recognizes prolonged local travel restrictions have made accessing education and health care difficult for many people.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.