Asian Development Outlook (ADO) September 2023: Subregional Forecasts

Asian Development Outlook (ADO) September 2023: Subregional Forecasts

  • The growth forecast for the Caucasus and Central Asia is revised up to 4.6% for 2023 and 4.7% for 2024 as the factors that pushed up growth in the Caucasus last year have not faded as quickly as expected.
  • In East Asia, the People's Republic of China's forecast is marginally revised down to 4.9% in 2023, reflecting softening momentum in domestic demand, headwinds from weaker global demand, and the property sector correction. Growth forecasts for the Republic of Korea and Taipei,China are also revised downward.
  • A small downward revision is made for South Asia for 2023, to 5.4% from 5.5%. South Asia will still be the fastest growing subregion, led by India and driven by strong investment and consumption.
  • Growth in Southeast Asia is revised slightly down to 4.6% in 2023 and 4.8% in 2024 due to weaker global demand for the subregion’s manufactured exports.
  • Growth in the Pacific is revised up to 3.5% for this year and 2.9% for next on the continuing recovery in tourism and infrastructure investment. This update retains the 4.8% regional growth forecast for 2024.

Caucasus and Central Asia

Economic activity remained strong in the first half (H1) of 2023, driven by domestic demand, though growth slowed in every country except Kazakhstan and Tajikistan, compared to H1 2022. Inflation accelerated in Kazakhstan but slowed in the other seven countries as import prices stabilized, allowing some easing of monetary policy. The outlook remains dependent on external factors, including growth in key trade partners, oil prices, the pace of remittances and private transfers, and inflows of tourists and migrants from the Russian Federation.

Growth moderated slightly but remained in double digits. It slowed from 11.1% in the first half (H1) of 2022 to 10.5% in H1 2023, buoyed by still- robust domestic demand. On the supply side, growth in services moderated from 14.9% to 14.2% as rapid gains in a few components—notably information technology at 63.1%, trade at 22.8%, and real estate at 10.4%—were offset by slower growth or declines in other services. Industry excluding construction grew by a mere 0.3% as gains in manufacturing and utilities marginally outweighed a 3.0% decline in mining and quarrying. Construction grew by 19.2% on higher private construction and public investment for roads and social infrastructure. Agriculture contracted by 0.2% as lower livestock output offset gains in crop production. On the demand side, growth in private consumption slowed from 10.3% to 6.7% as net money transfer inflow decreased, and despite lower inflation. Public consumption reversed a 2.6% decline in H1 2022 to grow by 16.1% on public salary increases in January 2023 and higher social spending. Gross fixed capital formation improved on 17.7% growth in H1 2022 with 20.1% a year later, reflecting higher public and private investment. With still-robust expansion in H1 2023 and continued higher spending and investment, both public and private, this update raises the growth forecast for 2023. It maintains the forecast for 2024, assuming some moderation in domestic and external demand.

Inflation fell sharply despite strong aggregate demand. Average annual inflation slowed from 8.3% in the first 7 months of 2022 to 3.6% a year later, in line with waning impact from exogenous shocks last year. Prices rose by 2.6% for food and 2.8% for other goods, offsetting a 5.4% increase for services. Despite buoyant aggregate demand, falling prices for goods—in particular lower import prices with a relatively stable exchange rate—brought deflation at 0.1% month on month in July 2023. With annualized inflation below the 2.5%–5.5% target based on month-to-month data, the Central Bank of Armenia lowered its refinancing rate by a cumulative 50 basis points in two steps in June and August 2023 to 10.25%, the first decreases since the third quarter of 2020. As inflation slowed more than expected in H1 2023, this update reduces inflation forecasts for 2023 and 2024.

Domestic demand remained robust, supported by private and public consumption. Higher household income boosted private consumption by 5.1% in the first half of 2023, though continued double-digit inflation may curb real incomes and consumption later in the year. Public consumption accelerated on higher spending for social services and will remain robust to the end of 2023. Investment rose by 10.4%, led by projects outside of the large hydrocarbon industry. Net exports contracted as imports outgrew exports in the first 5 months of 2023. In light of slower growth in hydrocarbons and tight monetary policy, this update forecasts a deeper slowdown in 2023 and 2024.

Inflationary pressures persist despite monetary tightening. Inflation declined from 13.0% year on year in the first 7 months of 2022 to 12.2% a year later with some moderation in food price inflation, from 18.7% to 14.3%, in line with diminishing global food prices. Inflation for other goods rose, however, from 7.0% to 11.0% and for services from 10.1% to 10.4%. With these developments, this update raises inflation projections for 2023 and 2024. To address inflation, the central bank raised the policy interest rate from 8.25% to 9.0% in three steps from January to May, and the government established a working group to monitor prices and recommend ways to curb inflation and achieve price stability.

Growth has moderated but remains robust, supported by tourism and financial inflows. Growth moderated from 10.6% in the first half of 2022 to 7.6% a year later as industry contracted by 0.7% and agriculture by 2.3%, and despite strong growth in construction at 15.1% and services at 10.2%. Expansion in services reflected increases of 14.0% in wholesale and retail trade, 15.7% in accommodation and food services, 44.2% in information and communication, and 17.2% in arts, entertainment, and recreation, much of this reflecting a recovery in tourism. On the demand side, growth came from strong domestic demand, reflecting high consumer spending on goods and services, particularly by Russian migrants, and continued revival in investment and tourism. Foreign direct investment remained high at nearly $500 million in the first quarter of 2023, and the unemployment rate declined by more than 3 percentage points to 17.3%. Such encouraging figures prompt this update to raise the growth forecast for 2023 but not for 2024, in light of an expected return to growth potential and possible fallout from slowing global expansion.

Inflation has fallen below target, helped by a relatively stable Georgian lari and prudent macroeconomic policies. With inflation year on year continuing to decline to 0.3% in July 2023, average annual inflation slowed from double digits throughout 2022 to 4.0% in 2023 to July despite increases of 7.3% for food, 24.9% for rental housing, and 12.1% for hospitality. Apart from a high base in 2022, slower inflation reflected lower import prices and transport costs with increased transit volume, strong foreign currency inflow that supported the lari, continued fiscal consolidation, and tight monetary policy that kept the policy rate high at 10.25% despite a 0.25% cut in August. Core inflation—which excludes food, nonalcoholic beverages, energy, regulated tariffs, and certain transport charges—slowed from 6.9% in December 2022 to 3.2% in July 2023. The National Bank of Georgia, the central bank, increased reserves to more than $5.0 billion, which the International Monetary Fund declared adequate. With inflation decelerating, this update cuts inflation forecasts for 2023 and 2024.

Services and industry will lead broad-based growth on the supply side. The forecast for growth in services this year is revised up from 3.3% in ADO April 2023 to 4.2% on anticipated expansion in trade, transport, and communications. Government efforts to attract foreign direct investment in mining and manufacturing are expected to increase local production, while the government’s continuing programs to support housing and modernize infrastructure will boost construction. However, escalating trade and investment sanctions on the Russian Federation, a main trade partner, pose downside risks to the outlook.

Inflation will diminish gradually but remain above the central bank target. Government-approved hikes in petroleum prices and utility tariffs have raised the cost of producing and transporting goods. In addition, procyclical fiscal policy has adding to inflationary pressure despite continued tight monetary policy. This update therefore raises inflation projections for both 2023 and 2024, but still on an easing trend.

A slowdown in gold production cut growth during the first 7 months of 2023. GDP growth decelerated to an estimated 2.9% during the first 7 months of 2023 from 6.4% during the same period last year as industry contracted by 2.0%. Industry contraction reflected a decline in manufacturing as the production of metals, mainly gold, reversed a 46.7% increase to fall by 11.7%, as well as smaller gains in mining and quarrying. Growth in services accelerated to 4.6%, led by strong performance in wholesale and retail trade and in food and accommodation. Expansion in construction remained robust at 11.2%, reflecting higher domestic investment. Due to unfavorable weather, agriculture contracted by 1.7%, reversing 6.4% growth during the same period last year. On the demand side, with data available from only the first quarter, growth came from higher public consumption and gross fixed capital formation. Net money transfers from abroad including remittances fell by 28.5% year on year in the first half of 2023, likely moderating private consumption. With lower-than-expected growth in the first 7 months of 2023, this update reduces projected growth for 2023 but maintains the ADO April 2023 forecast for 2024 amid the lagged effect of expansionary fiscal policy. Risks remain on the downside. Growth could slow with any net reversal of capital inflows, lower than projected economic growth in the Russian Federation, lower remittances, or secondary sanctions. Alternatively, the outlook could improve on continued growth in trade and demand from an influx of expatriate Russians.

Inflation subsided in the first 7 months of 2023 as global food and energy prices began to decline. Average annual inflation slowed from 13.0% in January–July 2022 to 12.4% a year later, decreasing from 15.2% to 11.1% for food but rising from 10.8% to 13.0% for other goods and from 8.8% to 10.5% for services. Average annual core inflation was 13.1% in January–July 2023. Factors contributing to continued inflation included expansionary fiscal policy and higher electricity tariffs and other administered prices. Inflation year on year declined from 15.3% in January 2023 to 10.3% in July 2023 but remained well above the 5%–7% target range of the National Bank of the Kyrgyz Republic, the central bank. Considering persistent uncertainty and elevated inflationary expectations, the central bank has kept its policy rate unchanged at 13.0% since the end of November 2022. To smooth volatility and avoid excessive swings in the exchange rate, the central bank sold $500.2 million in foreign exchange in January–July 2023, more than double sales in the same period of 2022. With slower growth in domestic demand expected, further depreciation of the Kyrgyz som likely, a poor harvest, and elevated core inflation, this update retains earlier forecasts for slowing but still high inflation in 2023 and 2024.

Growth has been supported by higher public and private investment. The average inflation-adjusted salary increase accelerated from 2.8% year on year in H1 2022 to 11.8% in H1 2023. Moreover, in March 2023 the government boosted salaries by 20%–25% for military and law enforcement personnel, followed by a 20% rise in July of base pensions and other social benefits—all of which lifted private consumption. Gross investment grew by 27.1% year on year during the first 6 months of 2023. With strong growth reported in H1 2023, this update raises growth projections for 2023 and 2024.

Inflation has decreased considerably. Inflation dropped sharply from 8.3% year on year in June 2022 to 2.4% in June 2023 as average inflation year on year fell from 7.0% in H1 2022 to 3.0%. Food price inflation rose slightly from 2.3% to 2.9% as prices for other goods rose by 2.3%. For services, 1.1% inflation reversed to 0.4% deflation, with planned utility tariff increases postponed to H2 2023. Inflation subdued, the National Bank of Tajikistan, the central bank, lowered its policy rate from 13.0% to 11.0% in February 2023 and to 10.0% in May, partly to boost investment and domestic spending. The Tajik somoni depreciated by 7.0% against the US dollar in H1 2023 but appreciated by 11.4% against the Russian ruble. In view of these developments, and despite upcoming utility tariff increases, this update reduces inflation projections for 2023 and 2024.

The government reported growth at 6.2% in the first half of 2023, slightly above 6.0% reported a year earlier. On the supply side, growth came from all sectors. Expansion in the large hydrocarbon economy came mainly from reportedly higher production and exports of natural gas, while the economy excluding gas and oil benefited from growth in construction, wholesale and retail trade, transport, and catering. As reported by the government, industry performance aside from hydrocarbons and construction reflected stable output in electricity, chemicals, textiles, food processing, and other agro-industrial products. Private firms engaged in import-substitution programs continued to receive substantial government support. According to half-year reports, strategic crops of cotton and wheat, as well as a large variety of horticultural produce, have been sown with the aim of meeting annual production targets. On the demand side, the government reported higher net exports and public investment in industrial and social infrastructure. At the same time, elevated inflation and constraints on employment continued to hold down real incomes and private consumption. With limited availability of official statistics and continued uncertainty about growth data, the update revises the growth projection for 2023 to align with the official forecast and maintains the projection for 2024.

In H2 2023, persistently high prices for food and energy and sluggish remittances will likely continue to trim real household income and consumption. However, industry, agriculture, and capital investment will likely maintain steadily higher growth in the rest of 2023 and in 2024. With these projections, this update raises growth forecasts for 2023 and 2024.

Producer prices and wages rose with persisting inflation. Higher costs for imported food and capital goods, along with increased wages and pensions, edged up inflation from 10.6% in H1 2022 to 11.0% a year later. Exemptions from tax and customs duties for essential foodstuffs, set to continue until the end of 2023, helped slow food inflation from 14.2% to 13.8%. However, inflation for other goods accelerated from 9.0% to 9.5%, and for services from 6.6% to 8.3%. Despite persistent inflationary pressure, the monetary authorities retained the policy rate at 14.0% in July 2023. This update thus retains earlier inflation projections for 2023 and 2024.


East Asia

Subregional GDP grew at a good pace in the first half of 2023, spurred by the lifting of COVID-19 restrictions in the People’s Republic of China. Nevertheless, the growth projection in this update for aggregate GDP in 2023 is revised down slightly from ADO April 2023. The 2024 growth projection is unchanged. Inflation has slowed more than expected overall, prompting a significantly lower inflation projection for the subregion this year. The inflation forecast for next year is adjusted marginally up.

Private consumption and services will drive growth this year and next. Leading indicators signal slowing momentum at the beginning of Q3. The headline composite purchasing managers’ index declined for the first time in 7 months, from 50.3 in June to 49.4 in July, while the latest business surveys showed less optimism by enterprises. However, the same tailwinds encountered in H1 should continue to shape the economy in the rest of 2023. Despite considerable recovery in tourism in the first 6 months of 2023, arrivals returned to only 37% of the number in the same period in 2019. Inbound tourism is projected to continue growing vigorously this year as residual pandemic disruption to transportation and handling capacity fade. A solid labor market should further boost consumption, domestic demand, and services, despite tight financial conditions. On the negative side, goods exports will remain weak with slower growth in the advanced economies, even as recovery in the People’s Republic of China provides some lift. On balance, and taking into account the unexpectedly fast growth in Q1, the 2023 growth projection is revised up. Normalizing external and domestic conditions will underpin continued recovery next year, but the 2024 growth forecast is revised down primarily to accommodate a base effect.

The April inflation forecast is revised up for this year but maintained for next year. Headline inflation fell marginally from 2.0% year on year in May to 1.9% in June, with smaller price increases for food, electricity, gas, and water utilities, and averaged 2.0% in H1 2023. The underlying inflation rate also declined slightly, from 1.8% to 1.7%. External price pressures are expected to moderate somewhat with favorable base effects, but inflation is still forecast higher in H2 2023 in tandem with local economic recovery—easing, as previously forecast, in 2024.

GDP will climb this year slightly more than forecast in ADO April 2023 but marginally less in 2024. Growth this year will be supported by substantial recovery in exports and continued fiscal expansion, but tempered by persistently high inflation, contractionary monetary policy, and tight domestic financing conditions. In 2024, GDP growth will accelerate further but remain below the April forecast. It will be driven by private sector lending, mining growth, and positive spillover into transport and other services, but constrained by lower growth in agriculture because of severe weather and a lower contribution from net exports owing to a sharp increase in imports.

Average inflation remained high in H1 2023, but forecasts for both years are revised down slightly from ADO April 2023. Annual inflation has been above the target set by the Central Bank of Mongolia for the past 27 consecutive months, but 12-month average inflation moderated from 15.2% year on year in December 2022 to 12.5% in July 2023 and is likely to trend downward in H2. Owing to unexpectedly robust exports, foreign exchange reserves have stabilized at $3.7 billion–$3.9 billion since April 2023, or cover for 3.5 months of imports of goods and services. This has eased pressure on the exchange rate, which should temper price increases in 2024. The current account improved significantly in H1 2023 to record a surplus equal to 3.2% of GDP. The current account deficit will be smaller than forecast in ADO April 2023 for this year and next, mainly because of higher exports.

Growth is expected to moderate in H2 2023 as momentum slows and favorable base effects fade. Services should continue to pick up in line with recovering household demand, which will prop up a frail private sector and offset some softening of external demand for PRC exports. Meanwhile, steady public infrastructure growth will support investment. Manufacturing investment is likely to slow as external demand cools, and real estate investment should continue to fall as stress persists in the property market. In the rest of this year, both monetary and fiscal policy will be accommodative, aiming in particular to boost domestic demand and private sector activity. Given softer external demand and continued weakness in the property market weighing on recovery, the GDP growth forecast is revised down by 0.1 percentage points to 4.9% in 2023, still within the government’s target of around 5.0% this year, and kept at 4.5% in 2024, as projected in ADO April 2023.

Consumer price inflation should stay moderate. Average consumer price inflation was muted in the first 7 months of 2023 by weak domestic and external demand and softer global commodity prices. Upward pressure from rising service prices should be modest in H2 2023 as recovery in consumption moderates. The forecast for consumer price inflation is revised down to 0.7% in 2023 but unchanged at 2.0% in 2024.

Economic growth this year is now projected to be slower than forecast in April. Growth picked up quarter on quarter from 0.3% in the first quarter to 0.6% in the second, but improvement reflected a significant positive contribution from net exports that is unlikely to be repeated. Further, semiconductor exports have been declining since August 2022, albeit at a slowing rate in recent months. Nevertheless, domestic chipmakers are well placed to benefit more than others from artificial intelligence developments such as High Bandwidth Memory, given their competitive advantage at producing the most advanced chips. Exports are therefore expected to improve in H2 2023 as the information technology industry recovers. Private consumption and investment will be constrained by high interest rates and a sluggish housing market but are still expected to contribute to growth.

Inflation forecasts are revised up from the April projections. In the year to date, inflation, though easing has remained strong and may not abate significantly anytime soon. Indeed, the central bank expects inflation to hover at about 3% in H2 2023, staying above its 2% target for some time to come.

Growth will slow in 2023 more than projected in April before rebounding next year. Industrial production has declined steadily this year, contracting by 17.2% year on year in June, in line with weak exports. The manufacturing purchasing managers’ index fell to a pessimistic 44.8 in the same month, which bodes ill for industry and export prospects well into H2 2023. On the bright side, retail trade grew by 13.3% year on year in June, reflecting robust private consumption, which is expected to bolster the economy through the rest of the year. Consumer confidence for the coming 6-month time frame, having hit a low of 59.1 in December 2022, climbed to 68.4 in July. On balance, given slow export growth from still-weak global demand, this update downgrades the ADO April 2023 growth forecast for 2023. However, it upgrades the forecast for 2024 marginally on the expectation that consumption will continue to expand and exports recover gradually as global demand improves.

Inflation slowed gradually to average 2.3% in H1 2023. It fell to 1.7% year on year in June as food and fuel price increases moderated. Core inflation declined at a slower pace, from 3.0% in January to 2.6% in June, sustained by booming domestic demand, particularly for dining, rental property, and entertainment services. With oil and food prices expected to trend down in the rest of the year, inflation is projected to slow further in 2023 and 2024 to meet the April forecast.


South Asia

Subregional economic growth is forecast to slow in 2023 slightly more than projected in ADO April 2023. It will likely reaccelerate in 2024 as previously forecast. Current growth outlooks for individual economies in the subregion largely confirm earlier projections, except for Nepal, where growth will be significantly lower in 2023. Inflation will be higher than forecast in April, especially in 2024, as domestic demand recovers.

Afghanistan’s economic outlook is challenging. Humanitarian assistance is critical to the economy, which lacks other drivers for a rebound. If humanitarian assistance continues at the 2022 level, modest growth is expected in FY2023, with annual average inflation in the middle single digits in calendar year 2023. Inflation relief could bolster real household income and possibly improve food security. However, further economic contraction and high inflation could come from any decline in humanitarian assistance or as spillover from economic and political difficulties in neighboring countries.

Growth, though higher than expected, moderated in fiscal year 2023 (FY2023, ended 30 June 2023). This was in the face of the sharp decline in growth in major advanced counties that provide the external demand propelling the country’s export-oriented economy. Inflation intensified on high commodity prices and shortfalls in meeting fuel and energy demands. Exports continued to grow, and a marked fall in imports sharply reduced the current account deficit. Growth in FY2024 is expected to edge up and inflation to ease.

The economy is expected to grow slightly faster in FY2024 with easing inflation and some improvement in export growth. GDP growth projection in FY2024 is retained at 6.5%, higher than 6.0% in FY2023, due to continued export growth supported by economic recovery in the euro area. Import growth is expected to return to positive territory due to an increase in demand for export-related intermediates and government imports. Moderate inflation and an increase in remittances will contribute to reviving private consumption, while completion of a number of major government infrastructure projects will increase investment. Private investment, however, may be dampened by the initial higher interest rates resulting from a revision in the country’s monetary policy framework.

Inflation is projected to decline to 6.6% in FY2024. Though high inflation may persist in the first months of the fiscal year, it is expected that it will come down with some fall in global nonfuel commodity prices, expected higher agricultural production, and the initial tightening of monetary policy under the new framework.

The growth forecast is downgraded for 2023 but upgraded for 2024. The 2023 downgrade follows adverse developments affecting hydropower and construction, which together provided 26.0% of GDP in 2022. The 2024 growth forecast is revised marginally higher because of the lower base now projected for 2023. Major factors behind 2024 projections made in April are unchanged, notably the opening of the Nikachhu hydropower plant by the end of 2023 and the Punatsangchhu II plant by the end of 2024.

Headline inflation in the first 5 months of 2023 averaged 3.7% year on year. This was much lower than expected, thanks to a midyear drop in fuel prices and low food inflation at only 1.8%. Inflation in the second half of the year is projected to rise to 4.5% as food price pressure results from the impact of the erratic monsoon on domestic agriculture, export restrictions imposed by neighboring countries on food commodities, and expected increases in global prices. The 2024 inflation forecast is maintained.

Despite global uncertainties, the economy showed robust growth in the first quarter (Q1) of fiscal year 2023 (FY2023, ending 31 March 2024), driven by strong government and private investment and private consumption. The growth forecast for FY2023 is modestly lowered from the projection in ADO April 2023 due to lower-than- expected agricultural output but retained for FY2024 as corporate profitability and strong bank credit buoy private investment. Inflation has moderated broadly, but the forecast for FY2023 is raised owing to a spike in food prices, and the forecast for FY2024 is marginally lowered as core inflation moderates.

The growth trajectory is broadly consistent with expectations in ADO April 2023. An exception is lower growth of the agriculture sector. Since ADO April 2023, monsoon rainfall under the influence of a developing El Niño has led to erratic weather patterns, including flooding in certain regions and deficient rains, particularly in August. The erratic rainfall patterns have resulted in damage to the rice crop in particular and lower sowing in 2023 for pulses in the kharif season. The ADO April 2023 forecast of robust growth of the sector in FY2023 had assumed no extreme weather shocks. However, given the current rain patterns, agriculture growth projection is revised down by almost a percentage point for FY2023, with FY2024 growth remaining the same under the assumption of normal rainfall next year.

GDP growth forecast is revised down from the ADO April 2023 projection to 6.3% in FY2023 and maintained at 6.7% for FY2024. On balance, India’s economic growth will be resilient and strong. The lower FY2023 growth forecast takes into account the impact of extreme rainfall spatial patterns on kharif output, while the forecast for FY2024 assumes that rising private investments and industrial expansion will propel growth.

Inflation is expected to moderate to 5.5% in FY2023 and 4.2% in FY2024. The forecast for FY2023 is higher than that in ADO April 2023 on account of expectations of higher food prices. This forecast takes into account the effect of various government policy actions to reduce inflation, including export prohibition on non-basmati varieties of rice, export duties on other rice varieties, the maintenance of buffer stocks of pulses and onions, the removal of import duties on pulse imports, and a new fuel subsidy for cooking gas. On the other hand, core inflation is moderating at a faster-than-expected rate, which will dampen overall consumer inflation in FY2024 to 4.2%, lower than projected in ADO April 2023.

Projections for 2023 and 2024 are for continued strong growth, though falling short of sizable expansion in 2022. High growth that year reflected continued recovery from an enormous 33.5% GDP contraction in 2020 because of COVID-19. With 929,607 tourists arriving in H1 2023, the ADO April 2023 projection of 1.8 million tourists in the whole year is attainable, especially as the fourth quarter is the peak tourism season. Strong travel demand is likely to carry over into 2024 as more airlines recommence direct flights with the PRC. Construction is also poised to remain expansive, thanks to substantial public investment scheduled for H2 2023 and 2024. On balance, ADO April 2023 forecasts for GDP growth in 2023 and 2024 are retained.

Inflation will remain low, though with adjustments to forecasts in 2023 and 2024. Average inflation in H1 2023 climbed to 3.5% year on year, reflecting a hike in goods and services taxes from 1 January that exerted upward pressure on local prices. Inflation in H2 2023 appears likely to average 3.5% as well, with the impact of the tax hike less than expected in ADO April 2023. In 2024, inflation will rise slightly higher than forecast in April due to the lower base now projected for 2023. In view of the foregoing, the 2023 inflation forecast is lowered, while that for 2024 is revised slightly higher.

Following 2 years of strong expansion since the pandemic shock, growth fell more than expected in fiscal year 2023 (FY2023 ending mid-July 2023). This update lowers the growth projection for FY2023 to align with the preliminary estimate. Significant growth moderation reflects tight monetary policy and fiscal consolidation used by the authorities to address rising inflation and pressure on foreign exchange reserves. The overnight repo policy rate was raised from 5.5% to 7.0% in August 2022. Affected by higher interest rates, import restrictions in the first 5 months of FY2023, and sharply lower growth in external demand, industry grew by only 0.6% as manufacturing and construction contracted. Growth in services fell by half to 2.3% as wholesale and retail trade contracted. Agriculture, however, expanded by 2.7% as a normal monsoon boosted rice yields. On the demand side, 4.1% expansion in private consumption underpinned growth as fixed investment contracted by 10.9%—with private investment down by 7.6% and public investment by 20.2%—subtracting 3.9 percentage points from GDP growth. Moreover, a steep drop in stocks reduced overall capital formation by 13.0%. Net exports were the major contributor to growth in FY2023 as imports contracted by 17.2%.

The growth forecast for FY2024 is revised down from the ADO April 2023 projection. This reflects weaker projected growth in the major advanced economies than in April baseline forecasts and the need to continue guarded macroeconomic policies and strengthen structural reform. While notable progress in restoring external balance has been made, fiscal challenges persist. On balance, economic activity in FY2024 will be curtailed by low domestic and external demand, continued weakness in investor confidence, high interest rates, and deficient rainfall in June that will likely suppress agricultural output. Considering these developments, Nepal Rastra Bank, the central bank, adjusted its monetary stance by lowering the policy rate by 50 basis points to 6.5% and by relaxing provisions on working capital loans to revive investor confidence, while the government has prioritized capital budget execution with the issuance of guidelines for its effective implementation. Fixed investment will provide the main impetus to growth in FY2024, reversing the drag it exerted in FY2023. With foreign exchange reserves rebuilt, there is little risk to external balance.

Inflation in FY2023 averaged 7.7%, a bit higher than ADO April 2023 projected. Annual food inflation averaged 6.6% as prices rose for cereal grains, spices, dairy products, and eggs. Nonfood inflation averaged 8.6%, despite a sizable decline in global fuel charges, as prices rose for transportation, health, education, and housing and utilities. The inflation forecast for FY2024 is retained in anticipation of a subdued increase for oil and lower inflation in India, Nepal’s main source of imports.

In fiscal year 2023 (FY2023, ended 30 June 2023), the economy was buffeted by severe floods, global price shocks, and political instability. Expansionary fiscal and monetary policy hit their limits. Growth fell, inflation jumped, the Pakistan rupee weakened, and international reserves shrank. In response, fiscal and monetary policy have been tightened. Adherence to an economic adjustment program through April 2024 will be critical for restoring stability and the gradual recovery of growth, which is projected to reach a moderate 1.9% in FY2024, with price pressures remaining elevated. Downside risks to the outlook remain exceptionally high.

The economy is projected to recover modestly in FY2024 with base effects from the post-flood recovery. Uncertainty will linger, though, and stabilization measures will limit the growth of demand. Growth in FY2024 is projected to be 1.9%, slightly lower than the ADO April 2023 forecast. The revised projection assumes a modest rebound in demand, with private consumption and private investment growing by about 3% and 5%, respectively. Fiscal and monetary tightening will crimp demand, as will inflation staying in double digits. On the other hand, implementation of the economic adjustment program and a likely smooth general election should boost confidence, while the easing of import controls should support investment as fiscal tightening restrains public consumption. On the output side, better weather conditions will enable an increase in the area under cultivation and in yields, supporting recovery in agriculture. The government’s relief package of free seeds, subsidized credit, and fertilizer will also help. In turn, the recovery of farm output will feed through to industry, which will also benefit from the increased availability of critical imported inputs. The recovery of output will enable exports to pick up, although imports will grow much faster, due to pent-up demand. However, the downside risks are significant, including from global price shocks and slower global growth.

Despite continued monetary tightening, disinflation faces headwinds. Inflation is expected to ease in FY2024, as base-year effects set in, food supply normalizes, and inflation expectations moderate. In addition, the central bank will likely raise the policy rate from the 22% it set in July 2023 to gradually reduce inflation to its medium-term target of 5%–7%. The central bank has agreed to achieve positive real interest rates, refrain from introducing new refinancing schemes, and contain refinancing credits. However, significant inflationary pressures remain. Sharp increases in petroleum, electricity, and gas tariffs are envisaged under the program. As import and exchange rate controls are eased, the rupee could further weaken, raising the cost of imported goods. El Niño and the continuing Russian invasion of Ukraine could disrupt supplies and raise prices of wheat, rice, and other basic foodstuffs. Hence, inflation will likely remain high at about 25% in FY2024, significantly higher than projected earlier in ADO April 2023.

Economic conditions have gradually stabilized. Increased food and fuel availability signals better supply conditions since ADO April 2023. Official reserves, which include a People’s Bank of China swap, have strengthened but still languish below 3 months of import cover. Better foreign currency liquidity has allowed most import controls to be lifted. The government has made progress on reforms envisaged under the International Monetary Fund program, having enacted an anticorruption bill and legislation that enhances the independence of the Central Bank of Sri Lanka and its powers to manage financial crises.

Leading indicators remain muted. The manufacturing purchasing managers’ index remained below 50 in July, indicating contraction for a fourth consecutive month, and the index of industrial production contracted by 10.9% in the first half of 2023. However, the services purchasing managers’ index surpassed 50 in April and every month since. With developments since April in line with expectations, growth forecasts for 2023 and 2024 are unchanged.

Inflation has decelerated more than expected. Subdued demand and better supply conditions drove down inflation, as measured by the Colombo consumer price index, from 69.8% year on year in September 2022 to 6.3% in July 2023. The central bank reduced its policy rate by 2.5 percentage points in June and a further 2.0 points in July, and cut the statutory reserve ratio by 2.0 percentage points in August amid muted demand for private sector credit. Market interest rates have declined but remain in double digits. Given these developments, the inflation forecast for this year is revised down from the April projection.


Southeast Asia

Growth slowed down for most economies in Southeast Asia. Deceleration reflected the cumulative effects of rising inflation, monetary tightening, and weaker global demand for manufactured goods from key trading partners. However, robust domestic demand and continued recovery of the services sector—particularly tourism—have contributed to better job and income prospects, keeping growth close to its long-run average. Growth in agriculture is also affected by the early onset of El Niño.

This update revises growth and inflation forecasts offered in ADO April 2023 in light of a downgraded GDP assessment for 2022. With deeper contraction and a lower base GDP realized last year, real growth is now expected to be somewhat higher this year and lower in 2024. Inflation is expected to moderate more quickly than previously forecast.

Lower energy prices softened consumer price inflation. Persistently high inflation over the past 3 years dropped to an average of 0.8% in the first 5 months of 2023. The rate of price increase in April 2023 was 0.2%, the lowest since January 2020, but it revived marginally to 0.8% in May. Transport and communication prices declined, and increases slowed for housing and utilities and for food.

This update lowers the growth forecast for 2023 from 5.5% in ADO April 2023 to 5.3%. The downgrade reflects industry and agriculture growing less than expected in the first half (H1). The growth forecast for 2024 is unchanged. Inflation forecasts are maintained for this year and next despite quarterly fluctuation in international fuel prices.

Gradual economic recovery continued in 2022, benefiting from border reopening and improved mobility. Recovery in services will likely continue to drive growth this year and next. Currency depreciation in 2022 will keep inflation high in 2023, particularly for food and fuel, dampening household purchasing power. Rising wages in neighboring countries are incentivizing workers to migrate out of the Lao People’s Democratic Republic (Lao PDR), which poses challenges for economic recovery.

This update projects a more sanguine scenario for 2023 than ADO April 2023. The forecast for growth in 2023 is raised from 4.8% in ADO April 2023 to 5.0%, and the projection for 2024 is kept at 5.0%. The projection for inflation in 2023 is revised down from 4.2% to 3.6% and for 2024 is kept at 3.0%.

This update revises down the 2023 growth forecast and raises inflation projections for this year and next. Growth prospects in the Lao People’s Democratic Republic (Lao PDR) are dimmed by slower growth in the People’s Republic of China, a late monsoon, and macroeconomic pressures arising from high public debt and a weak Lao kip. Sharp depreciation of the kip will translate into much more persistent inflation this year and next than earlier forecast.

This update lowers the ADO April 2023 forecast for GDP growth in 2023 from 4.0% to 3.7%. It maintains the 4.0% projection for 2024. Macroeconomic instability linked to unsustainable public debt and high inflation has eroded household spending and tapered commitments for new public and private investment. Prospects for growth in agriculture and hydropower have moderated with the late onset of the monsoon. These trends, coupled with tightening monetary and fiscal policy and an economic slowdown in the People’s Republic of China, have delayed Lao PDR recovery.

Inflation is projected to remain high until year-end, lifting average annual inflation to 28%. With high demand for services in 2024 and price adjustments linked with ongoing kip depreciation, double-digit inflation is expected to persist in 2024 at 10%. Low official reserves and high external debt service payments, averaging $1.3 billion each year in 2023–2027, put continued risk exerting pressure on the kip that will translate into further consumer price inflation. The central bank managed to bolster foreign reserves from $1.1 billion at the end of 2021 to $1.5 billion at the end of June 2023, but reserves still provide only 2 months of import cover.

Growth decelerated during the first half (H1) of 2023 with subdued external demand, sluggish commodity production and weak trade performance. Inflation declined, tempered by easing commodity prices and the growth slowdown. With deceleration, GDP growth in 2023 is now projected to slow more than forecast in ADO April 2023. Inflation in 2023 and 2024 is similarly projected to slow marginally more than earlier forecast.

The economic outlook for the rest of 2023 is somewhat weaker than forecast in ADO April 2023. Domestic demand will continue to drive growth with positive developments in the labor market and continuing income support from government policy measures. Stronger tourism is evident as tourist arrivals from major tourism markets improve. Growth in commodities and manufacturing for export remains a key constraint, hampered by weaker external demand for manufactures. This could be partly a lag effect from a weaker external outlook that has since improved. In contrast, fading growth factors are expected to slow growth further with a lower base effect in H2 2023. The GDP growth forecast in 2023 is lowered to 4.5% compared to the 4.7% made in April, while the 2024 GDP growth forecast is maintained at 4.9%.

Inflation is forecast to continue its downward path, though upside risk factors could push prices up. Downward pressure will continue to come from weakening global demand, falling commodity prices, and the efforts by the government to reduce the cost of living. Upside risks to inflation include the threat of El Niño, an Indian rice export ban, and changes in price subsidies and controls. The headline inflation rate is forecast at 3.0% in 2023, down from the earlier 3.1% projection. The inflation forecast for 2024 is at 2.7%.

Moderate gains in industry and services have driven modest economic recovery. Developments suggest growth this year and next consistent with the ADO April 2023 forecasts. Political uncertainty and continuing domestic conflict undermine prospects for stronger and more sustainable growth able to alleviate widespread poverty and food insecurity. Inflation is expected to stay higher than in the April forecast in light of lingering effects from sharp depreciation of the Myanmar kyat, supply disruption, and low domestic food production.

This update raises the inflation forecast for FY2023. Inflation accelerated sharply in FY2022 and into FY2023. In the first quarter of FY2023, it reached 31.9% year on year before declining to 24.2% in the second quarter. Despite a huge decline in average food inflation from 41.4% in the first quarter to 27.5% in the second quarter of FY2023, food prices are expected to remain high in the near term given the low agricultural production and high imported inflationary pressure. Following steep depreciation of the kyat in FY2022, the exchange rate stabilized in the first half of FY2023. With lower inflows of foreign direct investment, export earnings, and official development assistance, foreign exchange remains in short supply, which threatens further depreciation of the kyat and intensifying imported inflation in the near term. The forecast for inflation is thus revised significantly higher for this year, with the 2024 forecast for lower inflation unchanged.

Domestic demand enabled the economy to post 5.3% GDP growth in the first half (H1) of 2023, though softening in the second quarter (Q2) from the brisk pace in the prior year. The growth forecast is revised down to 5.7% this year and maintained at 6.2% in 2024. Domestic demand and public investment are expected to continue to support growth. As in ADO April 2023, inflationary pressures are projected to moderate next year and the current account deficit to narrow.

Growth is expected to remain strong, albeit tempered by inflationary pressures and global headwinds. The growth forecast in 2023 is revised to 5.7% (from 6.0% in April) and maintained at 6.2% in 2024. Private consumption and investment will continue to underpin growth. A moderation in inflationary pressures next year bode well for domestic demand.

Inflation forecasts are maintained at 6.2% this year and 4.0% in 2024. Inflation is expected to soften, though the onset of El Niño and elevated global commodity prices may slow the pace of deceleration. Second-round effects from higher transport fares and minimum wage hikes are also factors. The government is considering extending the period for the reduced tariffs for some food items including rice which are due to expire by December 2023, to keep inflation contained. With core inflation easing slowly, the monetary authorities will likely maintain policy rates before considering cutting them next year. The central bank is also looking at reducing banks' reserve requirement ratio.

Weak external demand and tighter financial conditions will moderate growth in 2023 and 2024. The government’s Economic Development Board reported in July 2023 that business sentiment in manufacturing toward the next 6 months remained slightly positive. However, the manufacturing purchasing managers’ index languished that month under 50, albeit slightly improved from June, with the electronics index at 49.3, signaling contraction. Weak manufacturing will likely drag on growth, countered by robust services and sustained expansion in construction, given a sizable pipeline of government projects. Growth in the services sector will be supported by continued improvement in trade services, information and communication, and a robust tourism industry, but tempered by lingering uncertainty regarding monetary tightening in the US that could adversely affect financial services. The boost from border reopening in the region will likely fade in H2 2023. Private consumption is expected to moderate as higher consumer prices restrain spending and higher borrowing costs threaten to dampen investment growth. Any rebound in the People’s Republic of China will be driven largely by consumption, which is unlikely to provide major support to Singaporean exports. Forecasts for GDP growth in Singapore this year and the next are thus revised down from projections made in April.

Inflation has eased but remains elevated. The consumer price index rose by an average of 5.4% in the first 7 months of 2023, and core inflation by 4.8%. From May to July 2023, both core and headline inflation moderated year on year as price increases slowed for all index components except for health care, recreation, and household durables and services. Nevertheless, the Monetary Authority of Singapore has not changed its monetary policy stance since a tightening in October 2022, because price pressures have remained persistent despite some easing. In the first 7 months of 2023, the Singapore dollar appreciated against the US dollar by 0.7%, and by 1.3% in nominal effective terms. Pressure on consumer prices arising from higher business costs will likely reverse in H2 2023 as oil and food prices moderate. Private transport inflation is expected to moderate in H2 with a higher quota for certificates of entitlement for vehicle ownership, and accommodation cost increases may slow with improved availability of rental units. On balance, the forecast for inflation is unchanged from the April projection for 2023 but revised up for 2024 in line with elevated inflation expected worldwide.

The growth forecast published in ADO April 2023 is upgraded for 2023 but unchanged for 2024. Tourism and private consumption are the main engines of growth, while sluggish merchandise exports subtract from growth amid global economic volatility. Headline inflation is on a declining trend as global oil prices weaken. Risks to the growth outlook remain on the downside, most notably from global economic conditions. A successful transition to a new prime minister in August reduces the biggest domestic risk to the growth outlook.

The growth forecast for 2023 is upgraded from 3.3% in April to 3.5%. The growth projection for 2024 is maintained at 3.7%. The upward revision for 2023 mainly accommodates growth in private consumption and tourism outpacing expectation. A key factor that has constrained the rate of economic recovery in 2023 is weak merchandise exports. However, the economy is expected to gather momentum in H2 2023 and gradually rise in 2024 in line with global economic recovery.

Forecasts for inflation and external accounts are now more favorable. Headline inflation in 2023 is adjusted down from 2.9% to 2.5% as energy prices will likely continue to fall for the rest of the year. Decelerating merchandise exports and rising policy interest rates would help contain inflationary pressure (Figure 2.4.41). For next year, the headline inflation forecast is maintained at 2.3%. With a higher growth forecast for exports of goods and services and a downward adjustment for imports, the current account surplus projected for 2023 is now expected to be wider, no longer the equivalent of 2.8% of GDP projected in April, but 3.4%.

This update revises growth and inflation projections in ADO April 2023 based on recent developments. Growth has been hampered by slow execution of fiscal expenditure. Inflation forecasts are revised up largely because of higher global commodity prices.

Growth projections are downgraded for 2023 and 2024. Real GDP growth in Timor-Leste is driven by government spending, which depends in turn on the Petroleum Fund. Execution rates for both current and capital expenditure have fallen short because of the government transitioning after recent elections and an uncertain global outlook. Lower government expenditure held back private consumption and investment.

Inflation is now forecast as more persistent in both years. Timor-Leste has been exposed to rising global commodity prices, notably for food and energy, since the Russian invasion of Ukraine in early 2022. Consumer price inflation remained elevated, averaging 8.5% year on year in the first half of 2023. In June 2023, headline inflation was 7.0%, driven primarily by price hikes for food and nonalcoholic beverages at 8.0%, with the price increases for rice at 10.3% and for bread and cereals other than rice at 9.2%. While tradable goods were subject to significant increases, prices for non-tradable goods remained stable.

The economy slowed more than expected in the first half (H1) of 2023, impacted by falling external demand. Given the unanticipated slowdown, the growth forecast in ADO April 2023 is downgraded to 5.8% in 2023 (from 6.5%) and 6.0% in 2024 (from 6.8%). Inflation is now expected to be slightly lower than forecast in April, with stable domestic commodity prices holding consumer price increases to 3.8% in 2023 and 4.0% in 2024.

Growth and inflation forecasts are revised down in this update from those in ADO April 2023. Economic growth is now expected to slow to 5.8% in 2023 before improving to 6.0% in 2024. The inflation forecast is also marked down. The main forces impacting the economy have been the global economic slowdown, monetary tightening in some advanced countries, and the continuing impact of the Russian invasion of Ukraine.

The ADO April 2023 inflation forecast is lowered to 3.8% for 2023 and 4.0% for 2024. Inflationary pressure in the near term may come from the disruption of global supply chains due to the continued Russian invasion of Ukraine. However, this pressure could be contained by subdued gas and petroleum prices in the year's second half and stable domestic food prices.


The Pacific

The 2023 and 2024 forecasts for growth in the Pacific economy are revised up from ADO April 2023’s projections. A strong recovery in tourism and stimulus-inducing public infrastructure projects have driven faster-than-expected growth, particularly in Fiji, the second-largest economy in the subregion. Capacity constraints exacerbated by the pandemic weigh on the outlook, especially for smaller economies. The inflation forecast is revised down for 2023 and up for 2024. International commodity prices remain elevated and their lagged pass-through to domestic markets is keeping inflation high in many Pacific economies.

The growth forecasts for Fiji for 2023 and 2024 are revised up. A stronger-than-expected recovery in tourism and a notable increase in government spending, as announced in the budget for fiscal year 2024 (FY2024, ending 31 July 2024), prompted the revisions. ADO April 2023 assumed that intense competition from other tourist destinations would moderate the recovery in visitor arrivals. However, the numbers have been greater than expected, with arrivals in the year to date exceeding the same period in 2019. This update expects the rebound in tourism will be sustained, despite monetary policy tightening in Fiji’s major tourism source markets. Fiscal spending was earlier projected to fall in FY2024, but the government has allocated higher spending, with notable increases in key infrastructure allocations, such as for road transport and hospitals.

The inflation forecasts are revised down for 2023 and 2024 on lower-than-expected consumer prices, especially since April. Lower fuel prices translated into utility prices declining by 4.6% and transport prices by 9.9% in the 12 months to July 2023. The new value- added tax and import duties rates, effective August, will keep inflation at a forecast 3.0% for 2023 and 2024.

Growth is revised down for 2023 because of a worse-than-expected economic performance so far this year. Sales in various sectors are reported to be down 20%–30% in the first half. Imports plummeted by 61% in the first quarter year on year (yoy) across all product categories, including machinery, which suggests postponed or abandoned private investments. The slowdown is also being caused by the difficulties businesses are having in sourcing foreign exchange. The Bank of Papua New Guinea, the central bank, continues to release only $100 million monthly to the foreign exchange market, falling short of demand. Other reasons for the slowdown are power and water supply disruptions, frequent flight cancellations due to technical problems with Air Niugini’s aging fleet, and glitches in the rollout of a new operating system at Bank of South Pacific, the country’s largest bank. The problems related to the rollout have affected businesses and consumers through delayed staff payments, trouble with reconciling financial data, and banking operations failing to function smoothly. Moreover, mining, one of the economy’s largest sectors, has weakened its contribution to growth due to decreased gold production in the first half of the year and a less optimistic outlook for copper output.

Headline inflation eased in the first quarter of 2023, and April’s projection for full-year inflation is retained. Price increases for clothing and footwear, communication, health, and recreation were below 2.0% yoy. The prices of alcoholic beverages, tobacco, and betel nut declined by 6.3% yoy and education by 22.9%. However, price pressures on some essential consumer items remained elevated, including food and nonalcoholic beverages, up by 8.7% yoy, household equipment (12.2%), and transport (4.9%). The Kina Facility Rate remains unchanged at 3.50%.

Growth forecasts are retained for 2023 and 2024. The recovery in growth, after 3 years of contraction, is still expected to be driven by government spending and investment associated with the Pacific Games this year and elections next year. The games, to be held in Honiara in November, should boost retail trade, accommodation and food services, and logistics and transport. Gains in these sectors are expected to partially compensate for otherwise weaker domestic demand due to higher-than-expected inflation. Additional sources of growth include the pick-up in business activity following the lifting of COVID-19 restrictions, higher exports, and the resumption of development partner–funded projects.

This update revises up the inflation forecast for 2023 from April’s projection. Inflation accelerated to 9.2% in the first quarter before slowing to 4.9% in the second. Higher overall inflation was mainly due to rapid increases in the indices for transportation (up 18.5%) and food and nonalcoholic beverages (up 14.3%). After raising the cash reserve ratio from 5% to 6% in March, the Central Bank of Solomon Islands maintained its tight monetary policy stance in September. Inflation is expected to decelerate in the third quarter, but likely to pick up in the fourth due to increased demand from the Pacific Games.

The forecast for weak growth in 2023, due to extensive damage caused by twin cyclones in March, is retained. The cyclones’ impact continued to be felt in the second quarter, particularly through high inflation, which is also being lifted by the lagged effects of increased global commodity prices. The economic pressure on households is expected to be offset by higher government spending in the second half of the year. A strong economic recovery is still expected in 2024.

The forecast for inflation in 2023 is revised sharply up from April’s projection. Damage to crops and disruptions to supply chains caused by the cyclones were considerably greater than estimated earlier. This, together with a 36% increase in the minimum wage in June, means that inflation in 2023 is now expected to be at its highest level in decades and monetary policy is therefore expected to be tightened in September. The inflation forecast for 2024 is also revised up. Inflation next year is expected to be lower than 2023’s rate, but still above the Reserve Bank of Vanuatu’s 1%–4% target range.

Forecasts for the Central Pacific economies are mixed. Kiribati’s growth forecasts are unchanged from ADO April 2023’s, but inflation for 2023 is revised up due to the rising prices of imports. Nauru’s growth forecasts for 2023 and 2024 are revised down due to the reduced activities of the Regional Processing Centre; the inflation estimates for both years are significantly revised up. Higher inflation forecasts for Tuvalu due to external factors and last November’s drought are risks to the upward revisions to the growth forecasts for 2023 and 2024.


GDP growth forecasts for 2023 and 2024 are unchanged. This is consistent with expectations that economic activity related to energy, water, and transport projects will continue to support the recovery. Elevated social protection expenditure equivalent to 29.5% of GDP in 2023 is expected to underpin the forecasts. However, ever-present natural hazards could cause delays in project implementation.

The forecast for inflation is revised up for 2023 and unchanged for 2024. Prices are expected to remain elevated, with external factors influencing domestic price movements. The government inflation report for the second quarter of 2023 indicated price increases in imported food products, such as canned goods, frozen goods, and powdered beverages, as well as transport fares. The latest price movements are in line with the increase in petroleum prices in Kiribati after the government reduced the subsidy last year. The inflation forecast for 2024 is unchanged as state-owned Kiribati Oil Company, the sole oil importer, restored oil prices to lower levels, following a higher subsidy for 2023.


This update revises down the estimate for GDP growth in fiscal year 2023 (FY2023, ended 30 June 2023) due largely to the reduced operations of the Regional Processing Centre (RPC). These were caused by the RPC’s shift in July 2023 to an enduring capability model, whereby the center remains operational regardless of its level of activity. Because the RPC was the second biggest employer after the national government from 2014 to 2021, changes in its operations have a huge impact on the economy. The downward revision to FY2023’s growth forecast also reflects a base effect, as FY2022’s growth estimate was revised up to 2.8% from ADO April 2023’s 1.2% projection.

Inflation in FY2023 was higher than forecast earlier. There has been a considerable lag in the impact on domestic prices of higher global commodity prices caused by the Russian invasion of Ukraine. Higher inflation in FY2023 was mainly driven by transportation costs (up 20%) and food and nonalcoholic beverages (up 10%). Updated data indicate that inflation for FY2022 was just 1.0%, lower than ADO April 2023’s 2.3%.

High inflation is expected to persist in FY2024, but at a lower rate than FY2023. This is mainly in line with the lag in the impact of global price movements on domestic inflation. But inflation is expected to ease slightly in the second half of FY2024 in line with anticipated global price movements. Subsidies for electricity and freight costs were maintained in the 2024 budget.


The forecasts for growth in 2023 and 2024 are revised up. The removal of travel restrictions and fewer shipping bottlenecks have improved the economic outlook from the expectations in early 2023. Infrastructure projects are likely to continue to drive economic growth. The recent opening of the harbor in Nukulaelae, and the completion of harbors in the other outer islands in the next few years, will increase mobility and economic activity. A renewable energy project is underway and is due for completion in 2024. The drought in November 2022 caused the government to declare a state of public emergency. Alongside the increased occurrence of disasters, climate change can threaten Tuvalu’s economy through impacts on fishing revenues, food and water security, damage to infrastructure, and loss of human lives.

The inflation forecast for 2023 is revised significantly up. This reflects higher-than-expected inflation in the first half due to high domestic food prices caused by the drought. Food prices rose by 8% in the second quarter after an average 18% increase in the preceding 3 quarters, with fruit and vegetable prices rising 30% from the second quarter of last year. The forecast for slightly higher inflation in 2024 than April’s projection reflects recent price outcomes and despite a reduction in freight charges, as proxied by the Drewry World Container Index.

Growth forecasts for the Marshall Islands are revised up from ADO April 2023’s projections, but unchanged for the Federated States of Micronesia (FSM) and Palau. The inflation forecast for Palau is adjusted to incorporate the impact of tax and tariff measures; inflation forecasts for the FSM and the Marshall Islands are unchanged. Food and fuel prices are at risk from an expected El Niño that could disrupt local agriculture and fisheries production, and the possibility of further international commodity shocks due to the Russian invasion of Ukraine. Likely extensions of Compacts of Free Association with the US bode well for fiscal resources.

Federated States of Micronesia

Growth forecasts are unchanged from ADO April 2023’s projections. The economy is on track to recover to its pre-pandemic level in fiscal year 2023 (FY2023, ending 30 September 2023 for all three North Pacific economies), underpinned by a rebound after the economy was fully reopened and pandemic measures were lifted in August 2022. The expansion in construction, hotels and restaurants, and transport will fade in FY2024 due partly to base effects and the economy returning to normal levels of activity. The FSM’s high dependence on imports and its exposure to international commodity price volatility remain the key risks to the outlook in the short term. In addition, the reopening of international borders may spur out-migration and exacerbate capacity constraints that hinder growth.

Inflation forecasts are unchanged from ADO April 2023’s projections. Inflation is expected to decelerate in line with modest decreases in the prices of key commodities. Nonetheless, the outlook is far from certain given that imports account for 68.2% of the consumer price index and international commodity markets remain volatile and vulnerable to geopolitical risks, as well as the potential impact of weather-related developments, such as El Niño, on food prices. In the first quarter of FY2023, a steady acceleration in the transport, food and beverages, and housing and utilities sub-indices drove a 6.9% increase in consumer prices.

Marshall Islands

Growth forecasts are revised up. The economy is expected to expand faster than earlier forecast, driven largely by revived fisheries and construction output. In May 2023 alone, the number of vessels calling at Majuro port was almost equal to that in January–April, indicating a pickup in fishing transshipments. Construction financed by development partners and preparations for the Micronesian Games in June 2024 are also spurring economic activity. El Niño poses a significant downside risk to the outlook as it could depress agriculture and fisheries output.

Inflation projections are retained from ADO April 2023’s projections. The impact of lower international fuel prices is expected to be offset by domestic factors, such as revived business activity and increased power tariffs in the urban centers of Majuro and Ebeye during FY2023. Furthermore, the suspension of the country’s sole air cargo carrier between February and June 2023 resulted in supply chain disruptions. Demand from the Micronesian Games and the potential impact of El Niño on food prices are expected to keep inflation elevated in FY2024 relative to past years.


GDP growth forecasts are unchanged from ADO April 2023’s projections. International arrivals increased by 234.1% yoy in the third quarter of FY2023, but the year-to-date total still represents only 24.1% of FY2019’s level. Tourist arrivals from Taipei,China and the People’s Republic of China (PRC) have grown rapidly. In FY2022, tourist arrivals from Palau’s top source markets prior to the pandemic—Taipei,China, Japan, the Republic of Korea, and the PRC—remained low as direct flights had not been fully restored. Still, latest data show signs of catch-up with the resumption of scheduled flights by United Airlines and chartered flights by Taipei,China’s flag carrier, as well as a new Air Niugini connection from Port Moresby. Given the challenging economic environments in major source markets and competition from other travel destinations, the pace of recovery in tourism remains uncertain.

The inflation forecast for FY2023 is considerably higher than ADO April 2023’s due to recent tax and tariff developments. The introduction of value-added taxes in January 2023 pushed up food and fuel prices, and increases in electricity and wastewater tariffs raised household utility costs. Because of the resulting higher base, FY2024’s inflation forecast is slightly lower than the earlier projection. Palau remains vulnerable to volatility in international prices because of its dependence on imported commodities. Although oil prices have declined faster than expected, they will likely rise over the rest of the year and into 2024. Further shocks to fuel or food prices from the Russian invasion of Ukraine or El Niño on agriculture are upside risks to inflation.

The Cook Islands, Niue, Samoa, and Tonga continue to recover faster than expected. But visitor arrivals and flight access to the Cook Islands and Niue are still below pre-pandemic levels. Inflation is a growing challenge in all four countries, with higher- than-expected results for fiscal year 2023 (FY2023, ended 30 June 2023 for all four) due to domestic and imported price pressures. Labor constraints are becoming increasingly prominent in these countries and may be a drag on future growth if not mitigated through active interventions in skills training, immigration, and labor force participation.

Cook Islands

Growth was stronger than expected in FY2023. After a full year of open borders, growth was driven by tourist arrivals that, at 116% of FY2022’s level and 70% of FY2019’s, exceeded expectations earlier in the year. New Zealand, as the primary tourism market, accounted for 80.5% of arrivals. Natural hazards and acute labor shortages are downside risks to the recovery, although the active recruitment of foreign workers should somewhat mitigate labor shortages.

Inflation over FY2023 was higher than projected in ADO April 2023, but is expected to fall back to trend in FY2024. Global supply disruptions escalated international fuel prices and transportation costs, which raised commodity prices, particularly for electricity and food. This increased the cost of living in the Cook Islands and reduced the purchasing power of consumers. However, inflation is expected to decelerate as imported fuel and food prices normalize, and the forecast for FY2024 is unchanged.


The economy is likely to perform slightly better in FY2024 if expectations of a doubling in visitor arrivals starting this November are on the mark. The economy contracted by 4.7% in FY2020 and 6.2% in FY2021 as prolonged border closures stalled tourism and slowed public investment spending. Having just a single weekly flight since borders reopened in June 2022 has hindered a quick recovery in the tourism industry. Although visitor arrivals in the first quarter of 2023 were higher than in the same period of last year, they remained well below pre-2019 levels.

Inflation is likely to remain elevated over the near term in line with higher prices in New Zealand, Niue’s main trading partner. Annual average inflation in New Zealand was 6.8% from July 2022 to June 2023, with food prices increasing by 10.6%.


Growth for FY2023 is revised up on a stronger- than-expected rebound. Visitor arrivals and domestic demand supported a recovery in tourism, commerce, and services through to the March quarter of 2023 and visitor arrivals in the June quarter recovered to near pre-pandemic levels. This momentum is forecast to continue into FY2024, with these sectors getting an additional lift from the increased mobilization of public spending, which has so far been subdued. Labor turnover has been significant, especially in tourism services. Continued growth in labor participation, as well as attracting former residents and overseas workers back to the domestic market, will be required to support growth.

Inflation in FY2023 was higher than earlier forecast because of persistent increases in import prices. ADO April 2023 forecast inflation reaching its highest level since FY2009, but the final result exceeded that estimate. Increases in the prices of local and imported food were the largest contributors to inflation, with most other categories posting declines or modest increases. Domestic inflationary pressure is expected to persist because the impact of international prices has not yet been fully felt, prompting the inflation forecast for FY2024 to be revised up.


An earlier-than-expected recovery in visitor arrivals improved economic activity in FY2023, but growth in FY2024 is expected to be lower than was projected in April. Competition from other international destinations and limited domestic air capacity are expected to slow growth in visitor arrivals. This will make it harder to attract much-needed reinvestment in tourism following the destruction of several properties from disasters in 2022 and 2020. Capacity constraints in carrying out capital projects will weigh on future growth, due in large part to labor shortages.

Inflation in FY2023 accelerated faster than was projected in ADO April 2023. Increases in consumer prices were initially driven by higher import prices, but domestic prices quickly caught up due to local supply constraints and the surging costs of local food items. Inflation has accelerated since May 2023. Despite a recovery in domestic agriculture and the prospect of softer international commodity prices, inflationary pressures are expected to remain and the inflation forecast for FY2024 is therefore revised up.