In line with ADO 2022 estimates, the reopening of the Cook Islands to tourism in January 2022 supported a significant rebound in fiscal year 2022 (FY2022, ended 30 June 2022 for all South Pacific economies). Conversely, delayed reopening in Niue, Tonga, and especially Samoa degraded their results. The economic impact of a volcanic eruption in Tonga has been even more severe than initially expected, but significant capital commitments are now expected to support more rapid recovery in FY2023 than previously forecast. Notwithstanding strong recovery in tourism in the Cook Islands, all South Pacific economies face continued risks to their fiscal positions, current account balances, and, because of elevated inflation, household purchasing power.
Growth in FY2022 was higher than projected in ADO 2022. This was driven by quicker-than-expected recovery in tourism, with tourist arrivals exceeding the government’s projection by 37.5%. Arrivals in June 2022 were 13,939, or 87.5% of the pre-pandemic level for that month. Spurring recovery is an effective vaccination program supported by development partners that has administered two doses of COVID-19 vaccine to 99% of the population aged 12 years and above and a booster shot to 76% of the population aged 16 years and above. Other measures implemented by the Cook Islands Tourism Corporation have helped to restore tourists’ confidence. The growth forecast for FY2023 is unchanged, assuming smooth recovery in tourist arrivals.
In its FY2023 budget document, the government estimated inflation at the end of FY2022 at 4.3%, consistent with ADO 2022. With supply disruption in New Zealand, the main trade partner of the Cook Islands, and effects on commodity markets from the Russian invasion of Ukraine, costs have risen for transportation, dairy products, and other imported food items. The forecast for FY2023 is unchanged, with inflation easing slightly.
The government posted a fiscal deficit in FY2022 equal to 13.3% of FY2019 GDP, higher than 10.0% as forecast in ADO 2022 as recurrent expenditure outweighed moderate growth in recurrent revenue. Official grants declined by 19%. In FY2023, the recent border reopening will boost government revenue, but the government still forecasts a larger fiscal deficit, equal to 21.4% of GDP, due to much larger increases in both capital and recurrent spending.
Imports increased by 8.4% to NZ$19.6 million, overshadowing a notable increase in exports to NZ$1.6 million. Imports were mainly food and petroleum products and machinery. The Russian invasion of Ukraine is likely to cause the trade balance to deteriorate further and accelerate inflation.
Revised GDP data released since ADO 2022 deepened the contraction in FY2020 to 3.1% but reduced the contraction in FY2021 to 7.1%. Border reopening delayed until August 2022 meant a second full fiscal year without tourism. GDP data for the second and third quarters of FY2022 show much deeper impact on the Samoan economy than previously suspected. The GDP growth estimate for FY2022 is thus revised down from weak recovery forecast in ADO 2022 to significant contraction despite countercyclical government programs.
Actual inflation in FY2022 was close to the ADO 2022projection. It featured significant increases in food and transportation prices, which stemmed from high global oil prices and imported food costs, partly related to the ongoing Russian invasion of Ukraine. As in ADO 2022, inflation is expected to moderate in FY2023 as these effects dissipate but still remain somewhat elevated.
The Hunga Tonga–Hunga Ha’apai volcanic eruption and subsequent tsunami in January 2022 affected agricultural production and exports more than initially anticipated. A consequence is that GDP decline in FY2022 was greater than predicted in ADO 2022. The eruption and tsunami caused damage estimated to equal 18.5% of GDP. The delayed reopening of borders, competition for returning tourists, and losses from repeated disasters are likely to hobble the long-term recovery of tourism. However, with border reopening in August 2022 now allowing Tongans to visit relatives at home, and increased capital spending supporting reconstruction, stronger GDP recovery is projected for FY2023.
Inflation outpaced the ADO 2022 forecast due to higher-than-expected import prices and domestic food prices, with food contributing 3.5 percentage points to annual inflation, transportation 2.7 points, and housing and utilities 2.1 points. The forecast for FY2023 is retained, with domestic price pressures becoming more important and imported inflation less so.