ADB says inflation likely to offset Pacific islands' post-Covid economic recovery
Updated: Apr 7, 2022
By Mar-Vic Cagurangan
As they slowly reopen their borders this year, Pacific island economies are expected to quickly bounce back with a growth rate projected to resume at an average of 3.9 percent in 2022 and 5.4 percent in 2023, the Asian Development Outlook 2022 reported this week.
However, their projected economic recovery is likely to be offset by the pressures of inflation that are compounded by the skyrocketing fuel prices due to the Russia-Ukraine crisis, according to ADO 2022, the Asian Development Bank's flagship publication.
Most countries and territories in the Pacific region are import-dependent.
"On average, inflation in the Pacific is projected to rise sharply to 5.9 percent in 2022, before easing to 4.7 percent in 2023. High inflation poses a risk to recovery by potentially constraining economic growth through reduced purchasing power and consumer spending," the ADO report said.
ADB estimated that Pacific island economies contracted by an average of 0.6 percent in 2021 as a result of the Covid-19 pandemic, which shut down world travel and slowed global market activity.
But with travel restrictions slowly being eased, tourism-driven economies have reason to be optimistic based on ADB's forecast.
Palau, for example, is predicted to see a 9.4 percent growth in 2022 before accelerating to 18.3 percent in 2023. However, ADB said this cautious optimism is dependent on the dissipation of the pandemic that will allow gradual return to pre-pandemic levels of international arrivals.
In the Federated States of Micronesia and the Marshall Islands, border reopenings are expected to boost recovery as long as they continue their vaccination rollouts.
"The economic expansion of 2.2 percent is expected in the FSM in 2022, accelerating to 4.2 percent in 2023, while the Marshall Islands economy is projected to return to growth of 1.2 percent in 2022, picking up to 2.2 percent in 2023," ADB said.
“Rising vaccination rates will help most of the economies of the Pacific recover from the effects of the pandemic by allowing the safe opening of borders and enabling a return to positive economic growth,” said Leah Gutierrez, ADB Director General for the Pacific.
While the projected growth suggests that the Pacific region may have turned a corner, Gutierrez warned island nations against being complacent with their vaccine programs.
Some Pacific island economies, however, will not perform as well as others due to various factors.
ADB said economic contraction is seen to persist in Solomon Islands with Covid-19 community transmission in the first half of the year.
"While logging activities are expected to decline in 2023, the expected easing of Covid-19 restrictions will increase construction, fishing, and mining, leading to the economic recovery of 3 percent," ADB said.
Gutierrez said it is crucial for all countries in the subregion to achieve a high vaccine coverage.
"At the same time, efforts to wind back heightened Covid-19 response expenditures, attention to bringing down debt levels, and careful monitoring of inflationary pressures are needed to underpin sustainable and inclusive economic recovery," she said.
Papua New Guinea, the biggest economy in the Pacific, was dampened by two Covid-19 surges in 2021, underpinned by a very low vaccination rate.
"Some relief has come from strong commodity prices and fiscal stimulus sustained by ADB and other development partners. Increased mining activities in the second half of the year should contribute to a growth of 3.4 percent in 2022," ADB said.
ADB projected PNG's economy to rise to 4.6 percent in 2023.
Fiji, the subregion’s second-largest economy, is projected to post 7.1 percent growth in 2022 and 8.5 percent in 2023.
Other highlights of the ADB report are as follows:
Vanuatu’s economic growth is forecast at 1 percent, with growth in public services as well as a recovery in agriculture and construction offset by the domestic transmission of Covid-19, which has delayed the reopening of international borders. Growth is projected to rise to 4 percent in 2023 as tourism activity revives.
The South Pacific economies of the Cook Islands, Niue, Samoa and Tonga were, until recently, largely spared the health impacts from community transmission of Covid-19, which allowed time for near-universal vaccine coverage.
The report projects growth in the Cook Islands to be 9.1 percent in 2022 and 11.2 percent in 2023, supported by a vaccination rate of more than 96 percent of the eligible population and the acceleration of infrastructure projects to enhance readiness to receive tourists.
The economic recovery in Niue will similarly depend on safely easing restrictions and reopening to tourists in the coming months.
With no clear sign of borders reopening in Samoa, growth in 2022 is expected to be tepid at 0.4 percent. Constrained by scarring in the tourism sector, only a slight increase in growth to 2.2 percent is projected for 2023.
The delayed reopening of borders in Tonga due to the recent volcanic eruption and community transmission of Covid-19 are likely to slow long-term tourism recovery. ADO 2022 projects an economic contraction of 1.2 percent for 2022 and a return to positive growth of 2.9 percent in 2023 assuming borders reopen.
The report projects a pickup in growth in the Central Pacific economies of Kiribati and Tuvalu and slower growth in Nauru in 2022.
Growth of 1.8 percent is expected in Kiribati in 2022, picking up to 2.3 percent in 2023. Nauru’s economic growth will slow to 1 percent in 2022 and rise to 2.4 percent in 2023. Tuvalu will experience 3 percent growth in 2022 and again in 2023.