World Bank: Repeated shocks are the ‘new normal’ for Pacific island region

By Pacific Island Times News Staff

Rising fuel and shipping costs, supply chain disruption and renewed global volatility put fresh pressure on Pacific economies, which are facing slow growth at 2.8 percent this year, according to the World Bank Group.

The World Bank’s new Pacific Economic Update finds that repeated external shocks are becoming the region’s “new normal,” while reliable water systems are increasingly critical to jobs, business growth and long-term resilience.

Palau grew by 6.7 percent in FY25, driven by strong tourism and construction, though arrivals remain 30 percent below pre-pandemic levels.

Although tourism normalizes, Palau's growth is projected to slow to 3 percent in FY26, amid rise in global costs and inflation picking up from low levels.

Palau's fiscal performance has strengthened and public debt is declining, but persistent emigration of skilled workers limits capacity in both public and private sectors.

The Marshall Islands' growth slowed to 2.5 percent in FY25 amid delays in Compact-related spending but is expected to rise to 2 percent in FY26,

as implementation accelerates.

Inflation continues to climb due to higher fuel and import costs, weighing on

household welfare despite UBI rollout. Fiscal and external surpluses have

narrowed, while sustained growth depends on fisheries, Compact support,

and better incentives for labor participation.

The Federated States of Micronesia posted the slowed growth at 1.1 percent in FY25 due to low public investment despite steady fisheries output.

Growth is set to ease to 0.8 percent in 2026 as fuel costs rise, while inflation remains elevated due to higher imports and energy prices. Fiscal buffers are strong, supported by the Compact Trust Fund, worth nearly four times GDP, even as state-level spending increases.

The Word Bank noted that Pacific economies remain highly exposed to fuel shocks, with oil imports accounting for around 15–25 percent of merchandise imports in many countries.

The update warns that continued disruptions in fuel and shipping markets are likely to further slow growth over the next six to nine months.

However, the report argues the Pacific still has a narrow window to strengthen long-term growth by moving beyond repeated crisis response and investing in the foundations of more productive jobs.

With growing numbers of young people entering working age, the update says countries will need stronger infrastructure, more reliable services, better skills and improved conditions for private investment to create opportunities at the scale the region now requires.

“The Pacific’s current growth model is no longer creating enough opportunities for the region’s growing and increasingly young populations,” said Stephen N. Ndegwa, World Bank Group division director for the South and North Pacific.

“Average growth across Pacific economies is projected to remain around 2 percent this decade, below the pace of the 2010s, while too many young people are still struggling to access productive work. Creating more and better jobs, especially for women and youth, will be critical to building resilience and supporting stronger long-term growth in a more uncertain world.”

The report sets out a “jobs-first” pathway focused on stronger economic foundations such as water, energy, transport, digital connectivity, and skills; better conditions for businesses and market access; and improved access to finance and private investment. It identifies tourism, agribusiness and fisheries, health and care services, resilient infrastructure, and digitally delivered services as sectors with strong potential to create jobs at scale across the Pacific.

Reliable water systems can be a foundational driver of economic growth and opportunity across the Pacific. This echoes the recently launched Water Forward initiative, which identifies water insecurity as a constraint on sectors such as tourism, agribusiness, fisheries, and services.

The report notes that reliable and safe water services support business continuity, improve productivity, strengthen health and resilience, and help expand opportunities for women and young people.

However, many Pacific utilities continue to face aging infrastructure, intermittent supply, high water losses, and rising operational costs that increase pressure on households and businesses. Strengthening the reliability of safe water will therefore be critical to supporting private-sector growth and more resilient Pacific economies.

“The Pacific has shown extraordinary resilience through repeated shocks, but resilience alone is not enough,” said Eka Vashakmadze, World Bank senior economist and report author. “Countries that invest now in reliable services, stronger economic management, and the conditions for businesses to grow will be better placed to create opportunities and withstand future shocks.”

The update also notes that successive shocks have eroded fiscal buffers, underscoring the need to rebuild them and strengthen public financial management as governments face rising costs and tighter financing conditions.

It emphasizes targeted, temporary support to protect vulnerable households, while avoiding broad-based subsidies that could further strain already limited fiscal space.

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