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Ms. Shari Boyce, Mr. Sergei Dodzin, Ezequiel Cabezon, Mr. Fazurin Jamaludin, Mr. Yiqun Wu, and Ms. Rosanne Heller

Abstract

This issue of the Asia & Pacific Small States Monitor focuses on the challenges facing Asia and Pacific small states associated with natural disasters and climate change. Most tourism-oriented economies experienced a robust increase in arrivals, partly reflecting country-specific factors. Among commodity exporters (Bhutan, Solomon Islands, and Timor-Leste) and other Asia and Pacific small states, growth remains uneven: robust activity in Bhutan was driven mainly by hydropower-related construction activities; Solomon Islands experienced a continuing decline of logging stocks and a short-term disruption of gold production; and Timor-Leste’s ongoing depletion of oil reserves has led to a tighter budget constraint and lower government spending in the non-oil sector.

Ms. Shari Boyce, Mr. Sergei Dodzin, Ezequiel Cabezon, Mr. Fazurin Jamaludin, Mr. Yiqun Wu, and Ms. Rosanne Heller

Abstract

Context: Bhutan is a small, until recently fast-growing, lower middle-income country with deep economic ties to India and a peg to the Indian rupee. Growth in Bhutan was robust during the last Five-Year Plan (2008/09 to 2012/13), driven by the development of the hydropower sector (exporting electricity to India) and a credit-fueled private consumption boom.

International Monetary Fund. Asia and Pacific Dept
Tonga’s recovery following the devastation of the 2018 Cyclone Gita has been derailed by a double blow from the pandemic and Cyclone Harold. FY2020 GDP growth is estimated to fall to -2½ percent due to domestic containment measures, a sudden stop in tourism, and investment delays. The full brunt of the pandemic will be felt in FY2021 (beginning July) during peak tourism season, when a deeper contraction is expected. A worse outcome was avoided by early actions to close external borders—which has kept Tonga COVID-19-free—and prompt economic support. Beyond FY2021, the recovery is expected to resume in line with the global recovery, but the magnitude and trajectory is uncertain.
International Monetary Fund. Asia and Pacific Dept
This paper discusses recent economic developments, economic outlook, risks, and challenges in Tonga. The Tongan economy has been rebounding since a contraction in FY2013. Growth accelerated from 2.1 percent in FY2014 to 3.7 percent in FY2015, supported by construction, tourism, strong remittances, and strong private credit, notwithstanding weather-related disruptions to agricultural production. The FY2016 real GDP growth is projected to remain relatively strong at 3.1 percent, driven by a recovery in agriculture and an increase in construction activity in preparation for the South Pacific Games. However, a protracted period of slower growth in advanced and emerging market economies, particularly in Australia and New Zealand, could weigh on Tonga via aid, remittances, and tourism channels.
International Monetary Fund. Asia and Pacific Dept
KEY ISSUES Context: Tonga’s economy is rebounding, partially owing to a recovery in agricultural exports. The outlook for tourism is also improving. The reconstruction from a recent cyclone is expected to lead to both a temporary boost to growth and additional financing needs. Risks to the inflation outlook and the external position are low. Fiscal Policy: The projected fiscal cost relating to the cyclone will be largely met by confirmed funding mainly from donor agencies. In the near term, the authorities should focus on reconstruction activities, while a medium-term fiscal strategy should aim at gradually stabilizing and then reducing the debt-to-GDP ratio, in order to improve Tonga’s moderate risk of debt distress. This will require careful execution of investments related to the 2019 South Pacific Games. Monetary Policy: The deleveraging cycle of the Tongan banks appears to be ending, and thus National Reserve Bank of Tonga should prepare to gradually withdraw liquidity and tighten monetary conditions once the current signs of a recovery of credit growth are confirmed. The authorities plan to lower the cost of credit through supportive credit policies, including by commercializing the Tonga Development Bank. The successful implementation of such plan requires sound safeguards, including a robust governance structure and firm risk management and accountability frameworks. Structural Policy: Structural reforms to facilitate the functioning of credit markets need to be implemented with renewed vigor. The authorities’ intention to gradually phase out existing ad hoc tax incentives is well placed. The promotion of foreign direct investments should focus on business-enabling structural reforms, while the use of tax incentives should be minimized and well targeted.
Ryota Nakatani
A big challenge for the economic development of small island countries is dealing with external shocks. The Pacific Islands are vulnerable to natural disasters, climate change, commodity price changes, and uncertain donor grants. The question that arises is how should small developing countries formulate a fiscal policy to achieve economic stability and fiscal sustainability when prone to various shocks? We study how natural disasters affect long-term debt dynamics and propose fiscal policy rules that could help insulate the economy from such unexpected shocks. We propose fiscal rules to address these shocks and uncertainties using the example of Papua New Guinea. Our study finds the advantages of expenditure rules, especially a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This paper contributes to the literature and policy dialogue by theoretically analyzing the impact of natural disasters on debt sustainability and proposing fiscal rules against natural disasters and climate changes. Our fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of natural disasters and climate change. Our rules-based fiscal framework is crucial for sustainable and countercyclical macroeconomic policies to build resilience against devastating natural hazards.
Hidetaka Nishizawa, Mr. Scott Roger, and Huan Zhang
Pacific island countries (PICs) are vulnerable severe natural disasters, especially cyclones, inflicting large losses on their economies. In the aftermath of disasters, PIC governments face revenue losses and spending pressures to address post-disaster relief and recovery efforts. This paper estimates the effects of severe natural disasters on fiscal revenues and expenditure in PICs. These are combined with information on the frequency of large disasters to calculate the rate of budgetary savings needed to build appropriate fiscal buffers. Fiscal buffers provide self-insurance against natural disaster shocks and facilitate quick disbursement for recovery and relief efforts, and protection of spending on essential services and infrastructure. The estimates can provide a benchmark for policymakers, and should be adjusted to take into account other sources of financing, as well as budget risks from less severe as well as more frequent disasters.
Ms. Shari Boyce, Mr. Sergei Dodzin, Ezequiel Cabezon, Mr. Fazurin Jamaludin, Mr. Yiqun Wu, and Ms. Rosanne Heller

Abstract

By Adam Gorajek, Head of the Economics Department at the National Reserve Bank of Tonga (NRBT) during May 2012-May 2014. This article is based on research conducted in the NRBT.

Ms. Shari Boyce, Mr. Sergei Dodzin, Ezequiel Cabezon, Mr. Fazurin Jamaludin, Mr. Yiqun Wu, and Ms. Rosanne Heller

Abstract

This issue of the Asia & Pacific Small States Monitor focuses on the challenges facing Asia and Pacific small states associated with natural disasters and climate change. Most tourism-oriented economies experienced a robust increase in arrivals, partly reflecting country-specific factors. Among commodity exporters (Bhutan, Solomon Islands, and Timor-Leste) and other Asia and Pacific small states, growth remains uneven: robust activity in Bhutan was driven mainly by hydropower-related construction activities; Solomon Islands experienced a continuing decline of logging stocks and a short-term disruption of gold production; and Timor-Leste’s ongoing depletion of oil reserves has led to a tighter budget constraint and lower government spending in the non-oil sector.