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© 2021 International Monetary Fund
WP/21/183
IMF Working Paper
Asia and Pacific Department
Managing Fiscal Risks from National Airlines in Pacific Island Countries
Prepared by Vybhavi Balasundharam, Leni Hunter, Iulai Lavea and Paul Seeds
Authorized for distribution by Todd Schneider
July 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
Pacific island countries (PICs) rely on national airlines for connectivity, trade, and tourism. These airlines are being struck hard by COVID-19. Losses will weigh on public sector balance sheets and pose risks to economic recovery. With a backdrop of tight fiscal space and increasing government debt, losses in airlines are adding to fiscal risks in some PICs. This paper discusses tools to evaluate and manage the fiscal risks from national airlines in the Pacific. We present a snapshot of the current state of Public Financial Management (PFM) practices in PICs and detail the best practices. This exercise would illustrate the areas in which PICs have scope to improve their risk management with regard to national airlines. We then discuss the use of diagnostic tools and capacity development to enhance monitoring and risk management. Greater transparency and accountability in the airlines, combined with rigorous oversight, would be the first step towards improved financial management of national airlines.
JEL Classification Numbers: E62, H61, H81, L32
Keywords: Pacific Island Countries, National Airlines, fiscal risks, Public Financial Management
Author’s E-Mail Address: vbalasundharam@imf.org, lhunter@imf.org, ilavea@imf.org, and pseeds@imf.org
Contents
I. INTRODUCTION
II. STATE OF NATIONAL AIRLINES IN PICs
III. THE PFM PERSPECTIVE: STRENGTHENING GOVERNANCE, OVERSIGHT AND TRANSPARENCY
A. Governance and Institutional Frameworks
B. Airline Planning Process
C. Transparency of Airline Support in the National Budget
D. Budget Execution Considerations
E. Reporting and Monitoring
IV. RISK MANAGEMENT, DIAGNOSTIC TOOLS, AND POTENTIAL CAPACITY DEVELOPMENT
A. Examples of Support Measures and Considerations for Use
V. SUMMARY AND CONCLUSIONS
BOX
1. Political Economy of National Airlines
FIGURE
1. Analysis of government support
TABLES
1. A Snapshot of PFM practices in PICs
2. Simplified SOE Health Check Tool
ANNEXES
I. Pacific Island Airlines – Country Experiences
II. Scope for a regional airline: History in the PICs and example from the Caribbean
III: Lessons from Airlines in the African Small Island States
IV: PIC coverage in SOE Governance Act
REFERENCES