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BUILDING ECONOMIC RESILIENCE:
MACROECONOMIC CASE FOR REDUCING PACIFIC’S
DEPENDENCE ON FOSSIL FUELS
Overview
• Vulnerabilities facing Pacific island countries
• How external shocks become internal
• Role of macroeconomic policies in improving resilience
and challenges faced
• Reducing dependence on fossil fuel improves
macroeconomic stability and expand policy space
• Moving forward: Renewables and/or energy efficiency;
and the role of green economic policies
Pacific Economies:
Slow Growing and Vulnerable
•
Growth in the past few years has been very slow
2006
2007
2008
2009
2010
2011
2012
Average
Fiji
1.891
-0.897
1.424
-1.271
-0.165
2.076
2.041
0.728429
Kiribati
1.237
0.453
-2.359
-2.35
1.4
1.8
2.5
0.383
Samoa
2.052
1.843
4.309
-5.136
0.37
1.999
1.456
0.984714
Tonga
-4.509
-2.386
0.519
0.941
1.626
1.468
1.384
-0.13671
Tuvalu
2.584
5.46
7.579
-1.733
-2.923
1.114
1.214
1.899286
Vanuatu
7.36
6.509
6.171
3.453
1.526
2.525
2.618
4.308857
Sources of Vulnerability
•
Several factors make the Pacific region economies very vulnerable
– Distance from major markets and from one another leading to high
transport costs
– Scale: Very limited markets to realize economies of scale and disincentive
for private sector investments
– Heavily dependent on trade: narrow export base and dependent on
primary commodities that exhibit price fluctuation. Also heavily dependent
on imports of food and fuel.
– Natural disasters: Prone to cyclone, floods, earthquakes/tsunamis, climate
change
These make the Pacific very vulnerable to external shocks beyond their
own control
How External Shocks Become Internal
•
Remittances
– Important for several countries (24 % of Tonga’s GDP in 2010, 25 % of Samoa’s)
– Remittances fell in Fiji by 33% between 2006 and 2008; 29 percent in Tonga
between 2007 and 2009
•
Tourism
– Tourism accounts for 60% of Palau’s GDP, 50% of Cook Islands’, 30 % of
Vanuatu’s and more than 20% of Samoa and Fiji.
•
Aid flows
•
Natural Disasters
– Economic impacts are considerable
• 1972-2004: Fiji suffered F$ 20 million per year from cyclones and storms
• Samoa: Average disaster costs 40% of GDP in 1989
• Vanuatu: Damage from cyclones in 1989 were twice the national income
How External Shocks Become Internal
• Trade flows and terms of trade
•
Natural Disasters
Role of Macroeconomic Policies
•
Macroeconomic policies are crucial to maintain stability and increase
resilience through:
– Stable prices
– Competitive exchange rates
– Adequate foreign exchange cover
•
However, many challenges exist
– Monetary policy is not very responsive; structural impediments
hinder effectiveness
– Fiscal space is very tight and limits the options available to the
government for countercyclical measures such as a stimulus package
Limited Fiscal Space
Central Government Debt
(In percent of GDP)
60
50
2010
40
2011
30
20
10
0
Samoa
Source: IMF, 2012
Fiji
Marshalls
Tonga
PNG
Solomons Vanuatu
Palau
The Pacific is very dependent on imported
fossil fuel
• Pacific is one of the most fossil fuel dependent regions of the world
and are extremely vulnerable to oil prices
Pacific’s Oil Imports
Oil Imports (2008)
Country
Percent of
Imports of Good
and Services
Percent of Good
and Services
Export
Percent of GDP
Cook Islands
27.2
982
20
Fiji
28.9
39.7
21.5
FSM
14.7
67.2
13.8
Samoa
17.2
28.3
9.2
Solomon Islands
22.6
35.0
13.1
Tonga
29.6
109.5
15.4
Vanuatu
14.0
17.9
7.7
Source: IMF, 2010
Macroeconomic Impact of Heavy
Dependence on Imported Fossil Fuel
•
Rising trade deficits
– With exports (goods/services) stagnant and price of oil rising, the deficits could
increase faster, and might need to be financed from abroad/foreign reserves
– Could impact availability of credit, interest rates, banking sector liquidity
•
Directly feed into inflation in Pacific countries through direct impact on transport
prices, and prices of food and other goods; has the potential to impact wages
•
Slower growth as a result of lower consumer and investment spending
•
Further constrains fiscal space through:
– Increase in costs of government operations
– Potential for increased budget deficits
AFFECTS MACROECONOMIC STABILITY
AND RESILIENCE
Economic Case for Reducing Fossil
Fuel Usage in the Pacific
•
Reducing fossil fuel usage
– Decreases vulnerability (one of many facing PICs)
– Improves macroeconomic stability and protects foreign reserves.
Enables better usage of fiscal and monetary tools
•
Energy policies should aim to reduce fossil fuel through renewables and/or
energy efficiency
– Green economic policies can be important tools to realize these
goals
•
Growth-enhancing structural reforms are crucial to tackle other
vulnerabilities
THANK YOU!