THE PACIFIC ISLANDS FISCAL POLICY TO BUILD RESILIENCE AND ADDRESS VULNERABILITY Poverty Reduction and Economic Management East Asia and Pacific Region The World Bank Pacific Department www.wordbank.org/pi
THE PACIFIC ISLANDS FISCAL POLICY TO BUILD RESILIENCE
AND ADDRESS VULNERABILITY
Pover ty Reduction and Economic Management
East Asia and Pacific Region
T h e W o r l d B a n k
P a c i f i c D e p a r t m e n t
w w w . w o r d b a n k . o r g / p i
THE PACIFIC ISLANDS S M A L L A N D I S O L AT E D ( B Y L A N D ) | L A R G E A N D C O N N E C T E D ( B Y O C E A N )
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Ave
rag
e G
DP
-we
igh
ted
dis
tan
ce
fro
m m
ark
ets
(k
m)
Population (logarithmic scale)
All Countries
Pacific
Caribbean
10k 100k 1m 10m 10bn
Pacific Islands: Extreme Remoteness from Major Markets
Vulnerability to shocks volatility is the norm
Fiscal policy responses to shocks
Building resilience to cope with volatility
OUTLINE
FIVE SOURCES OF VOLATILIT Y
•Shocks to key natural resource or cash crop exports
•Economic downturns in tourism source countries
Concentration of Exports
•Fuel price shocks
•Food price shocks
High Import Dependence
•Economic downturns in remittance source countries
•Tightening of labour market access
•Demographic shifts in diasporas
Significance of Remittances
•Can mitigate or contribute to overall economic volatility depending on donor aid policies and project cycles
Importance of Aid
•Cyclones, floods, earthquakes, tsunamis
•Effects of climate change
Vulnerability to Natural Disasters
REVENUE, AID AND EXPENDITURE VOLATILIT Y
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
Revenue Volatility Aid Volatility Expenditure Volatility
PICs
Other Small
States
Other MICs
Pacific Islands: Volatility in Revenue, Aid and Expenditure
FOUR MAIN FISCAL POLICY RESPONSES
•Trust funds / sovereign wealth funds
•Reserves
•Cash balances / Assets
• Concessional loans from IFIs
• Loans from bilateral donors
• Domestic borrowing, bank overdrafts / Debt
• Protects service delivery in the event of revenue shortfalls, without increasing deficits
• Augments value of other fiscal buffers
Address Quality of Spending
• Grants from bilateral donors
• Grants from IFIs (for countries at high risk of debt distress)
/ Grants
FIVE AVENUES TO BUILD RESILIENCE
•Prudent macroeconomic management best positions the economy against shocks and facilitates rapid donor response
•Sound budget management maximizes value from resources
Macro/Budget Management
•Maintaining a cushion between current debt levels and ‘debt distress’ thresholds provides room to use concessional loans to mitigate the impact of shocks on the economy
Debt Headroom
•Sovereign wealth/trust funds can help mitigate the impact of shocks if they are protected from unsustainable drawdowns
•Directing windfall gains to these funds or to reserves can help augment the robustness of asset buffers over time
Asset Buffers
•Process rigidity and objectives other than shock absorption mean that donor projects can add to volatility
•More work is needed to make aid an effective fiscal buffer, to support the public sector’s role as a shock absorber
Grants
•Facilitate use of alternative energy to reduce oil dependence
•Facilitate natural resource/tourism industry development
•Expand labour market access to secure remittances
Sources of Volatility
RULES AND RESILIENCE
Fiscal discipline can be important for building and
maintaining the resilience to manage shocks
Fiscal disciplines have tended to work well where –
For deficits, they have been target ceilings (rather than rules) with
justification required for breaches of the targets
For debt, they have either been target ceilings, with justification
required for breaches, or they have been policy moratoriums on
contracting new debt, in contexts where new debt is not justifiable
For sovereign wealth/trust funds, they have been rules for
maintaining the value of the funds, in contexts where donors have
provided additional grant support in extraordinary circumstances
In each case, the appropriateness of the form that fiscal
discipline has taken has been context specific and it has been
only one part of a broader fiscal management approach,
including support from development partners
T h e W o r l d B a n k
P a c i f i c D e p a r tm e n t
w w w . w o r db a n k . o r g / p i
THANK YOU
ANNEX 1: DIFFERENT T YPES OF ECONOMY
-10%
0%
10%
20%
30%
40%
50%
60%
Tim
or
PN
G
Solo
mo
ns
Sam
oa
Va
nu
atu Fiji
To
ng
a
Pa
lau
Tu
valu
Kir
iba
ti
Ma
rsh
alls
FSM
Public sector Agriculture Other industry Construction Services Natural resources Overall
Growth driven by inflows of tourists and remittances
Low growth, sustained by public sectorNatural resource
& cash crops
153%
Growth by Source – 1998-2008
Structure of Pacific economies reflects the special challenges and
opportunities facing small, remote economies.
ANNEX 2: IMPORTANCE OF AID
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
FJI PNG TON WSM KIR VAN PLW MHL TUV FSM SOL CAR LMIC LIC
Pacific Islands: Aid (Percentage of GNI)
ANNEX 3: SIZE OF GOVERNMENTS
Pacific Islands: Wage Bill Share of GDP
Pacific Islands: Total Expenditure Share of GDP
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
5%
10%
15%
20%
25%
30%
35%
CASE STUDY: NATURAL DISASTERS IN SAMOA
Samoa: Fiscal Responses to Successive Natural Disasters
tsunami cyclone
-20
0
20
40
60
80
-20
0
20
40
60
80
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13(e) FY14(f) FY15(f)
CASE STUDY: NATURAL DISASTERS IN SAMOA
Samoa: Fiscal Responses to Successive Natural Disasters
tsunami cyclone
-20
0
20
40
60
80
-20
0
20
40
60
80
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13(e) FY14(f) FY15(f)
CASE STUDY: NATURAL DISASTERS IN SAMOA
Samoa: Fiscal Responses to Successive Natural Disasters
tsunami cyclone
-20
0
20
40
60
80
-20
0
20
40
60
80
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13(e) FY14(f) FY15(f)
No new borrowing
Increased grants
Improved quality of spending to mitigate the impact of the decline in revenue on service delivery
Closer alignment of allocations and priorities in the approved budget
Better monitoring and control of budget execution
CASE STUDY: REMITTANCE DECLINE IN TONGA
Tonga: Remittances and Fiscal Situation
0
50
100
150
200
250
300
350
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Revenue Expenditure Remittances in constant (FY11) TOP
CASE STUDY: WINDFALL GAINS IN SOLOMON IS
Solomon Islands: Paying Down Debt and Building Up Cash Balances in the Good Years
-15
-5
5
15
25
35
-30
-20
-10
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013(f)
CASE STUDY: WINDFALL GAINS IN SOLOMON IS
Solomon Islands: Paying Down Debt and Building Up Cash Balances in the Good Years
-15
-5
5
15
25
35
-30
-20
-10
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013(f)
CASE STUDY: WINDFALL GAINS IN SOLOMON IS
Solomon Islands: Paying Down Debt and Building Up Cash Balances in the Good Years
-3
-2
-1
0
1
2
3
4
5
6
7
-30
-20
-10
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013(f)
CASE STUDY: GFC ON KIRIBATI AND TUVALU
The sovereign wealth/trust funds of Kiribati and Tuvalu were
severely affected by the GFC
Asset values fell by over 12 percent, on average
Income streams from the sovereign wealth/trust funds have been
subdued since the GFC
Governments were able to increase public spending to
mitigate hardship in the wake of the GFC using funds from
Grant receipts
Drawdowns from sovereign wealth/trust funds
These sources of funds enabled the governments to protect
expenditure and service delivery, while avoiding borrowing to
finance deficits, thereby supporting short term fiscal and debt
sustainability
CASE STUDY: GFC ON KIRIBATI AND TUVALU
Kiribati sought to maintain the real per capita value of its
sovereign wealth fund at 1996 levels
Since the early 2000s, drawdowns to fund deficits have exceeded
sustainable levels, and Kiribati might benefit from an updated,
formal rule to maintain the real per capita value at its current level
Tuvalu only receives distributions from its trust fund when the
market value of the fund exceeds its targeted value (which is
linked to the Australian CPI)
Distributions accumulate in a reserve fund, which is available for
budgetary spending
Tuvalu seeks to have a sufficient balance in this reserve fund to cover
a ‘dry spell’ (four years without trust fund distributions)
In good years, the reserve fund should be built up so that in bad
years it can be run down while financing the budget
The reserve fund thus serves as an important fiscal buffer
SAVING IN GOOD TIMES… TO SPEND IN BAD
TIMES
Tuvalu Consolidated Investment Fund Value Tuvalu Trust Fund Value
80.0
90.0
100.0
110.0
120.0
130.0
140.0
2005 2006 2007 2008 2009 2010 2011 2012
A$m
TTF Year-end
Actual Value
TTF Year-end
Target Value
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2005 2006 2007 2008 2009 2010 2011 2012
A$m
CIF Balance
CIF Balance (without
additional donor
contributions)