Pacific Economic Outlook and Collaborative Strategies for 2050

Economic outlook & partner collaboration for 2050 strategy OCTOBER 03, 2023 Matthew Powell: Real Sector Statistics Adviser, Pacific Financial Technical Assistance Center Krishal Prasad: Local Economist, Resident Representative s office, Suva IMF IMF | Pacific Financial Technical Assistance Centre 1

Phase V Donors: Australia, New Zealand, Canada, United States, European Union, Asian Development Bank, & Republic of Korea IMF IMF | Pacific Financial Technical Assistance Centre 2

Economic Outlook IMF IMF | Pacific Financial Technical Assistance Centre 3

GLOBAL ECONOMY GLOBAL ECONOMY Growth Projections - Advanced Economy (%) The global recovery is slowing amid widening divergences among economic sectors and regions. World Output (%) 3.0 2.7 8.0 Historical Jan-23 Apr-23 Jul-23 2.5 6.0 Global growth is projected to fall from an estimated 3.5 percent in 2022 to 3.0 percent in both 2023 and 2024. 2.0 1.5 4.0 1.4 1.5 2.0 1.0 In most economies, the priority remains achieving sustained ensuring financial central banks should remain focused on restoring price stability and strengthen financial supervision and risk monitoring. 0.0 0.5 disinflation stability. while 2018 2019 2020 2021e 2022e 2023f 2024f 0.0 -2.0 Therefore, 2022 2023 2024 -4.0 Growth Projections - Emerging Market & Developing Economies (%) Revisions in World Output (%) The rise in central bank policy rates to fight inflation continues to weigh on economic activity. Global headline expected to fall from 8.7 percent in 2022 to 6.8 percent in 2023 and 5.2 percent in 2024. Jan-23 Apr-23 Jul-23 4.2 3.7 inflation is 4.1 3.5 3.5 4.1 3.3 4.0 4.0 3.1 4.0 3.0 3.0 2.9 Overall, the balance of risks to global growth remains tilted to the downside. 2.7 3.9 2022 2023 2024 2.5 2022e 2023f 2024f Source: IMF World Economic Outlook IMF IMF | Pacific Financial Technical Assistance Centre 4

PACIFIC ISLAND ECONOMIES The Pacific is part of the dynamic Asia-Pacific region, which has remained resilient despite the global economic challenges this year. PICs Real GDP (%) 5.0 3.9 3.6 4.0 The Pacific region has not been immune from the economic impacts of the war in Ukraine. Just as the Pacific was set to begin its post-pandemic recovery, it has ben dealt with another shock. 3.0 2.0 1.0 1.0 0.0 Rising global energy and food prices have strained Pacific budgets, added to inflation, and ultimately increased the cost of living for families across the region. 2022e 2023f 2024f PICs Real GDP (%) 20.0 Nonetheless, the full reopening of borders has helped boost tourism across Pacific Island countries, with growth expected to accelerate to 3.9 percent this year. However, output remains below prepandemic levels, and policy space is shrinking as debt pressures remain elevated. 2022e 2023f 2024f 15.0 10.0 5.0 0.0 Inflationary pressures has mostly peaked in the first half of 2023, with consumer prices projected to fall in every PIC except Samoa, where inflation may reach as high as 12 percent in the second half of the year, before falling in 2024. -5.0 -10.0 Kiribati FSM Samoa Fiji RMI PNG Solomon Islands Tonga Nauru Vanuatu Tuvalu Timor-Leste Palau Overall, policymakers are urged to boost sustainable growth, minimize debt and fiscal vulnerabilities. Source: IMF World Economic Outlook, Regional Economic Outlook and World Bank Pacific Economic Update IMF IMF | Pacific Financial Technical Assistance Centre 5

GLOBAL RISKS AHEAD & IMPACTONTHE PIC REGION Impact of the current difficult global conditions are country dependent but some broad transmission mechanisms typical in PICs include: GDP Tourism linkages especially with Australia and New Zealand but also Asian economies and US: boosted by post-Covid domestic demand pick up but sensitive to interest rate hikes and real estate drops hitting real incomes in these markets Remittances dependent on labor markets especially in Australia/New Zealand and US: strong demand for labor in Australia so far which is positive for PIC incomes Trade China reopening is a positive, via the effect on Australia, for the region in general but especially for the commodity exporters such as Solomon islands and PNG But higher commodity prices would weigh on imports especially fuel in most countries Monetary and Financial Global monetary tightening transmitted to PICs given the exchange rate regimes common in the region either full dollarization or fixed/quasi fixed exchange rate regimes Higher interest rates could lead to lower growth, more NPLs and financial exclusion Global banking concerns could add to derisking/debanking in the region Persistent inflation may keep interest rates higher than anticipated Hitting domestic demand and the real estate sectors - risking recessions Revealing financial sector weaknesses and excesses Risks from geoeconomic fragmentation More trade tensions Less FDI, and A slower pace of innovation and technology adoption A fragmented world is unlikely to achieve progress for all Or to successfully tackle global challenges such as climate change or pandemic preparedness IMF IMF | Pacific Financial Technical Assistance Centre 6

CONOMIC I ISSUES The deep structural economic challenges facing the PICs such as remoteness, lack of economies of scale, and limited resource/production bases are well known but the outlook is even further complicated by the current global environment. Immediate challenges include: E ECONOMIC SSUESIN INTHE THE PIC PICS S Short Term Dealing with scarring from COVID especially the debt overhangs and the impact on living standards while fiscal space is limited Minimizing spillovers from the uncertain global economic and political environment Dealing with labor shortages potentially constraining growth pick ups and exacerbating inflationary pressures Managing climate change in all aspects Medium Term Developing new growth drivers including developing diversification strategies Putting in place fiscal reforms such as revenue mobilization and public financial management and managing fiscal risks Promoting better financial sector oversight and innovations including dealing with derisking and loss of CBRs, AML/CFT frameworks and digitalization issues IMF IMF | Pacific Financial Technical Assistance Centre 7

I INDICATIVE NDICATIVE P POLICY OLICY P PRIORITIES Key Growth Drivers RIORITIESFOR FOR PIC PICS S Outlook for Australia and New Zealand is a key factor. Resumption of tourism from Asia with China re- opening will be a positive. Inflation prospects remain uncertain. Labor shortages could be a constraint Fiscal Policy Monetary, Exchange Rate, Financial Policies Adjust monetary policy to limit core inflation Strengthen financial surveillance to identify vulnerabilities Improve AML/CFT frameworks especially on a regional level Deal with Correspondent Banking Relationships and derisking/debanking by international banks Focus on rebuilding fiscal buffers, including by removing Covid-related temporary measures. Remaining support measures should target the vulnerable population Implement credible medium-term plans to stabilize public debt and rebuild buffers while supporting pressing priorities such as climate change Structural Policies Boosting long-term growth is critical, given short-term challenges and expected scarring Priorities include diversification, human capital development, digitization, product and labor market reforms, and facilitating the green transition IMF IMF | Pacific Financial Technical Assistance Centre 8

Partner collaboration for 2050 strategy valuate our ecosystem use of data and information respecting data sovereignty. (from 2050 Strategy for the Blue Pacific Continent, Pacific Islands Forum Secretraiat 2022) IMF IMF | Pacific Financial Technical Assistance Centre 9

PFTAC & CAPACITY DEVELOPMENT IN THE PACIFIC PFTAC & CAPACITY DEVELOPMENT IN THE PACIFIC Fiscal Year-23 PFTAC aims to strengthen institutional capacity of 16 member countries to support: the design and implementation of sound macroeconomic and financial policies and processes Phase V concluded example of key milestones achieved: Tax legislation implemented Palau Increasing focus on climate PIMA / C-PIMA Modernizing risk-based supervision and regulatory framework Basel Framework, Stress Testing 158 activities executed by PFTAC advisors and experts, comprising 27 regional workshops/ activities and 131 missions to member countries or support for regional activities. 61% of CD was fiscal, either PFM or Revenue (1,640 of 2,685 field days), with 46% just Revenue (1,239 days) 23% of resources (615 days) provided to six PFTAC countries designated as fragile (FSM, RMI, PNG, Solomon Islands, Timor Leste, and Tuvalu) 8 programs overseen by 10 resident advisors: Revenue, PFM, FSS, RSS, GFS, Macro, MF and Debt Management. Phase VI adding support : GFS program Macroeconomic Frameworks FCS Climate challenges and cyber risks Operations funded by: Donors (7 in Phase V) Member Countries The IMF PFTAC (www.pftac.org) plays a critical role in providing CD and training to PICs, fostering peer learning, regional dialogue and close coordination with key partners in the region IMF IMF | Pacific Financial Technical Assistance Centre 10

Role of Statistics in Good Policy Formation Role of Statistics in Good Policy Formation The IMF places top priority on proper statistics as without these our surveillance and policy advice can be ineffective and mistargeted The Article IV missions emphasize and require accurate and timely statistics CD in this area is a top IMF priority with support from PFTAC, CDOT and IMF STA IMF IMF | Pacific Financial Technical Assistance Centre 11

Statistics and PFTAC Capacity Development Statistics and PFTAC Capacity Development IMF Statistics (imf.org/en/Data) Statistical methodology & support to Fund surveillance and lending operations through capacity development (N.B. climatedata.imf.org, Gender Data Hub) Issues Fragility (staff turnover inside & outside NSO - tax issues), Timeliness ( Nowcasting NSOs must raise profile & engage with NSS) Strategies/Plans for FY 23/24 Joined up working within PFTAC, across Fund (WEO), Development Partners Robustness & efficiency of (largely MS Excel) systems Balance quality dimensions; Integrity, Soundness, Accuracy, Serviceability (incl. timeliness), Accessibility Focus on Annual Accts & GDP(E), SoEs & (GFS) Balance sheets IMF IMF | Pacific Financial Technical Assistance Centre 12

High Priority Areas for Early Implementation of the Updated High Priority Areas for Early Implementation of the Updated SNA and BPM SNA and BPM - - Accounting for Natural Resources Accounting for Natural Resources Guidance recommended for depletion of natural resources to be recorded as a cost of production like consumption of fixed capital and for the income stemming from natural resources to be apportioned between the government and the extractors. The allocation of economic ownership will be based on the SEEA concept of resource rent; Resource rent is the surplus value accruing to the extractor or user of the natural asset after all costs and normal returns have been considered. Pilot study illustrated that the splitting of ownership based on resource rents shares is practically feasible and analytically beneficial for a wider range of countries. The feasibility of the approach was tested with several advanced natural resource intensive economies and 6 less advanced economies. The testing results showed: resource rent splits could be derived using the SEEA resource rent and are analytically beneficial. Next Steps: engage the wider GFS and SEEA communities to discuss results and help reach final conclusions on implementation, Regional workshops, TA & training, Handbooks and compilation guides, Coordinate CD with other international organizations IMF IMF | Pacific Financial Technical Assistance Centre 13