B UILDING E CONOMIC R ESILIENCE : M ACROECONOMIC C ASE FOR R EDUCING P ACIFIC ’ S D EPENDENCE ON F OSSIL F UELS

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 Average Fiji Kiribati Samoa Tonga Tuvalu Vanuatu

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 : 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 Source: IMF, 2012

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) CountryPercent of Imports of Good and Services Percent of Good and Services Export Percent of GDP Cook Islands Fiji FSM Samoa Solomon Islands Tonga Vanuatu 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

T HANK Y OU !