Pacific Islands Threatened by COVID-19

IMF News, May 27, 2020

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Pacific island states are among the most remote countries on earth and have seen vital economic links weakened by:
- the evaporation of tourism,
- severe disruptions to international trade,
- a reduction in remittances.
The COVID-19 pandemic may cut deeper than even some of the worst cyclones from years past.
Ongoing risks include the effects of climate change and the tropical cyclone season, including Tropical Cyclone Harold, which hit Vanuatu, Tonga, Fiji, and the Solomon Islands in April.
To sustain economies and contribute to a faster recovery, countries will need to allocate resources to vulnerable groups affected by the pandemic.

Tourism receipts are estimated to account for up to 20-30 percent of economic activity in countries like Samoa and Tonga.
Tourism is a prime source of employment and foreign exchange for countries such as Fiji, Palau, and Samoa.
Early containment measures (travel restrictions and enhanced screening) were implemented as early as January in many islands, but border controls and travel restrictions from source markets (Australia, New Zealand, and others in Asia) have left hotels and resorts effectively empty, forcing layoffs and closures.
Regional airlines face significant damage from prolonged loss of revenue, threatening the essential conduit for tourism and potentially diminishing tourism even after the virus recedes.

Shrinking global demand has caused steep drops in commodity prices, affecting commodity exporters such as Papua New Guinea through a loss in exports and revenue.
Energy companies could cut back production plans in anticipation of weaker energy demand from a contraction in global manufacturing activity.
For oil-importing countries in the region, lower oil prices will provide a buffer to the shock.
Globally, shrinking employment and repatriation of guest workers are expected to lead to a fall in remittances of around 20 percent.
Remittances average about 10 percent of GDP in the Pacific islands (excluding Papua New Guinea) and:
- exceed 40 percent in Tonga,
- about 15 percent in Samoa and the Marshall Islands.
Supply chain disruptions, including in the fisheries industry, continue to hinder islands dependent on this sector, including for licensing revenues.
Previous experience suggests a rebound in commodity prices, tourism, and remittances after the crisis subsides, but the pandemic may inflict deeper wounds than worst natural disasters.

Early public health and containment actions included preventing the arrival of COVID-19, containment measures (notably in Fiji), and additional spending on health infrastructure and preparedness.
Some countries announced fiscal packages that include:
- additional health spending,
- temporary cash transfers for displaced workers,
- credit support to small and medium-sized firms and affected sectors.
Many countries have limited fiscal room to counter the economic impact; public debt among the Pacific islands, on average, has already risen since the end of the global financial crisis.
Central banks and regulators should play complementary roles where feasible:
- Central banks in Fiji, Papua New Guinea, and Vanuatu have reduced policy rates and/or reserve requirements.
- Other central banks in the region have provided liquidity assistance in various forms.
- Some banks and lenders have offered short-term payment deferrals and interest rate reductions on mortgages and loans, and waived late fees and charges to eligible customers.
To safeguard financial stability, supervisors should intensify monitoring and increase the reporting frequency of financial institutions.
Important financial-sector actions include identifying exposures to tourism-related activities and conducting stress testing to ensure institutions can withstand shocks.

The IMF is working closely with the World Bank, Asian Development Bank, and other regional partners on innovative solutions and approaches to assist Pacific countries through the crisis and position them for recovery.
The doubling of the IMF’s emergency financing capacity means that up to $643 million could be made available immediately to the Pacific island economies.
Solomon Islands has already received debt relief under the Catastrophe Containment and Relief Trust.
A request for emergency financial support by Samoa under the IMF’s Rapid Credit Facility has been approved.
Emergency assistance for additional Pacific island countries will be considered by the IMF’s Executive Board in the coming weeks.

IMF News — Pacific Islands Threatened by COVID-19. May 27, 2020.