balance between catalyzing a sustainable and inclusive economic recovery and SOUTH PACIFIC Key conditions and maintaining macroeconomic balance in the face of several competing pressures. With challenges ISLANDS limited fiscal space and low capacity to carry debt, governments need to prioritize Natural disasters and external shocks pose strategic measures that lay the foundation a constant threat to livelihoods, economic for the economic recovery, while also sup- Table 1 2021 growth, and fiscal sustainability in the porting livelihoods for the bottom 40 per- Population, million South Pacific. Enhancing resilience to exter- cent of households. Effective implementa- Samoa 0.20 nal shocks is crucial to supporting long-run tion of structural reforms will be critical to Tonga 0.10 growth and achieving sustainable improve- ensure a sustainable economic recovery. Vanuatu 0.31 GDP, US$, billion ments in living standards and poverty re- Samoa 0.79 duction. Economic activity may remain de- Tonga 0.50 pressed for another six to nine months as au- Vanuatu 1.00 thorities remain cautious about border re- Recent developments GDP per capita, current US$ opening to prevent overburdening their Samoa 3954 weak public health systems. The delayed re- Border closures helped temporarily con- Tonga 4993 covery creates significant potential for scar- tain the pandemic but created economic Vanuatu 3253 ring effects in the longer term, particularly downturns. Substantial donor funding Sources: WDI, World Bank staff estimates. in the tourism sector. Lost firms and jobs cushioned the negative impact on fiscal create adverse structural changes to the and external balances. While the economy that are not reversed when aggre- COVID-19 vaccination roll-out has been The economies of Samoa, Tonga and Van- gate demand recovers. These changes progressing well in Samoa and Tonga with uatu have been hit by natural disasters would disproportionately affect the lower approximately 90 percent of the adult pop- educated, whose skills may not be as trans- ulation fully vaccinated as at end-February and the COVID-19 pandemic. These ferable to other sectors. The economic 2022, it has been relatively slow in Van- South Pacific countries just recorded their shocks and slow recovery also greatly in- uatu. It lags with only 48 percent of the first COVID outbreaks. Tonga’s outbreak crease the risk of poverty, particularly as adult population fully vaccinated. was amid a volcanic eruption and subse- households deplete savings and assets to The Samoan economy recorded a histor- cope with lost incomes. ical-high recession in FY21. While border quent tsunami. Strict travel restrictions The main immediate challenge for all three closure prevented domestic transmission have hit tourism-related activity with countries is to contain the domestic of COVID-19, it resulted in a sharp con- negative spillovers on the rest of the econ- COVID-19 outbreak. In addition, Vanuatu traction of tourism and related industries, omy. Governments need to continue sup- needs to sustain its recent uptick in vacci- and hindered construction activity. De- porting the vulnerable and embark on nations to minimize health and economic spite policy support and robust remit- impacts from the outbreak while Tonga tances, real GDP declined by 8.1 percent. structural reforms to support inclusive needs to prioritize response and recovery Poverty is likely to have risen from the pre- economic recovery. from the recent tsunami. The near-term pandemic level, with urban areas affected challenge will be to strike an appropriate more due to the higher concentration of FIGURE 1 South Pacific Islands / Overall fiscal balance FIGURE 2 South Pacific Islands / Current account balance Percent of GDP Percent of GDP 8 20 Samoa 6 15 Tonga 4 10 2 Vanuatu 5 0 0 -2 -5 -4 -10 -6 -8 -15 Samoa Tonga Vanuatu -10 -20 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sources: National sources and World Bank projections. Sources: National sources and World Bank projections. MPO 1 Apr 22 jobs in the service sector. Substantial de- The twin deficits are expected to narrow velopment partner grants, spending un- over the medium-term consistent with the der-execution and favorable tax revenue Outlook economic recovery. outturn, reflecting improved tax compli- In Tonga, the economy is expected to con- ance and the phased rollout of the Tax In- The near-term outlook remains dependent tract by 1.6 percent in FY22, reflecting the voice Monitoring System (TIMS) helped on the duration of COVID-19 related travel impact of the recent tsunami on agricultur- attain a fiscal surplus of 1.9 percent of restrictions and the economic fallout from al production, the commercial sector and GDP. The current account recorded a sub- the Russia-Ukraine war. Among others, tourism, aggravating the COVID-related stantial deficit (15.3 percent of GDP) as achieving herd immunity through vaccina- impact. Borders are expected to remain tourism receipts came to a standstill. tion is a key trigger for border reopening. closed until end of FY22 as the country bat- The Tongan economy is estimated to have Most of the adult population are expected to tles its first COVID-19 outbreak. Growth is contracted by 0.8 percent in FY21, due to the be fully vaccinated by end-March 2022 in expected to rebound to 3.2 percent in FY23 impacts of COVID-19 and TC Harold—a Samoa and Tonga. In Vanuatu, vaccination and FY24 driven by reconstruction activi- category 5 cyclone that struck the country in demand has increased substantially due to ty, recovery in agriculture production, and April 2020. These shocks have resulted in a the community transmission of the gradual pick-up in tourism receipts. The slowdown in the tourism, retail, and agri- COVID-19. Tourism activity is expected to fiscal and current account deficits are pro- culture sectors. However, a severe contrac- be sluggish in the near-term and gain mo- jected to remain elevated in FY23-24 as re- tion was avoided due to the fiscal stimulus mentum over the medium-term. While pre- construction activities and recovery efforts implementation, ramp-up of reconstruction mature border reopening could have impli- take place, before narrowing over the activities from TC Gita (2018) and TC cations on the domestic COVID situation, medium term. Harold, and buoyant remittance inflows. A economic activity will be constrained for as In Vanuatu, GDP growth is expected to marginal fiscal deficit of 0.4 percent of GDP long as international travel restrictions re- accelerate to 3-4 percent between was recorded, supported by relatively high main in place. The implication is that pover- 2022-2024, supported by a gradual pick grants and better-than-expected domestic ty rates across the three countries will grad- up in tourism and cyclone reconstruction revenue collections. Robust remittances and ually decline as economic activity picks up activity. In tandem, the poverty rate is lower service imports helped attain a cur- and jobs become available but will remain projected to gradually decline from 36.6 rent account surplus (5 percent of GDP). higher than pre-pandemic levels until full percent in 2022 to 35.9 percent in 2024. In Vanuatu, following a deep economic re- economic recovery is achieved. In the near term, the community trans- cession in 2020, growth is estimated to In Samoa, an economic contraction of 0.3 mission of COVID-19 is negatively affect- have recovered to 1.2 percent in 2021. The percent is projected in FY22, reflecting the ing growth. The fiscal deficit is projected economic recovery was underpinned by global growth slowdown and COVID-relat- to deepen in 2022 – due to lower ECP rev- continued fiscal stimulus, which support- ed impact but is projected to accelerate to 3.8 enues and increased COVID-spending but ed livelihoods and funded reconstruction percent by FY24. The recovery is expected to narrow onwards. A balanced budget is ex- activity related to TC Harold. A sizeable be driven by a gradual resumption of tourist pected by 2024 as the recently passed Tax fiscal deficit of 6 percent of GDP was activity from FY23, spillovers to other sec- Administration Act helps boost tax rev- recorded in 2021, driven by a fall in sov- tors and ramping up of capital projects. The enues and the COVID stimulus is gradual- ereign rents, particularly lower Economic fiscal balance is projected to record a ly withdrawn. These are expected to out- Citizenship Program (ECP) receipts, deficit of 2.9 percent of GDP as develop- weigh the projected decline in ECP rev- alongside increased expenditures. The cur- ment partner grants normalizes and capi- enues. Similarly, the current account rent account recorded a deficit of 8 percent tal expenditure picks up pace. With the de- deficit is projected to gradually narrow to of GDP, predominantly driven by subdued layed recovery in tourism, the current ac- approximately 4.4 percent of GDP by 2024, tourism receipts. count deficit is projected to persist in FY22. driven by a recovery in travel receipts. TABLE 2 South Pacific Islands / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices Samoa 4.4 -2.6 -8.1 -0.3 2.5 3.8 Tonga 0.7 0.7 -0.8 -1.6 3.2 3.2 Vanuatu 3.9 -6.8 1.2 2.0 4.1 3.7 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) Vanuatu 32.3 37.6 36.9 36.6 36.1 35.9 Sources: World Bank and IMF. e = estimate; f = forecast. Note: Financial years for Samoa and Tonga are July-June, for Vanuatu it is January-December. (a) Calculations based on EAPPOV harmonization, using 2019-NSDP. (b) Projection using neutral distribution (2019) with pass-through = 1 (High) based on GDP per capita in constant LCU. MPO 2 Apr 22