Revitalizing Pacific Island Economies: Overcoming Growth Challenges with Strategic Investments

The Pacific Economic Update highlights slowing growth across the Pacific Islands in 2024, driven by fading post-pandemic recovery and global uncertainties. The report emphasizes the need for targeted investment in key sectors like tourism and renewable energy to sustain long-term economic resilience.

The World Bank's Pacific Economic Update for October 2024, offers an in-depth assessment of the economic situation in 11 Pacific Island Countries (PIC-11), including Fiji, Solomon Islands, Kiribati, and others. Led by senior economists Ekaterine Vashakmadze, Vishesh Agarwal, and Warunthorn Puthong, with guidance from the World Bank’s regional experts like Stephen N. Ndegwa and Lalita Moorty, the report provides a comprehensive analysis of the region’s economic challenges and opportunities. It focuses on the slower-than-expected growth in 2024, down to an estimated 3.6% from 5.8% in 2023, highlighting the diminishing impact of the post-pandemic recovery and the increasing global uncertainties affecting these small, vulnerable economies.

Sharp Economic Decline in Fiji and Solomon Islands

Fiji, one of the largest economies in the region, experienced a sharp deceleration, with growth falling from 8% in 2023 to just 3.1% in 2024 as the momentum of the post-COVID-19 rebound began to fade. In contrast, countries such as the Solomon Islands are expected to see more moderate growth of around 2.5%, down from 3% in 2023, largely due to structural economic challenges. For countries excluding Fiji and the Solomon Islands, the report notes an acceleration in growth from 3.8% to 4.9%. This increase is driven primarily by tourism and remittances, which have seen a notable resurgence in countries like Palau, Samoa, and Tonga, where growth is projected at 5.6% in 2024. These nations are benefiting from a strong recovery in the tourism sector and resilient remittance inflows from citizens working abroad. Additionally, sovereign rent-led economies, including Kiribati and the Federated States of Micronesia, which rely heavily on non-tax revenues such as fishing licenses, also saw modestly accelerated growth, though their capacity limitations continue to constrain further economic expansion.

Inflation Eases but Costs Remain High for Households

Inflation across the PIC-11 has eased significantly in 2024, with the median rate dropping from 6.8% in 2023 to 4%, reflecting the stabilization of global commodity prices. However, Fiji experienced a temporary spike in inflation to 5.2% in 2024 due to adjustments in the Value Added Tax (VAT), though this is expected to decline in the following years. In contrast, tourism-dependent economies such as Palau, Samoa, and Vanuatu saw sharp declines in inflation, reversing earlier spikes. The easing of inflation has helped to reduce the cost of living in the region, though the cumulative price increases from previous years continue to weigh on household budgets, particularly for essential goods.

Fiscal Balances Improve but Public Debt Remains Elevated

The report also highlights progress in fiscal consolidation across several of the PIC-11 countries. Governments have gradually phased out COVID-19 stimulus measures while benefiting from increased tax revenues as economies recover. Despite this, public debt levels remain elevated in many of the countries, as spending pressures continue to rise. In countries like Fiji, public debt has decreased from its peak during the pandemic but remains higher than pre-COVID levels. Similarly, while fiscal balances have improved in other countries, including Tonga and Samoa, where strong revenue collections and grants have supported surpluses, challenges remain. In particular, the collapse of Air Vanuatu in 2024 has significantly impacted the Vanuatu economy, widening its fiscal deficit and contributing to increased public debt.

Investment Growth Stagnates Amid High Volatility

Investment in the Pacific Islands remains a critical challenge, with growth in the sector underperforming compared to other emerging markets and developing economies (EMDEs). After experiencing a sharp contraction during the COVID-19 pandemic, investment in the region rebounded, but the pace of recovery from 2021 to 2023 has been weaker than in other EMDEs. The report projects that investment growth in the PIC-11 will stagnate at around 1% annually from 2020 to 2029, significantly lower than the 4.2% annual growth seen between 2000 and 2019. High volatility in investment growth, driven by frequent natural disasters and the limited fiscal space available for public investment, is a major impediment to long-term growth. Natural disasters alone are estimated to cost Pacific Island nations about 1.5% of their GDP annually, and with limited financial reserves, these countries often struggle to manage economic shocks, creating a cycle of destruction, repair, and constrained capital accumulation.

Unlocking the Potential of Key Economic Sectors

The report outlines key barriers to investment in the region, including infrastructure deficiencies, unpredictable regulatory environments, and limited access to financing. For instance, poor transportation networks, particularly in remote areas, hinder economic integration and increase operational costs for businesses. Similarly, outdated port facilities in countries like Fiji and Vanuatu limit trade efficiency, while high electricity costs across the region discourage private investment. The tourism sector, a major driver of growth in many of the PIC-11 countries, also faces challenges due to outdated regulations and insufficient infrastructure to accommodate growing numbers of tourists. Moreover, the potential of the blue economy, which includes sectors like sustainable fishing and marine biotechnology, remains largely untapped, with inadequate regulatory frameworks and limited technological capabilities hindering its development.

Looking ahead, the report emphasizes that the medium-term growth prospects for the PIC-11 are subdued, with growth projected to remain below pre-pandemic levels. The report warns that without a rapid and sustained investment boom, many Pacific Island countries may struggle to achieve meaningful economic recovery and close the income gap with advanced economies. Additionally, the report identifies several risks to the region’s economic outlook, including a potential slowdown in major economies like China and the United States, ongoing climate-related disasters, and geopolitical tensions. To mitigate these risks and foster sustainable growth, the report recommends targeted investments in high-potential sectors, particularly those related to tourism, renewable energy, and infrastructure development, as well as improved regulatory environments to attract private investment.