Macroeconomic Policy Challenges in the Pacific Islands and IMF work. Patrizia Tumbarello Unit Chief, Small States Apia, February 26, 2016

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1 Macroeconomic Policy Challenges in the Pacific Islands and IMF work Patrizia Tumbarello Unit Chief, Small States Apia, February 26, 216

2 Growth in PICs has been lower relative to some comparators.. Real GDP Growth (In percent) PICs Low-income countries Caribbean countries PICs (excl. PNG and TLS)

3 especially the low-income countries Real GDP Growth (In percent) 7 6 PICs Caribbean countries Low-income countries PICs (excl. PNG and TLS)

4 varying also across the Pacific islands Pacific Island Countries: Real GDP Growth (In percent) PICs: Others PICs: Resource-rich PICs: Tourism intensive

5 Fiscal risks and challenges Large dependency on aid Revenue volatility, spending rigidities pro-cyclical policy Development needs, low productivity of govern. spending At times rising public debt 5

6 Fiscal deficit in PICs has been wider than in comparators if grants are excluded Headline Fiscal Balance Including Grants (In percent of GDP) Headline Fiscal Balance Excluding Grants (In percent of GDP) 1 Pacific island countries Caribbean countries Low-income countries Pacific island countries Low-income countries -1-5 Caribbean countries

7 Volatility of revenues is twice as large than in other small states Volatility of Revenue (Standard deviation of revenue-to-gdp ratio; 28-14) PIC microstates Pacific island countries Low-income countries Small states

8 partly due to natural disasters Revenue Volatility and Intensity of Natural Disasters Change in revenue (Log of standard deviation after controlling for GDP volatility) PIC small states Fitted values PIC small states Nonsmall states Intensity of natural disasters (In percent of population affected 1/) Fitted values nonsmall states 1/ Intensity = [(number of deaths +.33*number of people affected)/population]*1. 8

9 given the high vulnerability to these events Natural Disaster Risks - World Risk Index, 214 (In percentage point) Higher Risk Vanuatu Tonga Solomon Islands Timor-Leste Pacific island countries Small states (excl. PIC small states) Non-small states 9

10 Cyclone Winston (Fiji) and Pam (Vanuatu) are a strong reminder of the vulnerability of small states to natural disasters Probability of Occurrence of Natural Disasters 1 (In percent) Papua New Guinea Fiji Vanuatu Solomon Islands Tonga Samoa Caribbean small states Micronesia Tuvalu Timor-Leste Kiribati Marshall Islands Palau Small Pacific island countries average Pacific island countries average / During Sources: Center for Research on Epidemiology for Disasters, International Disaster Database; IMF staff estimates. Number of Annual Natural Disas Rest of APD Small States Vanuatu

11 Higher fixed government costs than other small states Current Government Expenditure (In percent of GDP) Small states Low-income countries Pacific island countries PIC Microstates Emerging markets

12 especially in microstates Pacific Island Countries: Current Government Expenditure (In percent of GDP, 21-12) PICs average PIC microstates average Emerging markets average Small states average Timor Leste Papua New Guinea Fiji Vanuatu Samoa Tonga Solomon Islands Palau Micronesia Marshall Islands Kiribati Tuvalu 12

13 Revenue volatility translates into expenditure volatility, especially capital Volatility of Capital and Current Expenditure, (Standard deviation of current expenditure-to-gdp ratio) 5 4 PIC microstates Pacific island countries Small states Low-income countries Capital Expenditure Current Expenditure

14 Procyclical bias Real Primary Government Expenditure 1/ (Average percent change year-to-year; ) During positive output gap episodes During negative output gap episodes PICs small states Caribbean small states Emerging economies 1/ Procyclical bias is measured by the difference between the bars within the group. Sources: IMF, WEO; IMF, APD-LISC; and IMF staff estimates. 14

15 Assessing fiscal position is complicated Headline Fiscal Balance Underlying Fiscal Balance Palau Solomon Islands Fiji Kiribati Vanuatu Papua New Guinea Samoa Tonga Marshall Islands Micronesia Tuvalu Palau Solomon Islands Fiji Kiribati Vanuatu Papua New Guinea Samoa Tonga Marshall Islands Micronesia Tuvalu

16 Buffers remain adequate in most small states Pacific Small States: Total Public Debt (In percent of GDP) ¹ 21 Gross International Reserves (In months of next year's imports) Samoa Tonga Marshall Islands Tuvalu Fiji Papua New Guinea Source: IMF staff calculations. 1/ Estimates. Vanuatu Micronesia Palau Kiribati Solomon Islands Timor-Leste Solomon Islands Tonga Vanuatu Fiji Samoa Papua New Guinea

17 Capital spending is lower than in LICs Government Expenditure, (In percent of total government expenditure) LICs (exc. small states) PICs Capital expenditure (median) Current expenditure (median) 17

18 The effects of limited capital spending have resulted in PICs weak structural indicators relative to peers Pacific Island Countries: Structural Indicators (Percentile ranks) 1 8 Living standards outcome (Life expectancy at birth) Infrastructure quality (Mobile cellular subscriptions for every 1 persons) Business climate (Ease of Doing Business Score) Priorities are countryspecific, but generally include: Higher performance Addressing the infrastructure bottleneck Increasing living standards Improving the business climate Samoa Tonga Vanuatu Fiji Palau Micronesia Kiribati Solomon Islands Timor-Leste Marshall Islands PNG Fiji Palau Vanuatu Solomon Islands Timor-Leste Tonga Samoa PNG Tuvalu Micronesia Kiribati Marshall Islands Samoa Tonga Vanuatu Fiji Solomon Islands Palau PNG Kiribati Marshall Islands Micronesia Timor-Leste 18

19 Infrastructure development is key Access to electricity Improved water source Mobile subscriptions Internet users (Percent of pop., 212) (Percent of pop. with access, 212) (Per 1 people, 213) (Per 1 people, 213) Small states Pacific island small states Caribbean small states Other small states OECD countries World Source: World Development Indicators

20 More efficient spending through PFM reforms is required to improve living standards Public Expenditure in Education and Secondary Enrollment Life Expectancy and Public Health Expenditure 12 Small states Pacific island countries 8 Secondary gross enrollment rate (212 or latest available) Palau Kiribati Fiji Tonga Samoa Tuvalu Micronesia Vanuatu Timor-Leste Marshall Islands Solomon Islands Life Expectancy (In years; 212) Tonga Samoa Vanuatu Fiji Timor-Leste Papua New Guinea Palau Solomon Islands Kiribati Small states Pacific island countries Marshall Islands Micronesia Tuvalu Public expenditure in education (In percent of government expenditure; 2-12) Public health expenditure (In percent of GDP; 25-12) 2

21 How to address macro fiscal stability MT fiscal framework and fiscal anchors Trade off between building buffers and spending Improve spending mix Preserve fiscal space 21

22 Multi-pillar framework: strengthening ex ante and ex post resilience Risk Management Ex ante Ex post Risk Assessment Self Insure Risk Reduction Risk Transfer Coping Assess vulnerability Incorporate disaster costs into national budget planning Build buffers Enhance preparedness Invest in smart infrastructure Enhance debt management capacity Emergency response and reconstruction Note: Green shows the role of the IMF. National Regional International Regional pooling (e.g., Melanesian emergency stabilization fund) Surveillance and Capacity Development integrate fiscal costs into macro framework and the DSAs and enhance PFM systems Surveillance and Capacity Development help calculate the efficiency of public investment Pacific Catastrophe Risk Insurance Pilot International community (ex ante pooling of global resources) Financial Support Emergency liquidity support Other bilateral or multilateral support 22

23 Natural Disasters: Actual damage and losses during reduced trend growth by.7 percentage point Pacific Island Countries: Long-Run Impact of Natural Disasters on Trend GDP 1 (198=1) Trend GDP (actual) Trend GDP (without natural disasters) / Trend GDP is calculated as a 1-year moving average of real GDP. Sources: EM-DAT; and IMF staff estimates. 23

24 PICs continue to lag other small states on financial inclusion Accounts, Commercial Banks (Per 1, Adults) 2, Caribbean Small States Small states LICs 1,5 PICs Number of Branches, Commercial Banks (Per 1, Adults) , Caribbean Small States Small states LICs PICs

25 and financial development Domestic Bank Deposits to GDP (In percent) 1 Caribbean Small States Small states 8 LICs PICs Private Credit to GDP (In percent) 7 Caribbean Small States Small states LICs PICs

26 Potential gains from further financial development in PICs are substantial Financial Development Effect on Growth Effect on growth rate (percent) 6% 5% 4% 3% 2% 1% LICs average Kiribati Other Small States average Morocco Poland Papua New Guinea Vanuatu Maldives Fiji Solomon Islands Samoa Tonga Ireland United States Japan Financial Development Index Source: IMF staff estimates, based on the methodology in SDN/15/8 (Table A1), and Čihák and others (212). 26

27 including in comparison to other small states. Financial Depth and GDP per Capita GDP per capita (thousand of current USD) Pacific small states Caribbean small states Other small states average of small states Micronesia Fiji Tonga TLS Samoa SLB Credit to private sector (percent of GDP) Source: World Bank, World Development Indicators. 27

28 Effects of de-risking through the termination of Money Transfer Operators (MTO) accounts have been severe for small states Bank Account Closures for MTO Clients (In percent) The number of accounts closed 1-1 At least one (1-1,+) Source: World Bank Group, CBR Survey.

29 From What to How: Recent work Surveillance: Article IVs and Regional Work A toolkit to analyze the impact of natural disasters on growth (IMF WP 15/125); and integrate natural disaster costs into the macro framework and DSAs Assess the tradeoff between building buffers and public investment spending Capacity Development : PFTAC with STA, FAD, MCM, ICD High-Level Dialogue and Workshop in Fiji, June 22-25, 215 financed by Australia Provide trainings for the authorities on incorporating the fiscal costs of natural disasters Financial Support : Solomon Islands (ECF); Vanuatu ( RCF/RFI); Samoa (RCF)

30 Work in the pipeline Re-measure fiscal space internalize natural disasters Public investment and natural disasters Growth and Resilience Initiative 3

31 Upcoming Book and India Conference India Conference One session on Climate Change Meeting with Pacific Islands authorities and Christine Lagarde

32 Managing Director Lagarde s Global Policy Agenda: Supporting members facing a changing world Through the AIM approach: Agile: e.g. Vanuatu Integrated: e.g., Strengthening the linkages between surveillance and capacity development (June 215 Fiji workshop) Member-focused: tailor better to natural disasters and de-risking

33 Key priorities identified in Phase V are: Strengthening macroeconomic and financial resilience to natural disasters and other shocks Ensuring fiscal and external sustainability Promoting inclusive growth 33