ADB expects Pacific growth and inflation to moderate in 2012

MANILA, PHILIPPINES: Economic growth in the Pacific region is expected to slow to 6.0% in 2012 from 7.0% in 2011, according to the latest Pacific Economic Monitor released yesterday by the Asian Development Bank (ADB). The slowdown is driven by lower growth in large resource-exporting economies that dominate regional growth.

The Pacific region continues to grow at rates above the global average, and economic troubles in the eurozone will likely have only modest and indirect effects on Pacific economies. Australia, New Zealand, and the US play larger roles in driving Pacific growth and reported either steady growth or economic recovery in 2011, which is seen to extend into 2012. However, the People’s Republic of China’s (PRC) recent downgrading of its 2012 growth target could carry greater implications for the Pacific, due to Australia’s strong ties with the PRC economy.

Inflation in the Pacific is projected to fall from 8.6% in 2011 to 6.6% in 2012 due to an easing in international food prices. Appreciation in the values of Pacific currencies could further lessen inflationary pressures by making imports cheaper for some economies in the region.

“Last year marked the tenth consecutive year of positive growth in Papua New Guinea, and the ninth consecutive year of growth in Vanuatu. These are impressive achievements, but to see such success more broadly in the Pacific, it is essential to continue to work with political leaders to address longstanding policy reform needs,” said Robert Wihtol, Director General of ADB’s Pacific Department. “Such efforts should focus on both investments in vital public infrastructure, and work to improve government fiscal management and public sector efficiency.”

The Papua New Guinea economy is projected to grow by 7.5% in 2012—down from 8.9% in 2011—and by 4.5% in 2013, due to declining resource export revenues and the winding down of construction activity on a key liquefied natural gas project. ADB also forecasts that Timor-Leste’s strong growth will continue on the back of government spending on infrastructure development, and reforms to improve trade and investment links with Indonesia.

Tourist arrivals, particularly in the Cook Islands, Fiji, Palau, and Samoa, reached record levels in 2011, and the tourism outlook for 2012 is positive. Resumed phosphate exports from Nauru should sustain relatively strong growth there in 2012 and 2013. In Kiribati, the Republic of the Marshall Islands, the Federated States of Micronesia, and Vanuatu, spending on infrastructure projects is expected to spur economic growth.

The report’s special topic section considers the benefits of more efficient budget management. This section of the Monitor discusses efforts of Pacific countries to improve budget management, such as developing fiscal management models and implementing multiyear rolling budgets to better link government resource allocation with development priorities. The cost savings from proper budgeting and financing of road maintenance are also considered.