Encouraging work-abroad programs could help Pacific island countries avoid crippling debt, write Paresh Kumar Narayan and Bernard Njindan Iyke as the Pacific Islands Forum meets this week
Pacific Islanders have always been travelers. Setting out in ocean canoes, they first spread to new lands and new prosperity over 5,000 years ago. Today they go again. In 2017-2018, before Covid-19, more than 18,000 islanders traveled to New Zealand or Australia for work.
Pacific island countries depend on money sent home. Seven of the top 10 recipients of remittances, measured as a share of gross domestic product, are in the Pacific region. Far from being a problem, remittances play a major role in keeping national debt in the Pacific at a sustainable level. If Pacific island countries were to negotiate with their main trading partners – Australia, New Zealand and China – to facilitate the movement of skilled labour, they could expect skills, income and increased government revenue.
Globally, we have seen rapid debt growth over the past three years due to the need to support economies against the potential economic and financial crises of the Covid-19 pandemic. The rate of global debt accumulation during the Covid-19 pandemic was faster than the early stages of the Great Depression and the global financial crisis of 2007/2008. Nearly 60% of developing countries, including Pacific island countries, are today in distress or at risk of distress.
For example, Papua New Guinea’s gross financing needs (the sum of the primary fiscal deficit and maturing debts) between 2021 and 2023 are projected at 13.4% of gross domestic product, or 6.4% above the pre-pandemic level. This substantial growth in the debt of Pacific island countries has exposed them to debt problems, which are expected to worsen in the years to come.
Currently, none of the Pacific Island countries are in distress, but most are at high risk. The average debt-to-gross domestic product ratio of Pacific island countries increased from 32.9% in 2019 to 42.2% in 2021. Fiji, Vanuatu and Palau all recorded debt-to-gross domestic product ratios above 70% in 2021.
Historically, workers’ remittances have played a major role in keeping the fiscal deficit in the Pacific at a sustainable level. Remittances increase government revenue by increasing household consumption of local goods and services and associated taxes.
Remittances increase deposits in the financial system, which are channeled to support government debts through purchases of treasury bills by banks. Moreover, remittances increase the demand for money (and the liabilities of the banking sector), thereby increasing the revenue that the government generates by issuing money. This is called seigniorage income.
In Samoa and Tonga, for example, remittances represent respectively one-sixth and two-fifths of their gross domestic product. However, these countries have recently experienced a drop in remittances, due to the Covid-19 pandemic and travel restrictions. The World Bank has estimated that remittances to the Pacific will decline by 4.3% for 2020 due to Covid-19. Remittances from Palau are expected to decline the most, at 29%.
Conversely, some Pacific island countries have seen record growth in remittances. In 2020, for example, Tonga recorded the highest remittance inflows, accounting for around 38% of its GDP. Similarly, inbound personal remittances from Fiji grew by 14.6% in 2021, reaching a new high of $842.2 million.
Even though the road to debt is not smooth for Pacific island countries, the performance of remittances in these uncertain times suggests that policymakers can better harness them to bolster their countries’ debt positions.
To facilitate labor mobility, Pacific island countries could negotiate special visa arrangements and immigration programs with wealthier trading partners. These countries could reduce visa requirements, encourage companies to employ workers from Pacific island countries, promote equal labor rights for these workers, and extend the maximum length of residence for these workers. This will increase the influx of Pacific workers to their trading partners. Workers can then develop skills, earn income, support their families and communities and, in turn, increase remittances and government revenues in Pacific island countries.
Professor Paresh Narayan is a highly cited researcher at the Monash Business School, Monash University, consultant to numerous governments, central banks and financial institutions, and commissioner to the Fiji Higher Education Commission.
Dr. Bernard Njindan Iyke is a Fellow at Monash Business School, Monash University. He regularly collaborates with central bankers.