Information about Asia and the Pacific Asia y el Pacífico
Chapter

Asia-Pacific Small States: Developments and Outlook

Author(s):
Shari Boyce, Sergei Dodzin, Xuefei Bai, Ezequiel Cabezon, Fazurin Jamaludin, Yiqun Wu, and Rosanne Heller
Published Date:
April 2014
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Information about Asia and the Pacific Asia y el Pacífico
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Growth and Inflation

Average growth in the small states in the Asia and Pacific region remained weak (1 percent) in 2013 and underperformed that in other small states—2 percent. However, activity within the Asia-Pacific small states was uneven, with commodity exporters growing at the rate of 3 percent which, while robust, was lower than past rates (Figure 1). Economic performance in the microstates (i.e., countries with a population below 200,000—Kiribati, the Marshall Islands, Micronesia, Palau, Samoa, Tonga, and Tuvalu) lagged behind with growth estimated at less than 1 percent. Inflation has remained broadly in check. These countries remain highly vulnerable to natural disasters as shown by the recent cyclones in Tonga and Vanuatu, and severe floods in Solomon Islands.

Figure 1.APD Small States Outlook: A Mixed Performance with Inflation Broadly on Track

Note: Asia and Pacific developing (APD) small states include: Bhutan, Fiji, Kiribati, Maldives, Marshall Islands, Micronesia, Palau, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu, and Vanuatu. Commodity exporters: Bhutan, Solomon Islands, and Timor-Leste. Tourism-intensive small states: Fiji, Maldives, Palau, Samoa, and Vanuatu. Others: Fishing license-dependent (Kiribati, Marshall Islands, Micronesia, Tuvalu) and Tonga.

Sources: Country authorities; and IMF staff estimates.

Fiscal Performance

Tax reforms led to strong tax revenue performance in some tourism-intensive economies (Maldives and Samoa), while nontax receipts—mainly fishing license fees—surged in Kiribati and Tuvalu (see special topic). The underlying fiscal position in commodity exporters and in countries dependent on fishing license fees (proxied by the change in the overall fiscal balance excluding natural resources) has deteriorated, however, despite minor changes in the overall fiscal balance because of spending pressures (Figure 2).

Figure 2.APD Small States—Outlook: A Favorable Revenue Outturn

Note: Commodity exporters: Bhutan, Solomon Islands, and Timor-Leste. Tourism-intensive small states: Fiji, Maldives, Palau, Samoa, and Vanuatu. Others: Fishing license-dependent (Kiribati, Marshall Islands, Micronesia, Tuvalu) and Tonga.

Sources: Country authorities; and IMF staff estimates.

Policy Buffers

External reserves are at comfortable levels in several small states (Bhutan, Solomon Islands, Tonga, and Vanuatu), and fiscal space has been rebuilt in Kiribati, the Marshall Islands, Solomon Islands, and Tuvalu (Figure 3). But more effort is required to rebuild policy buffers in some others to strengthen their resilience to shocks.

Figure 3.APD Small States—Outlook: Rebuilding Policy Buffers

Sources: Country authorities; and IMF staff estimates.

Outlook

Externally financed infrastructure projects and steady growth in Emerging Asia and Australia will underpin APD small states’ short- and medium-term performance under the baseline scenario. Lower commodity prices are expected to contain inflationary pressures. The recent natural disasters are expected to take a toll on economic activity in the short term. Elections in late 2014 in Fiji and Solomon Islands introduce some uncertainty to their outlook. Other risks are mainly external. Negative spillovers from Asian emerging markets in the event of increased financial volatility would pose challenges for APD small states. The key challenge remains how to lift potential growth in the medium term.

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