As the Pacific starts to map out a path to economic recovery from the global pandemic, external debts will weigh heavily on Island countries, including Palau, according to President Tommy Remengesau Jr. 

President Remengesau last week told reporters that debt stress will further impact Pacific economies which will need a regional, unified approach to ensure debt sustainably.

He said even Palau had to resort to borrowing to make up for the fiscal shortfall as a result of the pandemic, and that solidarity will be needed in the region to urge multilateral banks and external lenders to be more accommodating to the needs of developing nations. 

“We know that there is a debt ceiling for every country and we know because of the pandemic, everyone has to really borrow money to survive in this climate, so the stress right there will be very challenging, not only about debt ceiling but to refinance any debts you have existing,” he said.

While accumulating debts have already been a challenge, COVID-19 compounds debt burdens all the more, he said. 

“This is a prevalent challenge to all Pacific Islands, this is not only a subregional topic for us but a Pacific-wide agenda for everyone, to see how World Bank and the Asian Development Bank can be more accommodating to the island nations to keep everyone afloat,” Remengesau said.

Palau’s external debts are close to  USD$100 million, but the government has been keeping the debt-to-GDP ratio at 30 percent – far below some countries such as Fiji, where the debt to GDP ratio is expected to almost double to 83% in the year ahead. In Palau, with new loans as a result of COVID-19, the ratio is expected to be pushed to at least 60 percent of GDP.

Finance Minister Elbuchel Sadang said Palau can keep its debt within sustainable limits with tax reforms, such as Value Added Tax (VAT) which he hopes will be introduced next year.

Even though most Pacific nations are COVID-free, Pacific Islands Forum Secretariat (PIFS) Senior Economic Adviser Denton Rarawa said the region is facing devastating economic fallout.

According to Rarawa, most countries have little room in their budgets to repay more loans  and are expressing a preference for grant financing – which does not require repayments.

Donor countries too are facing difficulties and may not be able to offer dramatically increased help.

“Let’s …remember this pandemic is impacting the whole world, not just our region,” Rarawa said.

“So the financing landscape is also changing. 

“It’s becoming difficult but (Pacific) countries are looking towards additional support from wherever it can, from the rest of the international community, and the preference is towards grant financing more than debt financing,” he said. 

Everywhere economic forecasts are being revised down.

Forum nations are now expecting negative growth for 2020 due to the dramatically reduced tourism numbers and skyrocketing unemployment that has come with COVID-19. 

“According to the IMF June quarterly outlook, the negative growth in the region ranges from 21.7 percent in Fiji, 11.9 percent in Palau, 3.7 percent in Samoa down to 0.6 percent in Vanuatu,” Rarawa explained.

“These declines are being driven mainly by the slowdown in economic activities, trade, export, employment, and also a decline in remittance flows to the region,” he said. 

While COVID-19 ravages Pacific economies other problems are not disappearing and must be dealt with.

“Challenges like climate change, NCDs (non-communicable diseases), these still remain”, Rarawa said. 

Next week, a virtual Pacific Islands Forum Economic Ministers Meeting (FEMM) is scheduled to take place, with economic strategies for the Pacific region at the center of discussion. 

PIFS Secretary General, Dame Meg Taylor said the meeting “comes at a crucial time”.

She sees more innovative approaches and stronger regional cooperation as a way to survive the economic challenges of the pandemic.

“The COVID-19 pandemic has placed the world, and indeed the region, in an unprecedented situation,” she said.

“It has exposed and exacerbated systemic and structural imbalances in our systems and societies, underlining the urgency for decisive policy action. 

“Today, we are now faced with three crises: a health crisis, and economic crisis, and the ongoing climate crisis,” Dame Meg said. 

In Palau, tourism receipts make up 40%–50% of gross domestic product and with a stagnant tourism sector, the economy is forecast to contract by as much as 9.5% in fiscal year 2020.   In 2021, it will further decline by 12.8% if international travel restrictions remain, according to the latest ADB economic outlook. 

The nation has so far escaped the health costs of COVID-19 but border closures and extended travel restrictions are delivering a heavy economic blow to the tourism-linked sectors, including hotels, restaurants, transport, and retail trade. 

People in Palau and other Pacific countries will be hoping that this Economic Ministers meeting is able to come up with ideas and approaches to limit future economic damage. 

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