Government has a maximum additional headroom of about $65 million of debt, prompting warning.
A fiscal stimulus of about $250 million is needed to survive the coronavirus related economic crisis in the Cook Islands, according to a bank.
ANZ economists say with decisive, targeted, right-sized and timely fiscal and monetary stimuli, policy makers can limit the damage from Covid-19.
They suggest Cook Islands will need “something closer to 50 per cent of gross domestic product” which last year stood at $504.5 million.
Government has already announced its stimulus measures as part of the Covid-19 economic response package with a total value of $61 million. The stimulus package includes wage subsidy for affected workers and grants for employers along with other benefits.
The government is also considering an additional appropriation of up to $76 million in the 2020/2021 Budget which will be announced in June this year.
ANZ says with the stimulus spend, GDP and employment contraction can be limited to the -2 per cent to -3 per cent range, as opposed to double-digit declines without the additional support.
“Monetary stimulus, in the form of cheap central bank loans to businesses willing to undertake capex, could also be explored.”
However funding this stimulus is a major concern as the government has already employed the Stabilisation Account along with drawing down on general cash reserves to fund the economic response package.
The Finance Ministry says absence of a substantial cash (grant) injection from a donor partner due to the country’s developed status means the government will consider taking on new debt to fund ongoing stimulus measures.
There may also be the potential for additional grant funding from the Asian Development Bank, and other international partners, such as the United Nations, who are running both loan and aid grant schemes in response to the Covid-19 pandemic.
“Further debt financing is also likely be required once the immediate pandemic is over and it is time to return to the important business of bridging our critical infrastructure gap – a wastewater solution for Muri and upgrading telecommunications services in the Pa Enua, to name but two – all of which will improve the future productivity of our economy,” the ministry said in a Cook Islands Economic Bulletin released this month.
The ministry said strong economic growth of the past few years has left the country with good debt headroom, which means the Cook Islands has the ability to borrow more and be able to repay that debt.
In the Supplementary Budget, the estimated net debt to GDP ratio of 21.6 per cent in 2019/20 is expected to fall to 21.3 per cent in 2020/21. This is comfortably within the 30 per cent soft threshold.
“We have maximum additional headroom of about $65 million of debt, which would take us close to our hard threshold of 35 per cent of GDP in 2020/21.”
However the government would still be required to find $11 million of additional financing, or extra cash reserves to undertake the full stimulus.
“This will be a tough period, but this package is designed to assist in softening the harshest aspects of the blows our economy has been dealt and providing our people with a platform to lead the economic recovery once the danger and restrictions have passed.”