Government should build fisheries revenues to offset potentially ‘dire’ impact of tourism shutdown says Asian Development Bank.
The delay to a New Zealand air-bridge is causing Cook Islands “significant economic and social damage”.
According to the Asian Development Bank’s latest Pacific Economic Monitor report, each month without tourists costs the economy about three per cent in lost GDP.
With the collapse of tourism, the bank is now one of the country’s biggest financiers: half of Cook Islands’ $193 million government debt is borrowed from the bank.
It lent $15 million to see Cook Islands through the start of the Covid-19 shutdown, and this week announced an additional grant of $1.5m.
On Budget Day, Finance Minister Mark Brown told Cook Islands News the bank’s one per cent loans would be important to financing the economic stimulus package.
But much depends on tourists returning, and the coronavirus staying away.
Leah Gutierrez, the bank’s Director-General for the Pacific, said: “While much of the Pacific remains free from Covid-19, the recent rise of cases in Papua New Guinea shows that building capacity and strengthening health systems are integral parts of Covid-19 preparedness.”
And yesterday, Fiji announced its first Covid-related death – a 66-year-old man who died in isolation.
The bank estimates Cook Islands GDP will contract by nine per cent this year and 15.4 per cent in 2021 due to a sharp decline in tourist arrivals from April to June 2020 with this trend extended until December 2020.
Unlike the crisis in the 1990s and the global financial crisis in 2008/09, this crisis has impacted multiple sectors of the economy, such as the health, transport, and finance sectors, pointed out the report co-authored by former government economist James Webb.
In the coming months, it is crucial Cook Islands authorities evaluate and adjust public spending measures to ensure the most effective use of current fiscal reserves.
It suggests diversifying the economy by working to increase fisheries revenue, across the 1.9 sq km exclusive economic zone.
“If travel to the Cook Islands does not resume by December 2020, the fiscal position becomes dire, with development partner support and government reserves likely to run out in the latter half of 2021.
“Ongoing development partner support may delay the need for drastic fiscal measures, but in either case, a fiscal consolidation in 2021 and beyond will present a significant barrier to future growth.”
The crisis in the mid-1990s saw GDP decline by 11 per cent between 1996 and 1998, driving a 16.9 per cent decline in the resident population due to emigration to New Zealand (and later, Australia) because of public service cuts. The 2008/09 financial crisis saw a decline of 3.5 per cent of GDP in 2008.
“The difference between the mid-1990s and 2008 contractions compared with the present crisis is that the impact of Covid-19 is significantly larger because of the collapse of the tourism sector,” the report said.
However, the Asian Development Bank report recognised the responses from the government through stimulus packages and the private sector helped mitigate some of the immediate economic damage.
But it warns if the underlying challenge of zero tourist arrivals continues past the August time frame, the country will be forced into additional borrowings to continue its “costly stimulus measures” to avoid mass closures of businesses and loss of jobs.
According to Cook Islands Government, public debt stood at 17 per cent of GDP in fiscal year 2019, but the policy measures will increase debt to 34.8 per cent of GDP by fiscal year 2021.
“The debt position could increase further should the crisis worsen, with the decline in revenue threatening to exhaust cash reserves by late-2021, even with increases in development partner financing,” the Government said.