Overview

1. Building Economic Resilience: Macroeconomic Case for Reducing Pacific’s Dependence on Fossil Fuels

2. Overview • Vulnerabilities facing Pacific island countries • How external shocks become internal • Role of macroeconomic policies in improving resilience and challenges faced • Reducing dependence on fossil fuel improves macroeconomic stability and expand policy space • Moving forward: Renewables and/or energy efficiency; and the role of green economic policies

3. Pacific Economies:Slow Growing and Vulnerable • Growth in the past few years has been very slow

4. Sources of Vulnerability • Several factors make the Pacific region economies very vulnerable • Distance from major markets and from one another leading to high transport costs • Scale: Very limited markets to realize economies of scale and disincentive for private sector investments • Heavily dependent on trade: narrow export base and dependent on primary commodities that exhibit price fluctuation. Also heavily dependent on imports of food and fuel. • Natural disasters: Prone to cyclone, floods, earthquakes/tsunamis, climate change These make the Pacific very vulnerable to external shocks beyond their own control

5. How External Shocks Become Internal • Remittances • Important for several countries (24 % of Tonga’s GDP in 2010, 25 % of Samoa’s) • Remittances fell in Fiji by 33% between 2006 and 2008; 29 percent in Tonga between 2007 and 2009 • Tourism • Tourism accounts for 60% of Palau’s GDP, 50% of Cook Islands’, 30 % of Vanuatu’s and more than 20% of Samoa and Fiji. • Aid flows • Natural Disasters • Economic impacts are considerable • 1972-2004: Fiji suffered F$ 20 million per year from cyclones and storms • Samoa: Average disaster costs 40% of GDP in 1989 • Vanuatu: Damage from cyclones in 1989 were twice the national income

6. How External Shocks Become Internal • Trade flows and terms of trade • Natural Disasters

7. Role of Macroeconomic Policies • Macroeconomic policies are crucial to maintain stability and increase resilience through: • Stable prices • Competitive exchange rates • Adequate foreign exchange cover • However, many challenges exist • Monetary policy is not very responsive; structural impediments hinder effectiveness • Fiscal space is very tight and limits the options available to the government for countercyclical measures such as a stimulus package

8. Limited Fiscal Space Source: IMF, 2012

9. The Pacific is very dependent on imported fossil fuel • Pacific is one of the most fossil fuel dependent regions of the world and are extremely vulnerable to oil prices

10. Pacific’s Oil Imports Source: IMF, 2010

11. Macroeconomic Impact of Heavy Dependence on Imported Fossil Fuel • Rising trade deficits • With exports (goods/services) stagnant and price of oil rising, the deficits could increase faster, and might need to be financed from abroad/foreign reserves • Could impact availability of credit, interest rates, banking sector liquidity • Directly feed into inflation in Pacific countries through direct impact on transport prices, and prices of food and other goods; has the potential to impact wages • Slower growth as a result of lower consumer and investment spending • Further constrains fiscal space through: • Increase in costs of government operations • Potential for increased budget deficits AFFECTS MACROECONOMIC STABILITY AND RESILIENCE

12. Economic Case for Reducing Fossil Fuel Usage in the Pacific • Reducing fossil fuel usage • Decreases vulnerability (one of many facing PICs) • Improves macroeconomic stability and protects foreign reserves. Enables better usage of fiscal and monetary tools • Energy policies should aim to reduce fossil fuel through renewables and/or energy efficiency • Green economic policies can be important tools to realize these goals • Growth-enhancing structural reforms are crucial to tackle other vulnerabilities

13. Thank You!