This article was originally published by UNDP
Pacific island countries such as Kiribati, Tuvalu and Vanuatu are among the countries most vulnerable to extreme weather events and climate change. Just last year, Cyclone Pam ripped through Vanuatu and caused damages estimated at over 60 percent of GDP, in addition to 11 lives lost and widespread damage to homes and livelihoods.
The Asian Development Bank estimates that the Pacific loses US$300 million a year through disasters alone. And such events are expected to become more frequent and more severe with the predicted impacts of climate change.
With Pacific islands at the forefront of climate change impacts, they need to secure resources not only to meet development priorities such as improving health and education but also to adapt to climate change, build resilience and withstand sudden (often very large) economic and environmental shocks.
Where will these resources come from, and how can Pacific islands make most effective use of these funds? These were the topics of a recent workshop co-organized by UNDP and the Pacific Islands Forum Secretariat (PIFS) in Fiji, which brought together policymakers from the Pacific islands and experts from major bilateral and multilateral finance providers.
When it comes to resource mobilization, many Pacific islands have made important strides to increase domestic resources over recent years. For example, through the Nauru Agreement – which establishes the terms and conditions for issuing foreign fleets with licenses to fish in the Pacific – eight Pacific island countries have been able to increase fishing revenues from $100 million to over $500 million over the last five years. And there is room to increase this even further in the future.
Several other countries, such as Palau and Samoa have also increased revenues substantially from tourism. In Palau, income from tourism went from $85 million in 2008 to over $147 million in 2014. With support from UNDP, PIFS and other development partners, Pacific islands have also strengthened public financial management systems that convert budgets into development actions in the most efficient, accountable and transparent way.
Nevertheless, important challenges remain. The resource base in Pacific islands remains narrow and volatile. Timor-Leste for instance derives more than 90 percent of its income from oil. Moreover, it is much more expensive, on a per capita basis, to provide basic services to small populations often widely dispersed over many islands. The effectiveness of public spending, especially in outer islands remains mixed. Limited employment options in Pacific islands has led to a large public sector, which requires a higher than average ‘tax-take’ and also tilts public spending towards recurrent expenditure and away from capital investment.
Indeed, despite large infrastructure investment needs in most Pacific islands, capital investment is smaller than in other developing countries. In the Pacific, capital spending amounts to, on average, just 20 percent of GDP compared to 32 percent for developing countries as a whole over the last five years. This is despite analysis from the IMF that shows the development ‘payback’ from capital investments is much higher in small states than in other developing countries. Meanwhile, foreign direct investment – another important source of external finance – is often volatile and mostly concentrated in the extractive sectors.
When it comes to external finance, Pacific islands are major recipients of development aid and official loan financing from multilateral institutions such as the Asian Development Bank, the European Union and the World Bank, and bilateral donors such as Australia, New Zealand and China. Moreover, finance from some of these providers is set to increase substantially over the next five years. The Asian Development Bank expects its financing for the Pacific islands to increase from about $400 million today to between $750 million and $800 million a year by 2020. Increases are also anticipated in World Bank financing. Pacific islands are also strategically well-placed to access finance from the Green Climate Fund (GCF) and other large environmental funds. The Cook Islands has become one of the first countries to qualify for ‘direct access’ under the GCF.
The challenge for Pacific islands and their development partners is how to ensure this financing can be made truly transformative, that the conditions attached to the funds are appropriate for small fragile economies and that financing is delivered and spent in ways that strengthen local capacities and use country systems (such as local procurement systems). Small administrations can quickly become overwhelmed with a multitude of different application, monitoring and reporting requirements, which lead to considerable inefficiencies.
What are the ways forward? With the support of Australia and New Zealand and in collaboration with PIFS and Pacific island countries, UNDP is undertaking a study that looks at how Pacific islands can meet their financing for development challenges, maximize the opportunities presented by a dynamic and changing development financing landscape and make the most effective use of all available resources. To be launched in April 2017, the report will provide policy recommendations for both Pacific island countries and their development partners on seizing new financing opportunities and ensuring that – true to the SDG promise – no country is left behind.