Though the full blown impact of the global recession is yet to affect the vulnerable shores of the Pacific Islands, the governments and central banks of every island nation are bracing for it.

From larger commodity exports based economies like Papua New Guinea and the Solomon Islands through those heavily dependent on tourism and remittances like Fiji, Samoa and other Polynesian island states down to countries like Kiribati, Nauru and Tuvalu, whose economies primarily depend on their trust fund investments, have all warned their people of the coming recession tsunami.

PNG, the region’s fastest growing economy that registered an average of five percent annual growth over the past seven years propelled by growing demand for its mineral resources –particularly in China-- is bound to feel the impact of the slowdown throughout this year.

Recession in the United States and Europe has already slowed down activity in the world’s manufacturing powerhouse, China. This in turn has driven down the demand for mineral and energy resources originating from PNG and Australia and other natural resources like round logs from the Solomon Islands.

New investments in PNG’s mineral and energy sectors that showed much promise before the downturn began will undoubtedly feel the heat as credit –particularly as credit for speculative green field ventures becomes increasingly difficult to obtain.

The great prospects afforded by the vastly expanded exclusive economic zones after the redrawing of the extents of the continental shelves of the islands in accordance with their submissions to the UN Law of the Sea will have to wait until the global economy recovers and credit for new investments becomes available on easier terms.

The downturn in western markets has also affected commodity exports like coffee, copra and palm oil (which were in any case reeling from low international prices for some time) as well as marine products from the Melanesian island states.

Denton Rarawa, Governor of the Central Bank of the Solomon Islands cited declining commodity exports as the main reason for expecting the country’s foreign exchange reserves to dip over the coming year. He has warned of a contraction in the country’s economy and problems in servicing external debt.

Reserve Bank of Fiji Governor Savenaca Narube has also warned that the country’s widening trade deficit will exert increasing pressure on foreign reserves. Declining overseas demand will also have its adverse effect on Fiji’s manufacturing industry -- particularly in the clothing and footwear sectors, which employ significant numbers of the country’s workforce. Political problems and the recent floods in its western parts have only sought to exacerbate Fiji’s economic situation.

As the effect of the downturn unfolds in the island states’ main tourism markets of Australia and New Zealand, inbound tourist numbers would be affected and tourism organisations have predicted lower arrivals throughout this year.

Tourism happens to be the single biggest sector for direct and indirect employment across Fiji and the Polynesian islands and also drives a host of ancillary business activity like local transportation, communication and other services. The domino effect of the downturn in tourist numbers will run across this ancillary chain.

Remittances continue to be the biggest revenue earners for many island economies including Fiji, Samoa, Tonga, the Cook Islands, Niue and Tuvalu. Job losses and pay cuts in New Zealand, Australia and the rest of the western worlds where people from these island countries are employed are expected to affect the volume of remittances.

But this may not turn out to be as big a threat as it seems because of two reasons: most western governments have announced plans to address the problem of large scale unemployment and any acute loss of income is likely to be temporary. The dip in remittances, therefore, would also be temporary.

The other important reason is that the costs of remittances in terms of fees and commissions charged by money transfer firms and banks have dropped considerably over the last year (in some cases nearly 70 percent). Theses savings would be added to the remittance pools and would soften any blow expected from a serious dip in overall remittances.

The microstates of Nauru and Tuvalu and their slightly larger Micronesian neighbour Kiribati have been feeling the effects of the global downturn for over a year now. Their trust funds, managed mainly by Australian fund managers, have been considerably eroded because of declining returns from investments in a variety of financial instruments.

On his way back from the 2008 Pacific Forum meeting in Niue, Tuvalu Prime Minister Apisai Ielemia told this writer that Tuvalu was expecting no interest payments on its investments this year and would have to look elsewhere to meet its budgetary obligations. In October last year, Kiribati President Anote Tong also spoke of reduced receipts from its one time much-envied fund in Australia. 

Meanwhile aid, usually not being tied to economic factors, is likely to continue unaffected except in cases where western governments are actively considering restructuring their programmes –as is currently being proposed by the New Zealand government. 

So far, the island governments have been slow to act on a firm response to the crisis. Some have announced a few measures. Solomon Islands Prime Minister Derek Sikua has spoken of increased infrastructure and public works spending, echoing the strategy of most western leaders including New Zealand Prime Minister John Key.

The Samoan government is toying with the idea of developing a safety net around the debt of people who may lose jobs particularly in the country’s small but significant manufacturing sector.

Pacific people have innate survival instincts. Some experts have advised them to fall back on these strengths and adopt a back to basics approach in terms of increasing their reliance on their own natural food and energy resources while also developing alternative, renewable energy sources while tiding over the downturn. 
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This article first appeared in the Pacific Co-operation Foundation's Pacific Connections magazine.

Dev Nadkarni is editor, www.pacificbusinessonline.com and is based in Auckland.