Delivered by Hon Mark Brown
Prime Minister of Cook Islands
05 April 2022
There are a number of global distractions today that are garnering, and rightfully so, a lot of attention. The Russian invasion of Ukraine, spiking and dipping oil prices, delicate geo-political interplay between super-powers, and of course Will Smith slapping Chris Rock. I do hope that with all of these global distractions, that we can spare some of our time today to focus on our region. We have heard for two years that the Pacific faces unique and immediate problems in the wake of the COVID-19 pandemic, we know this. We know that the consequence of our actions to protect our people from the early ravages of COVID was massive impact and the distortion on our economies. What this pandemic has shown us that we cannot just employ the ‘normal’ economic responses to this abnormal situation.
Pacific nations, in particular Small Island Developing States, face unique challenges. We have relatively small, remote, and highly dispersed populations. We have diseconomies of scale that conspire to make our factors of production disproportionately high in comparison to other countries. We have the longest shipping routes of any region in the world. The current supply chain issues that will take some time to recover mean that we face extortionately high transportation costs for the foreseeable future at a time when we are trying to bounce back.
Our countries have limited options for economic diversification and we are highly vulnerable to external risks such as the inflation that we import into our countries through our disproportionate balance of trade. These challenges meant that the Cook Islands, alongside our Pacific neighbours, suffered in far greater proportion than many others from the effects of the COVID-19 pandemic. This conference is to discuss debt, I’m glad that we are doing that now. Because right now Pacific nations require urgent and targeted debt financing solutions to fast-track our recovery and minimise the effects of economic scarring.
The Cook Islands experienced one of the world’s largest economic contractions as a result of the COVID-19 pandemic and necessary travel restrictions, with the Asian Development Bank estimating a peak-to-trough fall in nominal GDP of close to 32 percent. This was the largest economic recession in Cook Islands history. A stimulus and support packaged valued at around 20 percent of GDP managed to keep our decline to 32%. Without that support package of wage subsidies for affected industries, interest payment to retail banks to stave off foreclosure, business grants to keep our industry investments as intact as possible, in anticipation of the opening of borders to allow tourism, we would have been looking down the barrel of a halving of our economy and economic scarring that would have included much of our tourism product being sold off at a firesale.
It would have killed any chance of rebounding the economy. To put it into context, we lost almost a decade of productivity in the space of 18 months. Today’s GDP is now back to what it was in 2015.
As a nation that is considered a micro-economy, with no central bank, we very limited levers to influencing monetary policy. Like many other Small Island States, national revenues are obtained by begging (another word for aid), taxing or borrowing to maintain services, growing the economy and improving productivity.
As I mentioned, our fall in GDP was despite a strong financial outlook pre-COVID, and our quick economic response to the pandemic. We closed our borders to visitors for a significant proportion of the last two years. This was necessary to protect our people, but immediately cut the largest component of our GDP – tourism.
We introduced the Economic Response Plan at the start of the pandemic to support individuals and businesses and the Economic Recovery Roadmap to stimulate our economy. The ERP and ERR represent a comprehensive economic response to the pandemic, much of which was due to generous support from our development partners.
Their support, both financially, and also with materials and technical assistance, has been invaluable. It enabled our economy to remain afloat through the toughest period in our history and has reduced the numbers of people migrating to New Zealand in search of ‘greener pastures’.
We were fortunate that the strong fiscal performance of our country in the years leading up to the pandemic allowed us the room and to respond quickly. With visitors from New Zealand coming back to our shores now, we are cautiously optimistic about our future – both in terms of economic recovery and in our ability to manage the impacts of the virus.
However, funding the necessary response to the COVID-19 pandemic has come at a steep cost. It has consumed the Government’s reserves and required the taking on of a substantial amount of debt funding – $228 million so far – and we are working to make this the final total. This has more than doubled our net debt, to 43.5 per cent of GDP.
The large increase in debt, and the servicing this requires for some of the loans with shorter terms, is a key challenge for us. Our debt servicing costs are forecast to increase to $30 million by the end of this decade. That is approximately 16 percent of our total revenue. This is three times our current debt servicing costs,
and with our current reduced economy debt servicing will demand a significant chunk of our revenue. This will severely impact our capacity to invest in, let alone maintain our infrastructure and will be a dampener to our attempts to fast track economic growth. It will hamper our efforts to meet mounting social obligations as prosperity levels drop.
The Cook Islands are far from alone in the Pacific in facing such challenges. We are all struggling in this unprecedented global situation, with the continued threat to the health of our people and our environment.
The pandemic has shown us how quickly another economic shock could knock us back. The Cook Islands, like other Small Island states, are at the front-line of the climate emergency. We have seen around the region and the world bigger and more frequent natural disasters – both climate-related like floods and fires in Australia, and non-climate related like the volcano and tsunami in Tonga. If a natural disaster hits the Cook Islands before we have had a chance to rebuild our Stabilisation Account, this could put the handbrakes on our economic growth and on our fiscal balances, and our ability to service existing debt. It has been almost two decades since a cyclone significantly impacted Rarotonga, our most populated island, and 12 years since one has hit our second-most populated island, Aitutaki. This good fortune won’t last forever. Adaptation and resilience building was our mantra prior to COVID to enable us to prepare and be able to respond to these calamities. Many of us are now starting this process of adaptation and resilience building from way behind the start line as a result of COVID impacts on our economies.
This debt servicing situation is not unique to the Cook Islands. We know that the problems faced by our Pacific neighbours are just as urgent as ours. Rising global inflation is likely to place additional pressure on all of our budgets, making debt servicing more difficult again. Collectively, we need proper solutions. And we need them now.
The IMF estimates suggest the economic damage caused by the this one in one hundred years event is likely to leave the Pacific on a permanently lower development path. The longer our recovery takes, the deeper the scarring becomes. The deeper the scarring, the less ability we will have to service our debt. And it is in everyone’s interests that Pacific nations can service our debt obligations.
The problem we face collectively is not a small problem. We know that we cannot simply erase old loans. We also know that we cannot avoid new debt. Everyone has taken on more debt during the pandemic.
The measures that worked in the past are no longer appropriate for this new global environment. Recovering from the COVID-19 pandemic, while facing a global climate crisis, represents a challenge we have never faced before. Therefore we need to think big.
The Lowy Institute estimates that the Pacific needs a $3.5 billion USD recovery package to get back to our pre-COVID trajectory. If you think that’s a big number, it’s not – in a region with annual GDP of around $60 billion, this is less than 6 per cent of regional GDP – The consequence of not providing this level of recovery support could result in a “lost decade of productivity”. A decade or more of countries trying to regain lost ground. A weaker economic region where the opportunity to trade back to pre-COVID levels will be hampered. A lost decade of people having to remain at poverty levels that were being eradicated. $3.5 billion is a modest sum that could help address the immediate concerns and forestall the medium term demands that debt servicing will place on all our countries.
This recovery package needs to include balanced response measures that focus on both the immediate and the medium term. But first we need urgent and immediate solutions.
We recognise the importance of medium term plans. However, without urgent assistance to first get us back to our pre-COVID path, any medium term assistance will be ineffective. In the meantime, Pacific nations cannot devote our resources to medium term plans without compromising our urgent recovery needs.
We, the Pacific Islands, need debt financing on realistic terms to stimulate our economies and fast track our recovery, and we need to work with our creditors to restructure existing debt. This means allowing our nations with debt to cap debt servicing to levels that are sustainable and affordable to member countries.
Our focus should be on increasing productivity and growing the economy. This means we cannot afford to have 30% of our generated revenue being consumed by debt servicing. Pacific nations need a cap on national debt servicing for the next 5-10 years. For example debt servicing costs of 5 to 10 percent of revenue are significantly more affordable than 15-20 percent. As our economies grow, so too will our ability to increase servicing levels. Every measure to restructure debt to minimize debt servicing needs to be considered as we climb back and participate in the global economy. Appropriately structured loans for both new and existing debt will help to improve our debt sustainability outlook and provide some resilience for future shocks.
To address these needs, our major creditors at the Multilateral Development Banks will need to be less risk-averse with their capital adequacy ratios and their lending. I understand this will face some hurdles within these organisations, but the consequences are greater if we do nothing.
This is the time to innovate to provide real, tangible benefits to the people of the Pacific.
So today I am asking for your help. Together, we can develop urgent solutions to address the Pacific Islands’ unique challenges. Together, we can get the Pacific quickly back on its feet and doing business. Together, we can leave a sustainable economic legacy for our next generation.