Already among the most remote countries on earth, Pacific island states saw their vital economic links weakened in recent months with the evaporation of tourism, severe disruptions to international trade, and a reduction in remittances. For these countries, the COVID-19 pandemic may cut deeper than even some of the worst cyclones from years past.

“Many island economies in the region are already reeling from the sharp collapse of tourism that followed on the heels of the CoViD-19 pandemic,” says the IMF in a new article that looks at how Pacific Islands economies are threatened by CoViD-19.

Tourism receipts are estimated to account for up to 20-30 percent of previous economic activity in countries like Samoa and Tonga.

At the same time globally, shrinking employment and repatriation of guest workers are expected to lead to a fall in remittances of around 20 percent. Remittances average about 10 percent of GDP in the Pacific islands (excluding Papua New Guinea) and exceed 40 percent in Tonga and about 15 percent in Samoa and the Marshall Islands.

The report says that many of the islands were quick to react to the spread of the coronavirus, instituting travel restrictions and enhanced screening as early as January in an effort to keep the virus at bay—particularly for Samoa, which had just endured a devastating measles outbreak in late 2019. But with tourists from countries like Australia, New Zealand, and others in Asia unable or unwilling to travel due to the border controls and travel restrictions, hotels and resorts on the islands are effectively empty, forcing layoffs and closures.

The economic fallout goes beyond tourism

“Globally, shrinking employment and repatriation of guest workers are expected to lead to a fall in remittances of around 20 percent. Remittances average about 10 percent of GDP in the Pacific islands (excluding Papua New Guinea) and exceed 40 percent in Tonga and about 15 percent in Samoa and the Marshall Islands.”

Drops in global demand and commodity prices affects commodity exporters such as Papua New Guinea through a loss in exports and revenue. However, “for oil-importing countries in the region, lower oil prices will provide a buffer to the shock.”

The report says that previous experience would suggest a rebound in commodity prices, tourism, and remittances after the COVID-19 crisis subsides. “But the pandemic may inflict deeper wounds than even the worst natural disaster. Regional airlines—which are the essential conduit for tourism to these far-flung island economies—are facing significant damage from the prolonged loss of revenue. The potential for significant revenue losses and reduced operations, together with a chilling effect on global travel, could mean diminished tourism even after the virus recedes.”

The report concludes that most countries in the region have limited room to counter the economic impact of the pandemic through additional spending. Public debt among the Pacific islands, on average, has already risen since the end of the global financial crisis. Now, some countries have announced fiscal packages that include, for instance, additional health spending, temporary cash transfers for displaced workers, and credit support to small and medium-sized firms and affected sectors.

It recommends that “To safeguard financial stability, supervisors should intensify monitoring and increase the reporting frequency of financial institutions. For Pacific island countries an important consideration will be to identify financial sector risks, including exposures to tourism-related activities, and conduct stress testing that ensures financial institutions are prepared to withstand shocks.”

The IMF works closely with the World Bank, Asican Development Bank and regional partners to assist countries in the Pacific overcome the challenges of the current crisis and position themselves for economic recovery. “The doubling of the IMF’s emergency financing capacity means that up to $643 million could be made available immediately to the Pacific island economies.

“Solomon Islands has already received debt relief under the Catastrophe Containment and Relief Trust. And a request for emergency financial support by Samoa under the IMF’s Rapid Credit Facility has now been approved. Emergency assistance for additional Pacific island countries will be considered by the IMF’s Executive Board in the coming weeks.”

Pacific Islands Threatened by COVID-19 [2]