Economic growth in the Pacific region is expected to slow to 6.0% in 2012, decelerating further to 4.1% in 2013, while inflation is expected to hold at moderate levels in much of the Pacific, according to the Asian Development Outlook 2012, released today by the Asian Development Bank (ADB).

Economic uncertainty in the eurozone will likely have only modest and indirect effects on Pacific economies, through declining revenue from resource exports, softening of tourism growth, and continuing weak remittances. Domestic factors, including the winding down of growth stimulating infrastructure projects and declining credit growth in most countries, are also behind the growth slowdown in the region.

"Delivering inclusive growth in an uncertain global environment requires Pacific governments focus on maintaining basic public services by investing in vital infrastructure, education and health services, as well as measures to improve government fiscal management and public sector efficiency," said Xianbin Yao, Director-General of ADB's Pacific Department.

Accelerating reforms to the public sector and state-owned enterprises are essential to take the pressure off expenditure demands on Pacific governments, the report notes. Sound fiscal management will become more important as the region's growth moderates, in order to create room to respond to future economic shocks.

This capacity has been eroded in many Pacific islands; debt levels are already above target ceilings in Fiji, Nauru, Samoa, and Tonga. Kiribati has been drawing down its trust fund at an unsustainable rate and Tuvalu cannot rely on its trust fund earnings in the foreseeable future.

The regional slowdown in growth is being driven by a tapering off in the high growth rates in the large resource exporting economies of Papua New Guinea (PNG) and Solomon Islands. Growth in PNG is expected to slow from 10.0% of GDP in 2011 to 8.0% in 2012, while Solomon Islands' growth is projected to decelerate from 9.3% to 6.0% of GDP. This is due to declining resource export revenues and, in the case of PNG, the winding down of construction activity on a key liquefied natural gas project.

Resource-rich Timor-Leste, however, is expected to sustain growth of 10.0% through 2012, supported by an increase in government expenditure, although growth is projected to soften to 8.0% in 2013. Tourism-reliant economies such as Cook Islands, Samoa and Tonga are also forecast to experience accelerated growth through 2012, before seeing this slow in 2013.

After experiencing its ninth consecutive year of expansion in 2011, Vanuatu is going against the moderating trend, with ADB forecasting acceleration of growth to 4.5% in 2012 and 5.0% in 2013. Government efforts to put in place a sound environment for the private sector are showing clear dividends. Vanuatu is on track to achieve a decade of uninterrupted growth. – ADB, 11/04/12.