UNESCAP – 2017
The SAMOA Pathway, the Sustainable Development Goals (SDGs) and the 2015 Paris
Agreement to tackle climate change all frame Pacific island countries’ sustainable development efforts over the next 15 years.
It is widely acknowledged that implementing these important international agreements
will require unprecedented domestic and international investments in areas such as poverty reduction, health and education, infrastructure development, peace and security, environmental protection and measures to tackle climate change. The capacity to deploy every dollar effectively will also be needed, as well as advances in technology.
Mobilizing adequate financing for sustainable development will be a challenge for all
countries, but will be particularly difficult for Pacific Small Island Developing States
(PSIDS) where financing needs for sustainable, climate-sensitive development are estimated to be among the highest in the world when measured as a proportion of national output. They are also set to rise with the predicted impacts of climate change,
which is expected to increase the frequency and severity of extreme weather events in
the Pacific. Indeed, for some Pacific island countries, climate change poses an existential
threat. Pacific SIDS will need to secure more finance to not only invest in long-term
development, but to address sudden major shocks such as extreme weather events,
and to plan for and adapt to climate change.
While Pacific SIDS and their development partners should not underestimate the scale
of the challenges ahead, there is also much cause for optimism. There is much diversity
across the Pacific, but many countries have made important strides over recent years
to reduce poverty, protect their natural environments and mobilize more revenues for
development – for example through fisheries, tourism and the extractive industries.
Overseas investment has increased in many countries and Pacific SIDS can – on the
whole – count on committed development aid partners for financial and technical
support. South South cooperation has also expanded.
Further increases in external finance can also be expected over the next few years from
a variety of sources. These include: climate finance, substantial increases from several
multilateral development banks, continued increases in South-South Cooperation, and Foreign Direct Investment Flows (FDI), especially from Asia. Innovative development
finance actors and instruments have also emerged and become more prominent over recent years. These developments offer opportunities to leverage new and additional
sources of development finance and are complemented by Pacific SIDS’ ongoing
efforts to strengthen the effectiveness and impact of domestic and external financing
flows, through processes such as the Forum Compact on Strengthening Development
Coordination in the Pacific, an initiative of the Pacific Islands Forum Secretariat (PIFS).
Challenges remain however. Climate finance remains complex to access and many Pacific
SIDS remain heavily reliant on accredited intermediaries to submit applications for resources. The effectiveness of public expenditures remains mixed, with poor results
especially evident in outer islands and rural areas. While the increase in resources from some multilateral financial institutions is welcome, there is also a risk that in the
scramble to deploy these increased resources, projects will need to be found quickly,
will be ill defined and not contribute substantively to national sustainable development
needs. The concessionality of this finance will also be key to ensure that debt remains sustainable in small vulnerable economies. There is also a lack of information and knowledge about many new innovative finance instruments which may be beneficial
to the Pacific. Pacific SIDS also remain extremely vulnerable to economic and environmental shocks and often lack the resources and capacities to effectively plan for and respond to disasters.
UNDP’s report examines how Pacific SIDS – at the frontline of climate change – can respond to a dynamic development finance landscape and most effectively plan for expected increases in development finance. It explores what financing for development
currently looks like in the Pacific and analyzes the steps countries have already taken to
mobilize different sources of development finance – domestic and external, public and
private – and to strengthen the effectiveness of public expenditures. It asks whether
there are opportunities to leverage innovative finance. Are there lessons learned from
other countries, in particular other Small Island Developing States (SIDS)? How can
PSIDS and their development partners make sure that future increases in finance can
be absorbed and made truly transformative, and are supplied on terms and conditions
that are appropriate for small vulnerable economies?
The report covers 15 Pacific island countries, specifically: the Cook Islands, Fiji, Kiribati,
the Republic of the Marshall Islands, the Federated States of Micronesia, Nauru, Niue,
Papua New Guinea, Palau, Samoa, the Solomon Islands, Timor-Leste, Tonga, Tuvalu and
It is informed in part by the results of a questionnaire survey issued to Pacific SIDS in
2016 and 2017. The survey, carried out jointly by UNDP and the Pacific Islands Forum
Secretariat, sought to explore Pacific SIDS’ experiences with various forms of finance,
understand successes and challenges, and identify countries’ priorities for the future.
It also asked them to articulate their key messages on development finance to the
Financing for development in the Pacific: a snapshot
UNDP’s survey on development finance in the Pacific revealed that while all Pacific
SIDS have some form of national sustainable development strategy or plan in place,
only some have elaborated a financing strategy linked to that plan. Where financing
strategies do exist, several key themes and priorities emerge. The survey showed for
example that Pacific island countries attach a high level of priority to increasing both
Official Development Assistance (ODA) and financing for climate change adaptation,
as well as attracting more foreign direct investment. Other major priorities include
deepening South-South Cooperation, more effective domestic resource mobilization
and exploring innovative finance options.
Pacific SIDS have in many cases already taken a number of policy measures to realize
these priorities. These include, inter alia: investing in technical capacity to access vertical
funds (e.g. climate funds); developing sector specific plans to attract resources and
guide the allocation of domestic and external funds; investing in public financial management systems and strengthening the effectiveness of public expenditures; better
alignment of national development plans with national budgets and foreign aid; and
implementing credit guarantee schemes to support local private sector development.
While several countries reported successes across several of these areas (e.g. national
budgets and overseas aid are now more aligned with national development priorities,
more aid is now delivered on-budget and public financial management systems have
in many cases been strengthened), they also described continued challenges. These
include, in particular, limited options to expand domestic resources, technical and administrative capacity constraints and a lack of understanding of new and innovative
financing instruments. These challenges are compounded by perceived complex application and reporting procedures for different sources of official bilateral and multilateral finance, especially climate finance.
In addition to carrying out the country level survey, UNDP’s report analyzed key data
on development finance in the Pacific. The key trends are summarized below:
Public revenue and domestic resource mobilization in the Pacific
Domestic resources will be critical for Pacific SIDS to achieve the SDGs and many have made progress to mobilize more domestic resources over recent years. The relatively larger economies – Fiji, Papua New Guinea, the Solomon Islands – have a comparatively broader economic base, land-based natural resources (e.g. oil, minerals and timber) and are able to mobilize independent sources of financing. Fiji has also managed to achieve some successes in export diversification.
Fishing license revenues have significantly expanded incomes in several Pacific SIDS over
recent years (up from US$ 100 million to US$ 430 million over the past five years). The
World Bank moreover estimates that fisheries could generate more than US$ 345 million
per year in additional revenue by 2040 and significantly boost incomes in Kiribati, Tuvalu
Revenues from tourism have also expanded incomes and are particularly important in several Pacific SIDS, such as Fiji, Palau, Samoa and Vanuatu. Innovative fees or taxes associated with tourism have also been tried in a few countries. The most notable is Palau’s “Green Fee”, a US$ 50 charge levied on overseas visitors to fund national conservations efforts. It has thus far raised over US$ 3 million in revenues. Further tourism expansion could mobilize an additional US$ 1.87 billion in revenue and create an additional 127,000 jobs in Pacific SIDS by 2040, according to World Bank estimates. Some Pacific SIDS are now exploring the potential of deep-sea mining as a potential source of sustainable revenue in the future, though caution is urged as to possible negative environmental and social impacts.
PSIDS continue to have particular domestic resource mobilization constraints however.
Especially in the Pacific microstates, independent financing options are much more
limited and a high degree of dependency on external aid persists. The report points to
considerable revenue volatility in Pacific SIDS, especially for those countries that are dependent on commodity exports.
Challenges in domestic resource mobilization are compounded by the problem of socalled
illicit outflows of capital. Estimates by Global Financial Integrity put the amount lost to the practice of trade mis-invoicing at US$ US$ 224.7 million per year in Vanuatu and US$ 145.4 million per year in Samoa for example.
Many Pacific SIDS also have high recurrent costs in their national budgets, which tilts
public expenditure towards recurrent outlays rather than capital investments. Capital
spending in Pacific SIDS has averaged less than 20 percent of government spending over
the last decade compared to 32 percent in low-income countries as a whole. The weak
effectiveness of public expenditure, especially in rural areas and outer islands, remains a
continued challenge. Boosting the effectiveness and impact of public finance, especially
in key public policy areas such as education, health, infrastructure development and adaptation to climate change will be critical for SDG achievement in the Pacific.
Sovereign Wealth Funds in the Pacific
Sovereign Funds (SFs) are another potentially important source of financing for sustainable development in the Pacific. It is estimated that over US$ 7 billion is held by the region’s superannuation and trust funds (Timor-Leste excluded). SFs in the Pacific are among the longest established in the world and are often the largest single asset owner and investor. For example, Timor-Leste’s Petroleum Fund is the largest Sovereign Wealth Fund in Pacific SIDS. At the end of 2015, its assets were US$ 16.2 billion. The income stream from these funds can be a large part of fiscal revenues.
Most SFs in the Pacific do not have an explicit economic development purpose and there are few macroeconomic stabilization funds despite the considerable levels of macroeconomic instability, as well as their exposure to disaster risks. Yet there are also
high opportunity costs associated with building fiscal buffers in a context where development needs are high and capital expenditures are low.
UNDP’s survey indicated considerable interest in the Pacific in exploring how the value of National Sovereign and Trust Funds can be better captured to support national sustainable development priorities. The Pacific Islands Forum Secretariat (PIFS) proposes
a ‘Regional Finance Facility for the Pacific’ as one way to mobilize this wealth in support
of social and economic development. According to the proposal, the creation of a regional bond market would allow countries with excess liquidity or investible funds (revenue windfalls, savings etc.) to make them available to neighbouring countries for development initiatives. While there is there is keen interest in carrying out further
analytical work as to the proposal’s feasibility, the lack of experience of many Pacific
countries with complex financial instruments as well as the lack of investible projects
in some countries present ongoing challenges.
Official Financial Flows to the Pacific
Concessional financial flows from official donors are key sources of external finance
for most Pacific SIDS and all countries are recipients of such flows. The total amount
of Official Development Assistance (ODA) received by Pacific SIDS nearly doubled in
volume terms between 2000 and 2012, from US$ 915 million to almost US$ 2 billion.
In 2014, ODA declined slightly to US$ 1.69 billion.
Dependency on official finance varies significantly amongst countries however, and
despite overall increases in official flows to the Pacific over the last 15 years, they constitute a decreasing proportion of overall financial resources available to Pacific SIDS
for sustainable development. Between 2000 and 2014, ODA as percentage of Pacific
SIDS’ GDP declined from 12.5 percent to 6.3 percent. This partly reflects improvements
in the development levels and income status of many countries, as well as increases
in other external financial flows, such as foreign direct investment and non-OECD DAC
The picture however remains mixed and some countries remain heavily aid dependent.
In Kiribati and the Federated States of Micronesia for example, aid totalled almost
40 percent and 31 percent of GDP respectively in 2015. Pacific SIDS as a whole register
ODA per capita levels of US$ 154 per person, which is higher than Caribbean small
states at US$ 55 per capita.
Most ODA continues to be allocated to the social sectors (47 percent in 2015), though
the share allocated to infrastructure investments has increased in recent years (17 percent for the same year) and also the environment (16 percent in 2015). Priorities such as competitiveness, economic infrastructure and export diversification have become
more prominent with both Pacific SIDS and their development partners. Financing for
disaster preparedness and response has also picked up significantly over recent years.
While the donor base is relatively narrow in Pacific SIDS, it is a committed one. Progress
has been made to deliver more aid on-budget, to align aid with national development
plans and to improve aid management and coordination. The challenge however
is that while the largest development partners deliver the majority of finance, the
remainder is delivered via a multitude of small often uncoordinated projects which
stretches countries’ administrative capacities, exacerbates fragmentation and reduces
effectiveness. For some countries, ‘projectized’ aid is the only aid received.
Important rises in several sources of official finance are predicted for Pacific SIDS over
the next five years. Pacific SIDS received about US$ 2.5 billion in total official concessional financial flows from bilateral and multilateral development partners combined in 2015. Over the next five years, this could increase to as much as US$ 3.5 billion annually. These increases are expected from: (i) the Asian Development Bank (from about US$ 400 million per year to up to US$ 750/800 million by 2020); (ii) the World Bank (under IDA 18 resource allocations will increase from about US$ 200 million per year to up to US$ 450 million annually by 2020); (iii) the Green Climate Fund (GCF), which could provide up to US$ 200 million annually in financing to the Pacific. South-South Cooperation is also on the rise in the Pacific. Between 2006 and 2015, China provided US$1,78 billion in aid to the nine Pacific small island countries with which it has diplomatic relations. China has become the fourth largest donor to the Pacific. As a result, the capacity of Pacific SIDS to absorb and use this financing in effective and transformative ways will be critical. The level of concessionality associated with this finance is also key to maintain debt sustainability in small vulnerable economies.
Climate finance in the Pacific
Climate change represents an existential threat to many Pacific island countries and
they urgently need to secure increased finance to adapt to its impacts. For many, finance
for climate change adaptation and mitigation has (positively) increased over
recent years. The flow of climate finance to the Pacific totalled US$ 748 million committed for the 15 PSIDS from 2010-2014. Recently, a couple of Pacific island countries (Fiji, Tuvalu) have leveraged large amounts of funding from the Green Climate Fund. Most has been in the form of grants with just under 60 percent allocated to adaptation, 36 percent to mitigation and 5 percent for both. Climate finance is complemented by new innovative insurance mechanisms such as the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) to support countries to manage environmental shocks.
While a few Pacific countries are building capacities to access climate finance ‘directly’
from bilateral and multilateral climate funds (e.g. the Cook Islands), most remain heavily
dependent on accredited institutions and technical assistance to develop project
proposals and access funds. Pacific SIDS face a complex web of eligibilities and variable
application requirements that can be difficult to fulfill (due to limited technical
and administrative capacities and/or co-financing requirements), and they often lack
expertise and capacity to develop high-quality “bankable” projects for investment. National public financial management systems and institutions also vary in their strength
Pacific SIDS are strategically well-placed to access more climate resources in the future
but will continue to remain heavily dependent on accredited entities to support
them to access it. And while climate finance is on the rise, the share of loans in climate
finance is expected to rise in the future, especially for the higher-income Pacific countries. Pacific SIDS are keen to emphasize that this finance should be in the form of grants, not loans.
Mobilizing domestic and international private finance for development in the Pacific
Domestic revenues and official external finance are both critical to support Pacific SIDS
to meet the SDGs. However, it is widely acknowledged that these sources alone will
be insufficient and that much more private finance – from both domestic and external
sources – will need to be mobilized by Pacific SIDS.
In most Pacific SIDS, domestic financial systems that can mobilize domestic savings for
sustainable development are underdeveloped. The development of the local private
sector, in particular, is dependent on its ability to secure appropriate finance to start
and expand businesses. Access to affordable credit is low, although there have been
some improvements in financial inclusion over recent years due to initiatives such as
the Pacific Island Financial Inclusion Programme (PFIP) which has now reached over
1.5 million unbanked citizens in the Pacific. Guarantee schemes for small and medium-
sized enterprises have also enjoyed some successes in increasing access to finance
for some target businesses/sectors though most have been relatively small (e.g. Samoa).
Private insurance markets are also underdeveloped.
Attracting FDI is a key priority for most Pacific SIDS. Net FDI inflows, have increased
since from US$ 258 million in 2000 to US$ 629.8 million by 2015 and are an important source of external private finance for long-term investment in physical capital, job
creation, skills and technology transfer. FDI inflows have increased in particular from
Asia and there have been some increases in inter-Pacific FDI. Most is concentrated in
the extractive sectors (e.g. oil, minerals, palm oil, timber and fisheries), but it has also
diversified into construction and services, such as real estate, the financial sector, business service, retail, and infrastructure. FDI flows exhibit considerable volatility in Pacific SIDS and there are significant revenue leakages associated with it, due in large part to generous tax incentives. The ‘enabling environment’ for FDI in the Pacific (e.g. weak infrastructure, communications and transportation links, political instability, access to land etc.) remain some of the most important constraints to FDI reported by investors
to the Pacific.
Remittances are also an important source of household income and foreign exchange
in some countries (e.g. Tonga), and remittances amounted to on average 7.6 percent
of GDP in 2016, an amount higher than for the Caribbean (at 5.5 percent of GDP). Remittances may be even higher due to unrecorded transfers. This has prompted some
countries to take an interest in initiatives that incentivize diaspora communities to invest
a proportion of their wealth ‘back home’. The recent withdrawal of correspondent banking relationships is however a new challenge for the Pacific and may further increase
already high remittance transfer costs as well as undermine recent progress in financial inclusion.
Private Development Assistance (PDA) and impact investment are growth areas internationally and are also on the rise in the Pacific, though finance from these sources
remains small overall (and data is weak). According to SDGfunders.org, between 2002
and 2013, a total of US$ 59.34 million in PDA was channelled from external sources to
Pacific SIDS for development-related activities. Most has focused on the environment,
health and disaster relief. Little to none is channeled via national budgets and instead
is distributed via NGOs, religious organizations and other entities.
Pacific SIDS and debt sustainability
Debt financing will make an important contribution to financing the SDGs in Pacific
SIDS. In the Pacific SIDS, public debt ratios remain fairly low overall and averaged 37
percent of GDP in 2015. Most of this is concessional debt from official lenders. Pacific
SIDS are moreover much less severely indebted than their counterparts in the Caribbean
where public debt ratios averaged 71 percent in 2015.
Nevertheless, debt risks remain elevated. Out of 10 Pacific countries, the IMF categorizes
four as at high risk of debt distress, four at moderate risk and just two at lowrisk due to narrow export bases and a large exposure to economic and environmental shocks. The rising share of loans in ODA, especially for higher-income countries, may also increase some Pacific SIDS’ debt burdens in the future while some South-South Cooperation providers are also supplying more loan financing to some PSIDS. This is combined with increases in loan finance from some multilateral lenders in the future.
Debt management capacities have improved in some Pacific SIDS but PSIDS will still be
constrained in the amount of debt they can take on, and the level of concessionality of
loan financing will be an important determinant of future debt sustainability.
UNDP’s survey showed that innovative finance modalities, such as debt-for-nature
swaps which have been implemented by some small islands (such as the Seychelles), and are now under active discussion in a few Pacific SIDS (e.g. Palau) are of broader
interest to the region as a tool to increase financing for environmental interventions.
Selected ways forward and recommendations
When it comes to financing for sustainable development, Pacific SIDS share many commonalities, such as high capital investment needs, narrow revenue bases, an underdeveloped domestic private sector and dependence on development aid. But UNDP’s study also showed that the picture varies considerably from one Pacific island country to the next – from dependence on ODA or remittances, to the ability to attract private investment to the effectiveness of public expenditure. This means that domestic and external resource mobilization strategies – and the institutional reforms and public
policies that will be needed to leverage and effectively use various sources of finance
– will vary from one country to the next and there will be no ‘one size fits all’ strategy.
Despite these differences, a number of key themes have emerged from this study’s
analysis and some possible ways forward can be identified – for both Pacific SIDS and
their development partners.
Domestic resource mobilization
There are opportunities in many Pacific SIDS to expand domestic resource mobilization over the next few years but tax reforms always need to be tailored to a specific country’s circumstances. Substantial additional domestic revenues are possible from fisheries, tourism, natural resource extraction, and (possibly) deep-sea mining. ‘Green’ fees or other innovative fees levied on the tourism sector can also provide complementary and sustainable sources of finance, especially as tourist numbers are predicted to rise with a positive impact on public revenues.
Progress is needed in many countries to further expand tax coverage (with a possible
focus on larger taxpayers) to better harness revenues from natural resource extraction,
redirect state subsidies to activities with positive externalities, strengthen administrative capacities and improve the efficiency of public expenditures overall.
Improved stewardship of natural resource income in particular will be critical. Reform
of state-owned-enterprises has also had a positive impact on public finances in some
countries and should be continued. To strengthen the effectiveness and impact of public finance, tools such as UNDP’s “Development Finance Assessment” (DFA) can be useful. The DFA helps countries to understand their current financing landscape, look at how different flows are currently managed and their effectiveness/impact, and identify opportunities for reform.
In some countries, tax exemptions and incentives result in considerable losses in revenues from overseas investors yet it is not always clear that they are effective in attracting investment. A focus on other factors such as the quality of infrastructure, and macroeconomic and political stability may be more influential in the long-run. To reduce
illicit outflows of capital, initiatives such as the joint OECD-UNDP programme, ‘Tax Inspectors Without Borders’ (TIWB) may be useful to help increase domestic resources.
More research is also recommended into how the wealth invested in Sovereign Wealth
and Trust Funds can be more effectively leveraged, including the proposal for “Regional
Financing Facility for the Pacific”. This should seek to understand how individual
countries will be impacted and in particular who would stand to benefit (lose) the
most from the proposal and propose how any undesired impacts might be mitigated
Official financial flows
Even with improved domestic resource mobilization, concessional development assistance will remain critical to most Pacific SIDS to enable them to not only deliver adequate public services, but to invest in critical infrastructure and to plan for and adapt to climate change. New increases in concessional finance from some multilateral development banks, climate funds and also South-South Cooperation providers are welcome and will provide much-needed additional financing for capital investments in the Pacific. UNDP’s study underscores that this finance must be as concessional as possible so as to preserve debt sustainability in a context where debt vulnerabilities remain elevated.
PSIDS will need to plan early for expected increases in financing in order to identify priority investments, ensure projects are aligned with national development plans, and secure the technical advice and implementation support they need. This is critical since the impacts of ‘failure’ can be ‘amplified’ in the Pacific due to countries’ small size.
PSIDS will need coordinated donor support to develop a ‘bankable’ project pipeline.
Official finance can be used more strategically to leverage or ‘crowd-in’ finance from
the private sector, especially in the area of infrastructure, or in other sectors where
there are expected economic returns. Projects supported with blended finance arrangements for example could be implemented and/or scaled-up in some countries in the Pacific. Areas that could be explored will vary from country to country but could include, inter alia: maritime infrastructure investments (e.g. ports, harbours, shipping and fisheries); improved water and sanitation facilities; development of the local private sector; aquaculture; renewable energy; improvements to national road networks and improved climate resilience.
Access to, and eligibility for, concessional finance continues to be a major issue for all SIDS. The study urges the international community to acknowledge that income per capita is an inadequate – and indeed sometimes misleading – measure of a country’s
overall development level, its economic and environmental vulnerabilities and its financing needs. The international dialogue on eligibility criteria for concessional finance – especially for middle-income SIDS – must continue with a specific focus on how vulnerability can be used to inform concessionality levels. The report invites Pacific SIDS and their development partners to take into consideration the work being prepared by a working group co-chaired by UNDP and the World Bank on small states’ access to development finance.
Pacific SIDS indicated a clear preference for more resources to be channelled via budget
support and multi-year arrangements. Greater use of sector wide approaches and direct budget support could help to build the longer-term capacities of PSIDS’ administrations
as well as support more resilient core expenditure, and strengthen country ownership. It can also help to reduce fragmentation. Pacific SIDS need to continue to improve lanning, budgeting, public financial and aid management to build further trust and confidence in their governance of concessional finance. Donors should consider further ways of pooling resources to reduce countries’ reliance on a single source of concessional finance and improve predictability. This can also help to reduce fragmentation and enhance coordination amongst development partners in a context of overall increasing resources.
Accessing climate finance
PSIDS are strategically well-placed to leverage additional climate finance from the international community and some progress has been made. Application processes remain complex however and other challenges remain, in particular weak technical capacity. Pacific SIDS and their development partners must continue to advocate for special access to climate finance resources for the Pacific, for procedures to be simplified, and continue to strengthen domestic capacities in this area. Development partners have a role to play in supporting Pacific SIDS to build capacities to access climate finance on their own.
Climate finance funds often look favorably on a multi-partner proposal. Pacific SIDS must therefore be proactive in developing partnerships with accredited entities and supportive bilateral donors to submit timely and high-quality project proposals since those entities can provide the appropriate technical advice and support. Countries that have successfully accessed climate finance to date have invested in forming these
Pacific SIDS could also explore the potential for joint-country project proposals to access
GCF and other climate resources as a way to support improved Pacific integration, share technical expertise and personnel, and lower costs.
Pacific SIDS can learn from those SIDS that have enjoyed recent successes in accessing
climate finance – both within and outside the Pacific. The Pacific South-South mentorship/ attachment programme recently established by PIFS in the area of public financial management could be potentially expanded to the climate finance arena to build
domestic skills to navigate the complex architecture of climate finance funds and application processes. The World Bank’s Small States Forum could also be used to foster
these types of partnerships, possibly with other SIDS outside the Pacific.
Leveraging private finance in the Pacific
Some Pacific island countries have been successful in leveraging increased FDI flows and further increases are expected, e.g. in the fisheries and tourism sectors. Further increases in FDI are also anticipated from Asia. Yet the impact of FDI on development in the Pacific is often weak. Limited absorptive capacities, concentration of FDI in one or two sectors and poor business environments are some of the factors that reduce the positive overall impact of FDI on Pacific economies.
Pacific SIDS need to focus carefully on the quality and impact of FDI and in particular
its alignment with the SDGs. This includes evaluating FDI next to key indicators, such
as its impact on job creation, environmental impact, and its contribution to exports and fiscal revenues, amongst other indicators. Pacific SIDS should in many cases seek to leverage FDI to move up the value chain, i.e. to build a low-carbon, environmentally sustainable economy (e.g. through investments in renewable energy technology, water
purification, etc.); build key infrastructure (ICT, roads, transport, water, etc.); and a knowledge based economy that provides high quality employment opportunities.
Pacific island countries also need to focus on strengthening the enabling environment
for business and on overcoming some of the barriers to investment, such as burdensome
and complex administrative procedures, weak infrastructure (and in particular poor transportation links), political instability and a poorly trained local workforce. Tax and import duty exemptions and other tax incentive schemes for overseas investors are prevalent in the Pacific. Yet in many cases, they are leading to considerable revenue losses. In many countries, a case can be made to review investor incentives. Concessions for international investors is an area that may also warrant a region-wide response.
Local private sector development is also identified as a key priority for many PSIDS, yet many continue to struggle despite the successes of some credit guarantee schemes and financial inclusion initiatives. Many Pacific island countries see merit in further improving and expanding credit guarantee schemes for small and medium-sized enterprises which are most useful when accompanied by business advisory support and technical assistance in financial literacy and education. Equity investment in Pacific SMEs could also be further explored and is relatively uncommon at present. This area may also be of particular interest to impact investors.
There is also a high level of interest in innovative insurance schemes as a tool to strengthen the local private sector, reduce risk, and to build resilience to shocks and
stresses of various kinds (such as weather-related risks, particularly cyclones, typhoons,
floods and drought). Crop, livestock and/or fisheries insurance should be further explored
in the Pacific and initiatives such as the Caribbean Ocean and Aquaculture Sustainability
Facility (COAST) may be of interest. COAST proposes an innovative insurance mechanism to promote the resilience of the small-scale fisheries sector in the Caribbean against increasing climate-change related disaster risk.
Recent challenges relating to the withdrawal of correspondent banking relationships
in some small states across the Pacific could undermine recent progress on financial
inclusion in the Pacific, as well as further raise the costs of remittance transfers. This
underscores the importance of development partners continuing to invest in lowering
the costs of remittance transfers, through for example targeted advocacy with banks
and financial awareness campaigns.
There is also a keen interest in exploring the potential of innovative finance schemes in the Pacific as a means to source new and additional funds, especially for environmental interventions. Innovative development finance modalities, such as schemes that target the diaspora, debt-for-nature swaps and impact investment represent additional and complementary sources of development finance that can be further explored by the Pacific. The emerging concept of the ‘blue economy’ in particular could be used to leverage impact investment (and other private sector capital) in initiatives that support e.g. sustainable fisheries management and sustainable aquaculture.
Schemes to incentivize the diaspora to invest ‘back home’ could also be considered, such as ‘SDG Funds’ and initiatives that aim to connect the diaspora with local businesses and investment opportunities in their countries of origin.
Information on the potential of many so-called ‘innovative finance’ schemes is weak in
the Pacific, in particular how to design and implement different financing mechanisms
and where to source technical expertise. Moreover, it should be noted that innovative
finance schemes typically represent complementary sources of development finance
and are unlikely, in the main, to provide finance at any real scale. Development partners
have a key role to work with national authorities to identify innovative finance ideas with promise, facilitate connections with relevant technical experts and impact investment communities, devise project proposals and provide co-financing/guarantees in some cases. UNDP’s ‘Financing Solutions for Sustainable Development’ provides information on a range of innovative finance mechanisms (such as social impact bonds, debt-for-nature swaps, environmental trust funds, payment for ecosystems services, environmental levies, impact investment and more), shows how they have been used, outlines their pros and cons. This platform may be of interest to Pacific SIDS.
Preserving debt sustainability
Increased financing from some multilateral and bilateral development partners, combined
with the use of blended finance arrangements and increased South-South financing imply that loan financing will rise for many Pacific island countries in the future, especially the higher-income economies. Despite overall low debt ratios in many Pacific island countries, debt vulnerabilities remain high. This finance must therefore be extended on highly concessional terms so as to minimize future risks of debt distress.
Innovative lending instruments such as countercyclical loans implemented by the French Development Agency and other variations on state contingent debt instruments – which see debt service fall when a major shock occurs – may be useful to the Pacific to help reduce macroeconomic risks. More limited variations include ‘hurricane’ or ‘cyclone’ clauses in loan contracts. The benefits would be more widely felt the larger the number of official finance providers extend such loans. Development partners should therefore explore the use of such innovative debt instruments to all Small Island Developing States.
Given the interest shown by Pacific SIDS in debt-for-nature swaps to help fund local
conservation efforts, more work could be undertaken by Pacific SIDS and their development partners to look at the potential of debt swaps for the Pacific – even where
debts are not considered technically unsustainable. Thus far, political support for debt
swaps has remained muted. Yet they could help mobilize additional finance for critical
UNDP’s report sets-out how Pacific SIDS (and their development partners) can maximize
the opportunities presented by a dynamic and changing development financing landscape. The key challenge is now to put some of these ideas into practice. This is
essential if we are to remain true to the SDG promise to “leave no-one behind”.
Micronesia Fed. Sts.
Papua New Guinea