Policy challenge—the burden of debt ------------------
Borrowing to finance development spending has worsened debt positions
in the South Pacific. The resulting financial obligation could limit
rnments’ fiscal flexibility and resulting ability to respond to future
economic shocks. Exchange rate fluctuations could affect countries’
capacity to repay debt involving large loans denominated in foreign
Samoa’s government has borrowed heavily to repair damage wrought
by natural disasters. As a result, the economy’s external debt reached
45.0% of GDP in FY2012 (Figure 3.37.7). This ratio was projected to
increase to 54.0% in FY2013, but it may turn out to be higher because
of the impact of Cyclone Evan on agricultural and tourism output,
and thereby on domestic revenues, which may prompt higher actual
borrowing to finance rehabilitation. For its part, Tonga has borrowed to
finance reconstruction following civil unrest that took place in 2006. Its
total public debt was estimated at 45.0% of GDP in FY2012, above the 40%
maximum recommended by the International Monetary Fund for most
low-income countries (Figure 3.37.8).
Most South Pacific countries plan fiscal consolidation toward reducing
expenditure, improving fiscal balances, and easing public debt burdens.
However, countries at high risk of debt distress must appropriately pace
their fiscal consolidation to avoid disrupting governments’ delivery of
basic services or inducing economic contraction. Consolidation efforts
must be complemented by structural reform to further ease fiscal
pressures and help promote private sector-led economic growth. For
economies receiving budget support, maintaining the implementation of
these measures is central to the joint policy reform matrix agreed with
Samoa Ministry of Finance. 2012. Fiscal strategy statement: Budget 2012/2013. May.International Monetary Fund. 2012.
The line denotes the International Monetary Fund’s recommended maximum for public debt Tonga-Article IV Consultation Staff Report. July. ( http://www.adb.org/countries/tonga/main)
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