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Initial economic impact of Covid-19 on FAS

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WASHINGTON (U.S. Department of the Interior) —  Assistant Secretary for Insular and International Affairs Douglas W. Domenech  announced the publication of three technical notes from the Graduate School USA’s Economic Monitoring and Analysis Program or EconMAP providing an initial assessment of the economic impacts of the novel coronavirus disease 2019 on the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau. 

“While each of the three Freely Associated States continues to remain free of Covid-19cases, the slow down and near termination of transportation across the region has had strong repercussions on their economies,” said Assistant Secretary Domenech. “It is hoped that the data and analyses in these technical notes can help illuminate impacts as FAS leaders draft fiscal measures and implement mitigation strategies to maintain financial and economic stability now and as they emerge from the impacts of Covid-19.”

Funded through the U.S. Department of the Interior’s Office of Insular Affairs, the projections made in the EconMAP technical notes assume that travel will remain limited for all three of the FAS through fiscal year 2021 or until a Covid-19 vaccine is developed. The technical notes also utilize economic modeling techniques that project the economic impact of the Covid-19 pandemic without consideration of any external donor assistance and in the absence of any confirmed domestic cases. Should any of the three FAS report Covid-19 cases and develop community transmission, the projected negative impacts of the pandemic could be compounded.

As laid out in the reports in more detail, the following highlights reflect initial expected Covid-19 impact in each FAS in fiscal years 2020 and 2021:

The Republic of Palau

Heavily dependent on tourism with 20 percent of all its workers employed in the tourism industry, Palau attracted 90,000 foreign visitors in fiscal year 2019, with the tourism industry contributing 20 percent to gross domestic product. Prior to the pandemic, Palau’s fiscal year 2020 first quarter tourism numbers were on track to grow more than 30 percent and estimated to attract 116,000 visitors for the year. Instead, it is now projected that Palau will experience a 51 percent reduction of tourists, with a total expected of about 44,075 visitors, and a further 89 percent reduction in fiscal year 2021. Overall, Palau is expected to experience a 22.3 percent decline in GDP and a loss of 3,128 jobs, primarily in the private sector.

The fiscal deficit for Palau, resulting from the loss of tax revenues such as the payroll tax, gross revenues tax, hotel room tax, and import taxes, is projected to be about $40 million; however, this impact is partially mitigated by Compact grants and trust fund revenues. Construction and infrastructure projects already planned for Palau are anticipated to serve as an important economic stimulus when the cyclical negative impact of Covid-19 on Palau’s economy is being realized.

The Federated States of Micronesia

While the FSM does not enjoy the same level of visitor arrivals as Palau, the majority of the Covid-19 impact will also be felt in the private sector, namely in the transportation and tourism sectors. The hotel and restaurant industries are projected to fall by 46 percent in fiscal year 2020 and then an additional 75 percent in fiscal year 2021, reflecting the absence of tourists and minimal interstate visitors. Similarly, the transportation sector, which includes shipping, port services, aviation, and airport ground handling, is projected to decline by 27 percent in fiscal year 2020 and an additional 14 percent in fiscal year 2021. Notably, the total projected loss to the FSM economy will be the most severe decline in the FSM economy since the start of the amended Compact period in 2004. Ultimately, the FSM is expected to experience a 6.9 percent decline in GDP and a loss of 1,841 jobs, reflecting an 11 percent reduction of employment levels in the FSM compared to fiscal year 2019.

Optimistically, given the FSM’s strong fiscal position at the outset of the Covid-19 pandemic, the application of targeted internal and external assistance, including Federal assistance, to bolster health sector investments, improve resiliency in the health system, provide budgetary resources to offset revenue losses during the pandemic, and to provide direct support to affected individuals and businesses, will be sufficient to offset much of the projected threat to the FSM economy and to its fiscal position going forward.

The Republic of the Marshall Islands

The overall RMI economy relies very little on tourism and visitor arrivals with the hotel and restaurant sector representing only 2.3 percent of GDP. It is, however, more heavily dependent on the public sector, which includes important fisheries activity and sovereign rent receipts. The Marshall Islands Marine Resources Authority is already seeing declines ranging from 30 to 50 percent across aquarium fish exports, the tuna loining plant operations, purse seining operations, and shore-based support to the longline fishing industry. With airline travel to the RMI near complete shutdown, wholesale fuel operations are projected to drop by 45 percent, reflecting the loss of nearly all of its aviation fuel sales. Overall, the RMI is projected experience a 6.9 percent decline in GDP and a loss of 716 jobs.

The projected impact on tax revenues, employment, and job loss coupled with potential significant reductions in fisheries revenues may result in a sizeable fiscal shock in the range of $14 to $20 million, larger than previous fiscal downturns experienced by the RMI. The RMI will benefit significantly from donor assistance that can help mitigate the projected negative impacts on the economy as a whole and to avoid a dangerous deterioration of its fiscal position.

In all three countries, the breadth and depth of economic impact will be substantial in the tourism, transport, and fisheries sectors, again under the current modeling with each country still reporting zero Covid-19 cases. Although Palau is hardest hit due to its tourism-centered economic structure, the FSM and RMI are also deeply affected. The EconMAP team expects to update the technical notes to eventually quantify the full range and impact that internal mitigating efforts and external donor assistance will have in each FAS, eventually providing a full report to better understand the combined impact of assistance and the net impact of the Covid-19 response.

The full and complete Covid-19 technical notes for the FSM, RMI, and Palau can be accessed at http://www.pitiviti.org

EconMAP technical notes are intended to provide a concise and timely analysis of an immediate situation for decision-makers, utilizing currently available data sets and macroeconomic tools developed in close collaboration with stakeholders.

All three FAS governments are working closely with federal partners in the United States government, including the Department of the Interior, to invest in strengthening their health systems and to mitigate the impact on affected individuals and businesses. For a partial list of U.S. Federal assistance to the FAS related to the Covid-19 pandemic, visit: https://www.doi.gov/oia/covid19

Funded through the Office of Insular Affairs’ Technical Assistance Program, EconMAP is managed by the Graduate School USA’s Pacific & Virgin Islands Training Initiatives. EconMAP produces annual economic statistics and economic reviews for the RMI, FSM, and Palau, as well as occasional technical notes on emerging issues.

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