Financial Crime World

Cook Islands: Fiscal Program Aims to Smooth Expenditure Management

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The Cook Islands government has launched a new fiscal program aimed at improving public administration capacity and debt sustainability as the country continues its transition towards high-income status.

Improving Public Administration Capacity

According to the program, the Cook Islands needs to focus on increasing its public administration capacity to ensure effective management of its finances. Despite having a per-capita income level comparable to higher-income countries, the country’s remote location, small size, and shortage of skilled labor continue to constrain its administrative capacity.

  • To address this issue, the government plans to initiate targeted training programs aided by international financial institutions and exchanges with advanced country partners.
  • Raising government salaries to reflect increases in living costs and attracting highly skilled Cook Islanders from overseas are key priorities.

Debt Sustainability: A Concern

The Cook Islands has made significant progress in reducing its debt-to-GDP ratio from 140% in the 1990s to around 15% in 2007. However, the global financial crisis led to a loosening of fiscal rules and restrictions, resulting in an increase in gross debt to 19% of GDP in FY19.

  • As of June 2020, the country’s overall public sector gross debt stood at NZ$110.8 million, with 49% direct crown debt and 51% loans held on behalf of state-owned enterprises.
  • The largest proportion of debt is held by the Asian Development Bank (74%) and the Export/Import Bank of China (24%).

Under a baseline scenario, real growth is expected to average around 4%, and inflation to remain below 2%. Fiscal policy is projected to go from a primary deficit of 1% of GDP in 2020 to a surplus of 1.4% in 2023.

However, alternative scenarios suggest that there are vulnerabilities in the debt structure, and should downside risks materialize, the debt ratio could rise rapidly to unsustainable levels. A fan chart based on historical averages, variances, and covariances of relevant variables presents a band of possible outcomes under the baseline from 11% to 24%.

Fiscal Responsibility Key to Sustainable Growth

The Cook Islands government has emphasized the importance of fiscal responsibility in ensuring debt sustainability. The country’s unique relationship with New Zealand has provided significant technical assistance and education, while donors such as the Pacific Financial Technical Assistance Centre (PFTAC) have focused on public financial management.

As the country continues its transition towards high-income status, it is crucial that it maintains a strong focus on improving its public administration capacity and debt sustainability. The new fiscal program aims to achieve this by implementing targeted training programs, raising government salaries, and ensuring effective management of public finances.