Policy Brief - Managing fiscal volatility in the Pacific

To undertake investments with a long-term horizon in support of the 2030 Agenda for Sustainable Development, countries need not only to have sufficient fiscal resources but also to ensure that such resources are stable and predictable. Shocks such as natural disasters constrain the capacity of Governments to allocate sufficient and predictable flows of funds to implement development priorities over the medium term. Other impediments include the structural features of economies, for example, Pacific island developing countries are generally characterized by small population size and limited land area, remote geographic location and exposure to natural hazards, such as tropical cyclones, floods and droughts. These characteristics of Pacific island developing countries make fiscal management particularly challenging, as national budgets are subject to several sources of volatility due to large fluctuations in GDP, terms of trade, tax and non-tax revenues, procyclical remittances or the negative impact of disasters. Keeping in view the structural features of the Pacific, a context-specific design of fiscal policies, along with effective risk management, can help to improve resilience to shocks, improve economic growth potential and facilitate the implementation of sustainable development priorities. Strengthening fiscal frameworks and building buffers, with revenue volatility smoothed as a precondition, can help manage risks to fiscal sustainability in Pacific island developing economies.

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