Using budget support to respond rapidly to COVID-19 in Pacific small island developing states (SIDS)

Challenge

Pacific small island developing states (SIDS) are among the smallest and most remote countries in the world. Like other SIDS, they are highly vulnerable to external shocks – not least the economic and fiscal consequences of the COVID-19 pandemic. Their small economies make many SIDS dependent on international trade, external finance and a small number of key sectors, often tourism and fishing. The pandemic and its consequences therefore severely reduced the Pacific SIDS’ public and private revenue, limiting their capacity to tackle the health and economic impacts. This in turn exacerbated their debt burden and threatened the availability of public investment for recovery.

Approach

Prior to the pandemic, New Zealand was already offering budget support to eight of its Pacific priority partner countries, linked to mutually agreed reforms (Fiji, Kiribati, Nauru, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Tuvalu). To respond quickly to the impacts of the COVID-19 pandemic, while protecting the priorities of these ongoing investments, New Zealand’s Ministry of Foreign Affairs and Trade (MFAT) rapidly designed and launched new support packages:

• The emergency fiscal budget support drew from the official development assistance (ODA) budget but was delivered on top of the ongoing reform-linked budget support, while using similar disbursement requirements.

• Fully grant based, this new finance modality drew on several years of experience in delivering reform-linked budget support in partner countries, including familiarity with partner government systems, as well as technical assistance for strengthening those systems.

• Fund allocation was based on partner governments having pandemic response and recovery plans in place.

• Accountability mechanisms involved partner government reporting on the use of funds, assessments by other development co-operation partners, and government financial statements and audits.

Results

• A rapidly delivered COVID-19 package of NZD 50 million, including NZD 40 million in emergency fiscal budget support. This was delivered in March 2020 as the first implications of the pandemic unfolded, making New Zealand among the first development partners to disburse flexible financing. MFAT subsequently delivered NZD 277 million in emergency fiscal budget support (between 2019/20 and 2021/22) as the crisis deepened and the medium-term implications became apparent.

• Partner government-driven COVID-19 response and recovery. Along with financing provided by other development partners, this funding helped to preserve countries’ cash reserves and government revenues, allowing partner governments to finance priority measures such as economic stimulus packages, social protection payments, and support for small businesses, particularly in tourism.

• Stability maintained. State institutions and public services could continue to function.

• Strengthened relationships between MFAT and affected partner countries, despite significant travel restrictions. New Zealand’s timely support helped to avert the worst economic impacts, demonstrated regional solidarity, and laid the basis for recovery in Pacific SIDS.

• Growing use of this modality. In four contexts where New Zealand provided COVID-19 fiscal crisis support (Federated States of Micronesia, Marshall Islands, Palau and Vanuatu), New Zealand did not already have reform-linked budget support programmes in place. New Zealand will also draw on this experience with emergency fiscal budget support, as well as its existing reform-linked budget support, for channelling part of its scaled-up climate financing.