Cook Islands: COVID-19 Active Response and Economic Support Program

approved

This Program is proposed under the COVID-19 Crisis Recovery Facility (the Facility) of the Bank and will be supported by a Sovereign-backed Loan to the Cook Islands, co-financed with the Asian Development Bank (ADB) and the New Zealand Agency for International Development (NZAID). The ADB co-financing is provided under ADB's Countercyclical Support Facility COVID-19 Pandemic Response Option (CPRO). The Program is designed to promote social protection and economic resilience to prevent long-term damage to the productive capacity, including human capital, of the Cook Islands' economy. The Cook Islands are one of the smallest and most remote nations in the Pacific Ocean. The economy remains heavily dependent on imports. Future growth is hampered by high cost structures, small population and high exposure to climate impacts and disasters. The Cook Islands are among the most tourism-driven economies in the world, with tourism revenues exceeding 60 percent of gross domestic product (GDP). The economy enjoyed sustained growth averaging 5 percent between FY2012 and FY2019 as visitor arrivals rose from 113,000 in 2011 to over 170,000 in 2019. The Cook Islands avoided a COVID-19 outbreak within its borders with the GOCI taking preemptive actions and implementing a quick containment response. In Jan. 2020, the Ministry of Health (the MOH) activated the Health Emergency Response System. From March 2020, all primary healthcare services were relocated away from the main hospitals. On March 11, 2020, the World Health Organization (WHO) declared the COVID-19 pandemic and on March 24, 2020, the GOCI closed the country's borders. Widespread testing, mandatory 14-day quarantine, school closures, domestic travel suspensions and social distancing were enforced during the ensuing lockdown period which began mid-March 2020. The GOCI declared the country COVID-19 free on April 16, 2020. The COVID-19 pandemic is a significant economic threat to the Cook Islands. Due to the shutdown of tourism, the economy is estimated to have contracted by 7 percent in FY20 and projected to further contract by 15.4 percent in FY21, or more if borders remain closed to New Zealand tourists beyond early 2021. The impact on business viability has been severe. The impact on the fiscal position will be significant. In addition to higher expenditures, which will temporarily increase from 36 percent of GDP in FY19 to over 70 percent of GDP in FY21, the collapse in tourism has led to a decline in tax revenues of 7 percent in FY20 and a further expected decline by almost 40 percent in FY21. As a result, the fiscal deficit in FY20 was 2.4 percent of GDP (instead of 1.2 percent planned), and for FY21 it is projected by the ADB to reach 30 percent of GDP or more.