Cook Islands: Country and Foreign Investment
Economy and Currency
Both the New Zealand dollar and the local Cook Islands currency are legal tender on the Islands, with an exchange rate of around USD1 = NZD1.23 (November 2012).
The Cook Islands geographic isolation and their lack of natural resources have hindered the Islands' economic development. Most goods have to be imported and there is little to export in return: in the first quarter of 2012, exports stood at around NZD0.7mn against imports of approximately NZD29.9mn. Remittances from emigrants bridge only some of the gap and there is substantial external debt. The balance of trade for March 2012 quarter stood at NZD29.3mn. This had improved by NZD7.6mn over the previous quarter.
Government profligacy led to a declaration of 'bankruptcy' in 1996. The impact of this default has been substantial and has created a negative international perception. Under pressure, the Government cut its workforce and costs by more than 50%, and sold assets. It tried to expand the mining and fishing industries, and to encourage tourism, but the drain of economic migrants to New Zealand fleeing the dire local situation added a further difficulty.
Agriculture provides exports of copra and citrus fruit. Manufacturing activities are limited to fruit processing plants and some clothing factories. Other exports include fish, jewellery, handicraft and mother of pearl shell. Trade is dominated by New Zealand with regular shipping connections from the port at Avarua.
By 2003, the government's efforts had borne fruit and the Islands' Finance Secretary at the time, Kevin Carr was able to announce that taxation revenue had almost doubled in the jurisdiction over the previous five years. The budget for 2004/2005 maintained a fiscally responsible strategy.
Citing tourism, the pearl industry and the fishing sector as the driving forces behind the economy of the Cooks, Mr Carr also reported a 1.5% increase in economic growth, and predicted that the Islands could achieve growth levels of 3.2% per year in the long-term. Tourist arrivals in 2003 at 78,000 were up from 72,000 in 2002. Total visitor arrivals for September quarter 2012 (40,842) increased by over 20.0% when compared to the previous quarter (33,635).
After growing by 9.5% in 2007, GDP dipped by 1.2% in 2008, 3.5% in 2009 and 0.1% in 2010. Preliminary data suggests a rise of 1.1% for 2011.
Inflation stood at 7.8% in 2008, 6.6% in 2009 and 4.0% in 2010. 2011 is expected to show inflation at 3.5%. Revenues from the four main taxes (VAT, income tax, import duties, and company taxes) were lower than in the previous year. GDP ran at about USD15,500 per head in 2009.
The Consumer Price Index (CPI) for September quarter 2012 was 125, up by 1.7% over June quarter 2012.
The overall improvement in the fiscal position was recognized in October 2004 by Standard & Poor’s, which raised the long-term rating to BB- from B+, which is still maintained today. This was the fourth upward revision to the rating since an initial B-/C rating was assigned in 1998. However, the Cook Islands was put on credit watch in early 2005 because of the threat to the economy from cyclone activity.
The 2005/2006 budget recognized difficulties caused by cyclones early in the year. "There is evidence that the economy contracted in the March quarter of this year. There are some signs that the economy was slowing even before the cyclones. Moreover, the five cyclones that hit the country in February-March had a major short-term effect on the economy," said the Minister of Finance.
The minister continued: "Economic growth in 2005-06 will be lower than it would have been without the cyclones. The budget is premised on real growth of 2.4% in 2005-06, slightly below the long-term trend growth rate of around 3%."
The budget foresaw an operating surplus of $3.4m. GDP growth was estimated at 0.1% (2005).
The March quarter 2012 shows that gross turnover was $125.2 million for all industries in the Cook Islands. This is a decrease of 13.4% when compared to the previous quarter but an increase of 3.8% when compared to March quarter 2011. Total Value Added Tax (VAT) collected on Sales and Income was $13.2 million for the Cook Islands in this quarter. The Wholesale & Retail Trade industry continued to contribute the highest VAT collected on Sales and Income with 40.8%, followed by Hotels & Motels with 15.8% and Transport & Communication with 13.8%. Net value added tax (VAT) for all industries was $9.25 million for March quarter 2012. This is a decrease of 38.8% when compared to the previous quarter.
The offshore sector started early with various pieces of legislation in 1981/82, and despite its small absolute size is the second biggest contributor after tourism to Government finances, although concerns have been expressed in recent years with regard to shrinkage of the finance industry. See Offshore Business Review for further details.