Growth and oil price: A study of causal relationships in small Pacific Island countries

This paper investigates the nexus between economic growth and oil price in small Pacific Island countries (PICs). Except Papua New Guinea, none of the 14 PICs has fossil any fuel resources. Consequently, the other 13 PICs are totally dependent on oil imports for their economic activities. Since PICs have limited foreign exchange earning capacities, as they have a very narrow range of exports and are highly dependent on foreign aid, high oil prices in recent months have seriously tested their economic resilience. This paper applies the ARDL bounds testing methodology to four selected PICs, Samoa, Solomon Islands, Tonga and Vanuatu, which have consistent and reliable time series of data, with a view to assess the impact of oil price on economic growth. The findings are that oil price, gross domestic product and international reserve are cointegrated in all the four PICs. Further, both in the long and short runs, we observe that there is a uni-directional relationship as causality linkage runs only from oil price and international reserves to economic growth. The paper makes some policy recommendations.