The Impact of Monetary Policy on Pacific Island Tourism: A Deep Dive into Interest Rates and Money Supply, Here’s What You Need to Know

Published on December 1, 2025

The impact and importance of the tourism sector on the economy of small island states is signficant, as there exists a symbiotoc relationship between the development of the sector and the economic growth of the sate. Less often considered, however, is the relationship between tourism and monetary policy, particularly interest rates and money supply. A recent investigation by researchers from IIT Hyderabad, IIT Kanpur, the Reserve Bank of Fiji and the Central Bank of Solomon Islands seeks to understand the impact of monetary policy on tourism expenditure and tourist arrivals in the Pacific Islands, particularly Fiji, Samoa, Tonga, Vanuatu and Solomon Islands. The findings highlight how the tourism sector of a country can be shaped by the actions of the central banks, as measurable impacts can be seen on the volume of arrivals and the tourism expenditure of the country.

The Symbiotic Relationship Between Economic Growth and Tourism

Tourism and economic growth often go hand in hand. In small island nations, where tourism is a significant contributor to GDP and employment, a thriving tourism sector often signals a strong economy. For example, Fiji receives over half a million visitors annually, and tourism accounts for more than half of its export revenue. This mutual dependence means that any shift in one sector—whether through monetary policy or economic cycles—can have significant ripple effects on the other.

The study reveals that the relationship between economic growth and tourism flows is reciprocal. A strong economy tends to attract more tourists by improving infrastructure, safety, and services. Conversely, increased tourism boosts the economy by generating spending, creating jobs, and contributing to foreign exchange earnings. This two-way relationship underscores the importance of maintaining a healthy economic environment for tourism growth.

The Role of Monetary Policy: Interest Rates and Money Supply

Monetary policy—managed primarily through interest rates and money supply—can have a direct or indirect effect on tourism. The study’s findings provide an interesting perspective on how these two factors influence tourism demand.

Interest Rates: A Subtle Influence on Tourism

Higher interest rates tend to discourage borrowing, which could dampen investment in tourism-related infrastructure and reduce disposable income for tourists. However, the study finds that this effect is relatively small and statistically insignificant. In other words, even when borrowing becomes more expensive, it doesn’t necessarily discourage tourists from visiting or businesses from investing in the sector. This highlights the resilience of the tourism industry, which can weather moderate changes in interest rates.

Money Supply: Boosting Tourism Revenue

A more direct impact on tourism demand comes from changes in the money supply. When central banks increase the money supply—typically through lower interest rates or liquidity injections—it can stimulate spending and investment in tourism infrastructure. This includes improvements to hotels, transport systems, and restaurants, which enhance the quality and profitability of tourism services. While an increase in money supply can boost tourism receipts, the study suggests that it doesn’t necessarily attract more tourists. This finding indicates that the number of visitors depends more on external factors such as connectivity, global income levels, and the destination’s reputation.

Global Economic Influence on Pacific Island Tourism

While the effects of monetary policy are significant, global economic conditions also play a vital role in shaping tourism demand in Pacific Island nations. The study highlights that a strong foreign economy, particularly in countries like Australia, New Zealand, and the US, tends to encourage outbound tourism to Pacific Island destinations. For example, when the Australian economy performs well, its citizens are more likely to travel abroad, including to destinations like Fiji or Tonga. However, the study finds that these global economic trends do not always significantly impact tourism demand, as other factors—such as ease of access, safety, and destination appeal—also influence tourists’ decisions.

Pandemic Impact and the Need for Stabilizing Policies

The COVID-19 pandemic exposed the vulnerability of small island economies heavily reliant on tourism. During the pandemic, tourism in these regions plummeted by over 80%, leading to massive job losses and significant declines in government revenues. This sharp decline emphasizes the need for central banks and tourism authorities to work in tandem, using monetary policy as a stabilizing tool in times of crisis. Lower interest rates and a looser money supply can help businesses in the tourism sector stay afloat during downturns by making it easier to borrow and maintain liquidity.

Additionally, exchange-rate adjustments, which are often influenced by monetary decisions, can make island destinations more affordable for foreign visitors. A weaker local currency can create opportunities for foreign tourists to visit at lower costs, thus supporting the tourism sector.

Coordinating Fiscal and Monetary Policies for Tourism Growth

The study calls for greater coordination between central banks and tourism authorities to ensure the long-term sustainability of the tourism sector. When monetary conditions are favorable, such as during periods of low interest rates and increased liquidity, governments can seize the opportunity to invest in tourism infrastructure. Conversely, during times of monetary tightening, fiscal measures like targeted subsidies or marketing campaigns can help mitigate the slowdown in tourism demand.

The research suggests that while monetary policy plays a role in shaping tourism outcomes, it is not the sole driver of tourism growth. Non-monetary factors such as improved connectivity, environmental sustainability, and safety play an even more significant role in attracting visitors. Thus, understanding the interplay between monetary and non-monetary factors can help policymakers design more effective responses to external shocks and ensure the resilience of tourism industries in small economies.

Understanding the Macro-Tourism Link

This research represents the first attempt to understand the relationship and impact that the actions of central banks, such as modifying interest rates and the money supply, have on the demand for travel to small island nations. This research seeks to incorporate the relationship between monetary policy and travel to the various destinations, such as Fiji, Samoa, Tonga, Vanuatu, and the Solomon Islands, while helping to understand and promote the fact that travel is much more than the enjoyment of the beach and the sun; it is also a function of the economic climate. This research will assist policymakers in constructing an optimal economic response to external shocks so that tourism will continue to contribute positively to the small island nations.