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International Monetary Fund. Asia and Pacific Dept

KEY ISSUESContext: With successful landmark elections in September 2014, Fiji took a decisive stride toward returning to democratic government for the first time since 2006. The successful elections are expected to solidify the recent improvements in relationships with traditional development partners, improve access to concessional development finance, and boost confidence in the economy. In terms of economic policy, the comfortable Parliamentary majority for the former interim Prime Minister�s party (FijiFirst) is expected to support continued economic reform momentum.Key issues and policy recommendations:� With the economy now growing above potential, near-term macroeconomic management needs to be carefully calibrated. The accommodative monetary policy in place since 2011 has stimulated economic activity. The Reserve Bank of Fiji should now tighten policy in order to moderate credit growth and curb excess liquidity.� Fiscal policy has been prudent and well focused in recent years, but the expansionary 2014 budget was a major departure from these welcome trends. Reversion to the prudent trend is strongly encouraged.� The authorities have accelerated economic reforms in recent years, for example in the sugar sector and pension schemes, but the key policy challenges remain to raise potential growth, reduce unemployment, improve financial inclusion, and increase resilience to shocks. Following the elections, continued structural reform momentum is needed to improve the business environment, address the infrastructure backlog, and raise the absorptive capacity to take full advantage of a potential increase in investments.

Mr. Jonathan C Dunn, Mr. Matt Davies, Yongzheng Yang, Mr. Yiqun Wu, and Mr. Shengzu Wang
During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.