On February 12, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Republic of Fiji and considered and endorsed the staff appraisal without a meeting2.
The economy is recovering well from several natural disasters and is expected to record its ninth consecutive year of expansion in 2018. The fiscal stance has eased substantially in fiscal year 2017/18 and external conditions are becoming less favorable due to lower sugar prices, higher oil prices, and slowing growth in main trading partners. Growth is expected to pick up to about 3.2 percent in 2018, underpinned by consumption and public investment. The growth momentum is projected to continue in the coming years. Headline inflation increased to 5.2 percent in November reflecting higher taxes on tobacco and alcohol as well as higher prices for yaqona caused by floods in April. Inflation is projected to decline to 3 percent in 2019–20 as supply conditions normalized.
Policies should aim to increase Fiji’s resilience to shocks and strengthen growth performance. Faster fiscal consolidation is needed to rebuild fiscal space and support external stability. Improving the business environment and governance will raise potential growth by mobilizing private investment, enhancing productivity, and diversifying the economy.
Executive Board Assessment
In concluding the 2018 Article IV consultation with the Republic of Fiji, Executive Directors endorsed staffs appraisal, as follows:
Economic growth has been resilient. Despite the recent wave of natural disasters, the economy is expected to record its ninth consecutive year of positive GDP growth in 2018, underpinned by strong consumption and public investment. Growth is projected at 3–3.5 percent the medium term, in line with estimates of potential growth.
However, external conditions have become less favorable, underscoring the need to increase the economy’s resilience. Higher oil prices, lower sugar prices, and weaker growth in Fiji’s major trading partners increase risks to external stability and warrant a recalibration of macroeconomic policies.
Fiscal buffers should be rebuilt as soon as possible to support fiscal sustainability and external stability. The fiscal deficit and public debt increased sharply in recent years and put fiscal space at risk. Fiscal consolidation should proceed quickly to put the debt-to-GDP ratio on a clear downward path. This will help maintain fiscal sustainability, create fiscal space to respond with flexibility to natural disasters in the future, and alleviate the current pressure on foreign reserves by containing imports. Consolidation measures need to be spelled out expeditiously and should be mainly expenditure-based, given the limited scope for further revenue mobilization.
Monetary policy may need to be tightened to further support external stability. A tighter monetary stance could contribute to narrowing the current account deficit and preserving foreign reserves in tandem with fiscal consolidation, if less favorable external conditions persist.
Continuing to undertake financial sector reforms, following the recommendations of the 2018 FSSR, is encouraged. Priority reforms include: adopting a more risk-based approach to banking supervision; development of macroprudential toolkits by passing legislation to formalize the RBF’s mandate over such activities and filling existing data gaps; enhancing the governance of NBFIs; and adopting the new Credit Union Act.
Pension savings used to mitigate the impact of Cyclone Winston should be restored. Low levels of pension savings could jeopardize the adequacy of pensions for a large fraction of contributors. Although allowing pension savings withdrawals was effective in containing the adverse impact of Winston on many households, it is also important to safeguard adequate savings for retirement.
To boost growth potential, reforms should focus on attracting and supporting private investment. High-priority measures include: an improved investment regime that can better protect the property rights of investors; an adequate regulatory framework that allows to shift from far-reaching price controls to enhancing competition; and improving the ease of doing business (e.g., fewer procedures to start a business and a decrease in the number of hours that tax compliance requires).
Governance would be improved by enhancing fiscal transparency and strengthening the rule of law. Fiscal transparency would be improved by: extending reporting of government operations to include public corporations that pose a significant risk to public finances; publishing in a timely manner the annual reports of major SOEs and statutory bodies; and issuing mid-year budget reports. Rule of law would be improved by upgrading the investment regime in line with international best practices.
The exchange restrictions for payments on current international transactions should be removed. The limits on large external payments and the tax certification requirement on the transfer abroad of profits, dividends, and proceeds of airline ticket sales are inconsistent with Article VIII and discourage investment.
Improving data quality will help better guide policy-making. National accounts, consumer price indexes, and government finance statistics should be improved with support from PFTAC and development partners.
|2015||2016||2017 Est.||2018 Proj.||2019 Proj.||2020 Proj.|
|Output and prices (in percent change)|
|Consumer prices (average)||1.4||3.9||3.4||4.1||3.5||3.0|
|Central government budget (in percent of GDP)|
|Money and credit (in percent change)|
|Net domestic credit depository corporations||13.4||7.6||5.9||…||…||…|
|Private sector credit||14.2||12.9||9.3||…||…||…|
|Broad money (M3)||13.9||4.8||8.3||…||…||…|
|Central Bank Policy rate||0.5||0.5||0.5||…||…||…|
|Commercial banks deposits rate||2.7||3.0||3.2||…||…||…|
|Commercial banks lending rate||5.8||5.8||5.6||…||…||…|
|External sector (in percent of GDP)|
|Services plus income (net)||12.5||12.7||10.0||12.0||12.0||11.8|
|Current account balance||-2.3||-3.2||-6.2||-5.9||-5.1||-4.4|
|Capital account balance||0.1||0.1||0.1||0.1||0.1||0.1|
|Financial account balance||-3.4||-6.7||-10.4||-3.4||-4.6||-5.0|
|Of which: FDI (net)||-5.5||-8.9||-8.0||-3.2||-5.4||-5.8|
|Of which: Portfolio investment (net)||2.1||0.6||0.9||0.9||0.9||0.9|
|Of which: Other investment (net)||0.0||1.5||-3.3||-1.0||-0.1||-0.1|
|Errors and omissions||0.3||-3.5||-0.9||0.0||0.0||0.0|
|Change in reserve assets||1.5||0.1||3.5||-2.5||-0.4||0.7|
|Gross official reserves (in millions of U.S. dollars)||921||915||1,103||961||940||978|
|(In months of retained imports)||5.5||5.2||5.7||4.6||4.5||4.5|
|Exchange rate (Fiji dollars per U.S. dollar; period average)||2.11||2.10||2.06||…||…||…|
|GDP at current market prices (in millions of U.S. dollars)||4,344||4,569||4,891||5,118||5,322||5,668|
|GDP per capita (in U.S. dollars)||4,996||5,232||5,528||5,758||5,961||6,321|
|GDP at current market prices (in millions of Fiji dollars)||9,150||9,582||10,073||10,716||11,404||12,145|