Resilience and Growth in the Small States of the Pacific
Chapter

Appendix 1. Fiji

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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Fiji, located in the South Pacific, has a territory of 18,274 square kilometers spread over 332 islands, of which about one-third are inhabited. Most of Fiji’s population of nearly 900,000 live on Viti Levu and Vanua Levu, the two largest islands.

Several coups since 1987 have made political stability elusive. But with a landmark election in September 2014, Fiji took a decisive stride toward democratic government for the first time since a 2006 military coup. This has improved relationships with traditional development partners, access to concessional development finance, and overall confidence. The comfortable parliamentary majority for the former interim prime minister’s Fiji First Party is expected to maintain the momentum of economic reform.

Fiji, like other Pacific island countries, is prone to natural disasters. On February 20, 2016, Cyclone Winston hit Fiji with unprecedented force, claiming over 40 lives and causing over 5 percent of the population to take shelter in evacuation centers. The authorities’ preliminary assessment of the damage and losses was US$940 million (about 20 percent of GDP). Foreign aid and remittances are expected to increase and help finance the rebuilding.

Sources of Growth and Economic Profile

Main sources of growth. Fiji’s economy has become increasingly diversified, although it relies considerably on tourism, and the sugar sector remains important. Lower political uncertainty has boosted business confidence and investment, and underpinned a robust pickup in growth that is currently underway.

Production, employment, exports, and imports. Fiji is a middle-income country with an income per capita of about US$5,000. The share of agriculture (particularly sugar), forestry, and fisheries in GDP has declined over the past decade, while services account for more than half of GDP, driven by tourism, finance, communications, wholesale and retail trade, and public services. Fiji’s main exports are sugar, gold, garments, mineral water, fish, timber, coconut oil, fruit, and vegetables. Major imports include foodstuffs, mineral fuel, manufactured goods, machinery, and transport equipment. Fiji’s trade deficit is large and has widened over time, contributing to sizable current account deficits in the past decade. Unemployment has remained persistently high at approximately 9 percent, with youth and underemployment rates significantly higher.

Sources of external income. Large trade balance deficits have been partly offset by surpluses in the services account, owing to positive net earnings from tourism and remittances. Remittance inflows have increased in recent years, reaching about 5 percent of GDP in 2015. In the capital account, Fiji has relied on foreign direct investment inflows, primarily into the tourism sector.

Development aid. Fiji’s traditional development partners (Australia, Japan, New Zealand, and the Asian Development Bank and World Bank) limited new projects and aid following the 2006 coup. To finance increased infrastructure investment, the government tapped nontraditional sources, such as the export-import banks of China and Malaysia, for financing. With the return of democracy, relations with a broader group of development partners have improved.

Government finance. Fiji’s fiscal policy continues to balance the competing needs for a stronger fiscal position and increased public investment to enhance growth. Fiscal policy has been generally prudent, with an emphasis on increasing the share of capital spending in total expenditure and an estimated budget deficit of 3.2 percent of GDP in 2015. The ratio of government debt to GDP has declined to approximately 46 percent of GDP, down from 56 percent in 2010. The Medium Term Fiscal Framework projects smaller deficits over time and associated declines in debt-to-GDP levels.

Financial sector. The banking sector consists of five foreign-owned banks and one domestic bank. Most banks remain well capitalized, with average capital adequacy ratios above regulatory levels, and have low nonperforming loans and adequate loan-loss provisioning. Access to credit needs broadening, particularly in the agricultural sector and for small- and medium-sized enterprises, where the lack of adequate collateral and credit history often impedes access to credit. The Reserve Bank of Fiji has introduced a small- and medium-sized enterprise loan guarantee scheme, established sector lending ratios for banks, and encouraged microfinance operations.

Business climate and investment. The return of democracy boosted business and consumer confidence, and expectations of continued economic reform have created a favorable overall business climate. Sector-specific structural reforms are now needed to improve the investment climate. This will require faster implementation of reforms in land use and the sugarcane sector, relaxing price controls, and continued improvements in infrastructure, among other measures. A reliable energy supply is essential to meet the increasing demands of the economy and crucial to improve the investment environment.

Monetary policy. Accommodative monetary policy has stimulated economic activity over the past few years, with the policy rate nearing the zero lower bound. Monetary policy is focused on maintaining price stability, a comfortable foreign reserve position, and a stable exchange rate. The monetary transmission mechanism remains weak, and structural excess liquidity remains. The Reserve Bank of Fiji’s current policy stance has contributed to low lending rates, while positive economic sentiment has led to a strong pickup in credit growth in 2013 and 2014, though this has moderated more recently.

Exchange rate and competitiveness. Fiji maintains a basket peg. The competitive boost from the April 2009 devaluation was largely eroded by creeping real exchange rate appreciation, driven by partner-country inflation differentials. The real exchange rate is now slightly higher than a level consistent with medium-term macroeconomic fundamentals, while in nominal terms, the Fijian dollar has appreciated against the Australian dollar since 2013. The current stable macroeconomic environment provides a good opportunity to lay the foundation for a more flexible exchange rate regime.

Growth Challenges, Vulnerabilities, and Spillovers

Main growth challenges. Fiji is a richly endowed country, but average growth has remained slow over the past decades owing to political instability, susceptibility to external shocks, and slow progress on structural reform. While the authorities have accelerated reforms in recent years, raising potential growth and increasing resilience remain major policy challenges.

Main vulnerabilities. Domestic risks stem from the slowing reform momentum, which could impact investment. Planned large-scale privatizations may not materialize, jeopardizing the authorities’ medium-term debt and deficit targets unless offsetting expenditure and revenue measures are undertaken. Fiji is also susceptible to natural disasters, requiring significant fiscal buffers. Given rapid credit growth, particularly over 2014, authorities need to be vigilant to avoid overheating amid strong import growth and relatively shallow markets for skilled labor and capital.

Regional and global economic spillovers. Fiji remains vulnerable to international commodity price shocks, as higher import prices would lead to higher current account deficits and lower reserve coverage. Even so, the recent decline in oil prices provided a significant windfall.

Appendix Table 1.1Fiji: Selected Economic Indicators, 2010–15
Nominal GDP (20149): US$4,532 millionGDP per capita (2014): US$5,118
Main export products: Sugar, Mineral water, GoldPopulation (2014): 885,470 (est.)
Remoteness (GDP-weighted distance): 9,234 km
Sources: Fiji authorities; IMF, World Economic Outlook database (April 2016); and IMF staff estimates.Note: … = data not available; SDR = special drawing rights.

GDP expenditure shares are IMF staff estimates.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans; does not include small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

1991–20002001–092010–152015
AverageAverageAverage20102011201220132014Estimate
GDP, GDP growth, employment, and prices
Real GDP (at constant factor cost, percent change)2.71.63.63.02.71.44.75.34.3
Real GDP per capita (percent change)1.61.12.82.01.80.64.04.83.8
Unemployment (percent)7.58.88.99.08.68.78.88.8
Consumer prices (percent change, average)2.13.43.77.33.42.90.52.8
Shares in nominal GDP (percent)
Largest sector (services)44.850.448.454.749.648.046.444.147.6
Transport and communications7.99.29.710.49.69.69.59.410.0
Wholesale and retail trade10.611.08.59.98.78.58.07.48.2
Real estate and business services5.57.07.28.27.57.46.96.56.9
Second largest sector (manufacturing)12.412.710.111.710.710.29.79.29.3
Sources: Fiji authorities; IMF, World Economic Outlook database (April 2016); and IMF staff estimates.Note: … = data not available; SDR = special drawing rights.

GDP expenditure shares are IMF staff estimates.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans; does not include small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Third largest sector (agriculture, forestry, and fishing)12.110.68.28.98.68.58.07.67.5
Tourism14.818.119.819.018.317.416.917.0
Contributions to nominal GDP growth (percent)
Largest sector (services)2.73.62.61.71.10.92.32.47.2
Transport and communications0.60.70.80.70.40.50.70.91.4
Wholesale and retail trade0.40.50.30.1−0.10.20.30.11.5
Real estate and business services0.60.50.40.30.30.30.10.31.0
Second largest sector (manufacturing)0.80.60.40.60.30.00.30.50.8
Third largest sector (agriculture, forestry, and fishing)0.90.20.3−0.30.70.30.20.40.5
Share in nominal GDP (percent)1
Private consumption
Private investment
Public consumption
Public investment
Exports minus imports
Contributions to nominal GDP growth (percent)1
Private consumption
Private investment
Public consumption
Public investment
Exports minus imports
Public finances
Central government finance (percent of GDP)
Revenue and grants26.824.926.925.526.726.527.027.628.2
Total domestic revenue26.824.926.725.426.626.326.827.327.9
Grants0.20.10.10.20.20.30.3
Expenditure and net lending29.028.729.227.728.028.927.631.831.4
Current (excluding grants)24.123.920.822.120.720.820.021.020.3
Of which: wages and salaries11.611.08.79.48.48.48.18.99.0
Development (capital)4.94.88.05.05.77.57.610.911.1
Current balance22.71.05.93.35.95.56.86.37.6
Overall balance−2.2−3.7−2.3−2.2−1.4−2.4−0.6−4.3−3.2
Financing2.32.21.42.40.64.33.2
Assets (sinking fund)−0.2−0.2−0.5−0.7−0.90.30.6
Debt2.52.52.43.72.43.50.9
Of which: external1.50.74.21.81.01.10.0
Of which: concessional1.40.81.71.91.31.81.1
Other0.20.00.00.00.10.11.1
Sources: Fiji authorities; IMF, World Economic Outlook database (April 2016); and IMF staff estimates.Note: … = data not available; SDR = special drawing rights.

GDP expenditure shares are IMF staff estimates.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans; does not include small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Public-debt-to-GDP ratio (percent)47.350.150.656.252.651.749.547.746.1
Sinking fund: closing balance (percent of GDP)2.01.41.82.43.12.50.8
Balance of payments (percent of GDP, unless otherwise indicated)
Current account including official transfers2.0−8.5−5.4−4.1−4.9−1.3−9.8−7.2−5.4
Current account excluding official transfers0.7−8.5−5.5−4.2−4.9−1.4−9.9−7.3−5.4
Overall balance−1.1−4.8−3.0−2.11.80.41.1
External debt service (percent of exports of goods and services)0.30.40.30.40.30.30.30.20.2
Foreign direct investment8.211.110.79.56.37.37.6
External debt14.812.518.014.016.416.921.721.820.7
Total external income8.68.98.08.98.78.18.8
Investment income1.92.52.61.92.11.31.3
Remittances4.64.94.34.34.44.55.0
Other2.11.51.12.72.22.32.6
Contributions to external income growth (percent)
External income growth6.5−4.90.416.96.82.517.3
Investment income0.05.35.0−7.84.3−7.50.7
Remittances6.815.9−0.92.95.36.511.0
Other−0.3−26.1−3.821.9−2.73.65.7
Exchange rate (Fiji dollar to U.S. dollar period average)1.61.91.91.91.81.81.81.91.9
Real effective exchange rate (period average)3118.5112.4104.8100.0103.4106.6107.6106.6
(percent change)−0.90.10.4−4.63.43.11.0−0.9
Money, credit, and financial sector
Broad money (percent change)11.63.63.511.55.919.010.413.9
Credit to private sector (percent of GDP)51.757.062.758.058.659.061.565.3
(percent change)17.22.03.53.96.39.215.514.2
Bank assets (percent of GDP)54.761.662.861.962.169.068.972.8
Short-term treasury bill interest rate (three-month)2.81.43.91.00.30.12.50.8
Nonperforming loan ratio1.81.01.40.80.70.70.7
Foreign bank market share (percent)4
Sources: Fiji authorities; IMF, World Economic Outlook database (April 2016); and IMF staff estimates.Note: … = data not available; SDR = special drawing rights.

GDP expenditure shares are IMF staff estimates.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans; does not include small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Business climate indicators
Business environment rankings5
Doing business (overall)60.7384251598688
Construction permits75.050555966109111
Getting electricity69.2616467707578
Enforcing contracts66.0535355598888
Getting credit53.5383942527179
Human development index50.70.70.70.70.7
Memorandum:
Nominal GDP (F$ million)2,902.24,899.47,566.46,024.46,768.57,119.67,726.78,552.99,206.1
Nominal GDP (US$ million)1,785.32,717.24,067.13,140.53,774.53,977.74,196.14,531.54,782.0
Sources: Fiji authorities; IMF, World Economic Outlook database (April 2016); and IMF staff estimates.Note: … = data not available; SDR = special drawing rights.

GDP expenditure shares are IMF staff estimates.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans; does not include small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

Sources: Fiji authorities; IMF, World Economic Outlook database (April 2016); and IMF staff estimates.Note: … = data not available; SDR = special drawing rights.

GDP expenditure shares are IMF staff estimates.

Current balance excludes grants and development (capital expenditure).

Index, 2005 = 100.

Share in total loans; does not include small loan scheme.

World Bank, Doing Business reports.

United Nations Development Programme.

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