Fiji
Recent Economic Developments

This paper reviews economic developments in Fiji during 1990–95. The reorientation of policies, although incomplete, led to stronger growth of nontraditional exports and non-sugar manufacturing, and to a pickup in GDP growth to an average of 4.1 percent between 1988 and 1993. Fiscal deficits declined in the early 1990s, although often larger than budgeted, and the external current account progressively turned into a surplus position. Despite the actions undertaken, however, private investment did not recover from its slump in the late 1980s impeding the economy from fully exploiting its growth potential.

Abstract

This paper reviews economic developments in Fiji during 1990–95. The reorientation of policies, although incomplete, led to stronger growth of nontraditional exports and non-sugar manufacturing, and to a pickup in GDP growth to an average of 4.1 percent between 1988 and 1993. Fiscal deficits declined in the early 1990s, although often larger than budgeted, and the external current account progressively turned into a surplus position. Despite the actions undertaken, however, private investment did not recover from its slump in the late 1980s impeding the economy from fully exploiting its growth potential.

Fiji: Basic Data, 1989-94

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Souces: Data provided by the Fiji authorities; and staff estimates.

IMF, Information Notice System index, 1980=100, adjusted to exclude Brazil from Fiji’s trading partners covered by the index; 1994 data refer to July.

September 1994.

I. Background and Overview 1/

Fiji is one of the most developed of the Pacific island economies (PIEs), with a per capita GDP of about US$2,000 and a population of 771,104. In terms of health and educational attainments it is the most developed, and, after Papua New Guinea, is also the largest. 2/ Fiji is rich in natural resources, such as minerals and fisheries, and has a relatively well-developed transportation infrastructure enabling it to act as a transhipment hub for the smaller PIEs. Like most of the other PIEs, however, Fiji’s growth has been constrained by its remoteness, high transportation costs, vulnerability to adverse weather, and the limited size of domestic markets. Although more diversified than most other PIEs, the Fiji economy remains heavily dependent on the sugar and tourism sectors, which account for about 40 percent of foreign exchange earnings. Since the late 1980s, garments have also emerged as a major export sector.

The interim civilian Government that was formed after the 1987 military coups embarked upon a strategy aimed at improving the supply performance of the economy by enhancing the role of markets in decision making. 3/ After drastic measures to stabilize the economy were implemented in 1988, including a large devaluation, wage cuts, the introduction of exchange controls, and the deregulation of interest rates, the reorientation of structural policies was announced at the 1989 National Economic Summit. The new strategy abandoned the pervasive intervention and promotion of import substitution, dominated by a large and generally inefficient public sector, and adopted a less regulated, outward-looking approach. Deregulation, reducing the size of the public sector, tax and labor market reforms, and the provision of generous export incentives were the key elements of the new strategy.

After the five-year rule of the interim Government ended with elections in May 1992, the new Government persisted with the broad economic strategy of its predecessor. 4/ Measures taken to date include the replacement of licenses and quantitative restrictions on the import of most products with tariffs, followed by the gradual lowering of tariffs; the rationalization of personal and corporate income taxes, with the lowering of tax rates; the replacement of a highly distortionary system of excise taxes with a broadly-based value-added tax (VAT); and the deregulation of the labor market. 5/

The reorientation of policies, although incomplete, led to stronger growth of nontraditional exports and nonsugar manufacturing, and to a pickup in GDP growth to an average of 4.1 percent between 1988 and 1993 (Table 1). Fiscal deficits declined in the early 1990s, although often larger than budgeted, and the external current account progressively turned into a surplus position. Despite the actions undertaken, however, private investment did not recover from its slump in the late 1980s impeding the economy from fully exploiting its growth potential.

Table 1.

Fiji: Selected Economic Indicators, 1977-93

(Annual average)

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Sources: Fiji Bureau of Statistics; and Supplement to the Budget, various issues.

Fiji’s economic performance in 1993 was adversely affected by cyclone Kina, which hit the country in January. The rate of economic growth slowed from 3.1 percent in 1992 to 1.9 percent in 1993 reflecting weather-related declines in nonsugar agriculture. The average annual rate of inflation increased from 4.9 percent in 1992 to 5.2 percent in 1993, owing to the introduction of the VAT in July 1992. Domestic demand continued to outpace real GDP in 1993, and the current account shifted into deficit. The overall balance of payments also moved into deficit with gross international reserves declining from over six months of import cover in 1992 to four-and-a-half months at end-1993.

The stance of financial policies was generally accommodating during 1993. The budget deficit widened from 3.3 percent of GDP in 1992 to 3.9 percent of GDP in 1993, substantially exceeding the original target of 2.5 percent. The deficit excess was due mainly to a revenue shortfall, while total expenditure was held largely in line with the budget. The 1994 budget, approved in April 1994, aimed at reducing the fiscal deficit to 2.9 percent of GDP, mainly through expenditure restraint. 6/ Although broad money growth slowed sharply in 1993, domestic credit expansion remained fairly rapid, supported by an injection of liquidity from the Reserve Bank of Fiji (RBF). Interest rates remained on a gradually declining trend.

II. Real Sector

1. Overview

After recovering in 1992, in line with the recovery in Fiji’s major trading partners, namely, Australia and New Zealand, Fiji’s economic performance in 1993 was adversely affected by cyclone Kina. Real GDP growth slowed from 3.1 percent in 1992 to 1.9 percent in 1993, despite a continued expansion in sugar production and an incipient recovery in tourism, because of a fallback in construction and weather-related declines in nonsugar agriculture (Table 2 and Charts 1-2). On the expenditure side, gross capital formation recovered somewhat in 1993, partly owing to the lease of a large aircraft.

Table 2.

Fiji: Gross Domestic Product by Industrial Origin, 1988-93

(In millions of Fiji dollars; at constant 1977 prices)

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Sources: Fiji Bureau of Statistics, Statistical News, various issues; and Central Planning Office.
CHART 1
CHART 1

FIJI: ECONOMIC PERFORMANCE, 1988–93

Citation: IMF Staff Country Reports 1995, 010; 10.5089/9781451813319.002.A001

Source: Data provided by the Fiji authorities.1/ GDP at 1977 factor costs.
CHART 2
CHART 2

FIJI: INTERNATIONAL COMPARISONS OF INFLATION AND GROWTH, 1988-93

Citation: IMF Staff Country Reports 1995, 010; 10.5089/9781451813319.002.A001

Source: IMF: World Economic Outlook.

Following the introduction of the VAT in July 1992, the price level jumped by 4.8 percent, interrupting a downward trend in inflation and raising the annual average inflation rate from 4.9 percent in 1992 to 5.2 percent in 1993, well above the rates of Fiji’s main trading partners (Chart 2). This was compounded by substantial increases in public housing rental rates and shortages of some locally grown food products at the beginning of the year. However, as onetime factors dissipated and food supplies recovered, and with external price pressures remaining low, the annual average inflation rate fell to below 0.7 percent during the 12 months through July 1994 (Appendix Table 18).

The unemployment rate is estimated to have increased from 5.4 percent in 1992 to 5.9 percent in 1993 as the labor force grew more rapidly than employment (Appendix Table 19). Total paid employment reached a record high of 95.3 thousand, with jobs being created mainly in the private sector. With emigration still considerably above the pre-1987 levels, labor shortages continued, especially in the skilled and technical areas. Despite the labor market reforms, wage setting in the private sector was still guided mainly by the inflation rate and the awards in the public sector. Wages appeared to be trending downward with the decelerating inflation, although not at the same pace.

2. Output

a. Sugar sector

Although its share in GDP has declined moderately in recent years, sugar remains one of the pillars of Fiji’s economy. Sugarcane contributes about 40 percent of total agriculture value added, and exports of refined sugar account for about 15 percent of export proceeds. There are about 22,000 independent sugarcane growers. The average farm holding is only 4.6 hectares. Most of the land for sugar cultivation is leased by growers from the Native Land Trust Board or the state. The majority government-owned Fiji Sugar Corporation Ltd. (FSC), with about 4,300 employees, owns and operates all four of Fiji’s sugar mills, the railway system, and the research center. The growers are organized in the Sugar Cane Growers Council. The growers pay the FSC for railway services and share in the FSC’s net proceeds from sales according to a progressive schedule depending on total sugar production. The Sugar Commission of Fiji advises the Government, and the Sugar Industry Tribunal mediates and resolves industrial disputes.

Sugar output rose by 9.5 percent in 1992 as the industry recovered from disruptions it experienced in 1991 (Appendix Table 15). A drought, cyclone Kina, and a strike kept the increase in sugar production in 1993 down to 3.8 percent despite a timely start of the harvest, the high sugar content of the cane, and the generally good factory performance. The outlook for the 1994 season, for which harvesting finishes in December 1994, is quite good, and sugar production is estimated to be 9 percent over the 1993 level.

The industry faces two major uncertainties: the implications of the Uruguay Round Agreement for the preferential trade arrangements with the European Union (EU); and the expiration of most long-term land leases. The Sugar Protocol of the Lomé Convention guaranteed Fiji’s access to the EU sugar market at a price linked to the EU’s internal sugar price which is about double the world free market price. 7/ The Uruguay Round Agreement has an important bearing on this arrangement. In particular, it provides that

  • the EU will continue to grant access to its market for African, Caribbean, and Pacific (ACP) countries and India, for a total of 1,304,700 metric tons of sugar imports at zero tariff, but this guarantee does not extend to the price;
  • the EU’s system of variable import levies for nonpreferential sugar must be converted into fixed tariffs, and those must be progressively reduced by 20 percent between 1995 and 2000; and
  • the EU must reduce export subsidies by 36 percent in value and 21 percent in volume on all agricultural products by the year 2000.

In the short term the implications for Fiji’s sugar exports to the EU are expected to be limited, especially since the guaranteed market access continues. Over the medium term, however, it is likely that the EU will lower its internal price for sugar and this will affect the price received by Fiji. In anticipation the Fiji sugar industry has started to look for ways to improve efficiency. At present the estimated average cost of production is F$24 per metric ton of sugarcane, well below the F$48 received by growers; the yield per hectare at approximately 50 metric tons is about average for rainfed cultivation. After a recent conference on the subject, the Sugar Commission recommended for examination and decision, among other things: the introduction of a quality-based cane payment system (at present, growers’ payments are based exclusively on weight); a restructuring of marketing, research, and extension facilities; improvement of the cane transportation system; and rationalization of the incentives to growers and millers. The conference also called for a speedy resolution of land lease renegotiation.

Most sugar cultivation takes place on leased lands. 8/ The leases are negotiated between the farmer and the Native Land Trust Board (NLTB) acting on behalf of the Fijian land-owning units. The legal framework for the leases is the Agricultural Landlord and Tenants Act (ALTA) of 1976 which replaced a similarly named "Ordinance" (ALTO). The former removed from the latter the so-called hardship clause, entitling owners to reclaim their land every ten years when the leases came up for renewal, provided they could prove to the Agricultural Tribunal that they needed it for their economic survival. Instead, ALTA allowed new leases to be concluded for up to 30 years, and it also amended some other provisions of ALTO. Furthermore, ALTA grandfathered existing leases with less than five years remaining by extending them collectively by 20 years, and that is what causes the bunching of lease expirations between 1997 and 2002. Thus, with most leases expiring in just a few years, there is much anxiety among the farming community about the possibility of nonrenewal, and compensation for capital improvements in that case, as well as about the conditions for renewal (lease lengths and rates).

b. Nonsugar agriculture

Most crops suffered from cyclone Kina in 1993, and output levels were generally below those of 1992 (Appendix Table 16). The main traditional nonsugar crops remain copra and paddy. Copra production declined by 38 percent partly reflecting cyclone-induced damages. A significant share of Fiji’s population, particularly those living on the outer and smaller islands, rely on this crop as their main source of monetary income. The viability of the sector is, however, constrained by the advanced age of coconut trees as well as by the fairly low world price of coconut oil. However, the forestry sector entered a period of rapid growth, with round log harvest in 1993 20 percent above the 1992 level. Paddy output declined by a further 11 percent in 1993 as low import prices aggravated the damages inflicted by the cyclone. The rice sector has recently been deregulated, with import licensing substituted by protective tariffs to be reduced in three years.

To reduce the economy’s dependence on sugar, the Fiji Government has pursued a policy of agricultural diversification. To that end a number of specific programs are being implemented to stimulate crops suitable for export; and tariff protection and regulation of domestic production of primary commodities is gradually being reduced. The crops targeted are cocoa, ginger, vegetables, and tropical fruits, along with timber and commercial fisheries. The programs are all directed at smallholders and concentrate on quality consciousness and the reliability of supply. So far the progress of the diversification program is most noteworthy in the emergence of the commercial ginger industry, the increase in meat production, and in the foundations being laid for agro-processing. Deregulation has involved the replacement of import licensing by near equivalent protection by tariffs, followed by the phased lowering of those tariffs. With the deregulation of dairy products, rice, and canned fish in 1994, virtually all import licensing has been removed. 9/ The Government is assisting the affected industries in making the transition to a less protected environment with technical advice and temporary budget support.

Among the more recently introduced crops, cocoa and ginger, the diversification into cocoa has not proved to be very successful as world prices have remained relatively low. Its production levels have remained marginal and declined over the last two years, with the decline in 1993 almost halving the production levels reached the previous year. On the other hand, ginger has proved to be the most successful new crop to date. The ginger industry, which is totally in the hands of the private sector, has shown high labor absorption capacity. Although heavily damaged by cyclone Kina, with production levels declining by more than 15 percent, the ginger industry is expected to rebound strongly in 1994 and many farmers are already switching to ginger from less viable crops.

As to the other nonsugar yields, the fishing potential remains to be exploited. Its GDP share declined gradually from 1.7 percent in 1988 to 1.3 percent in 1993 and commercial catches have remained stable over the last five years, with most of the exports taking the form of canned tuna to the EU market. However, substantial investments would be necessary to further develop the industry. On the contrary, logging volumes increased by 20 percent in 1993, despite a 20 percent decline in unit values, based on harvesting of native forests and extensive areas of exotic plantation. Its GDP share, however, has remained broadly constant over the last six years at 1.6 percent. The National Code of Logging Practice was introduced in 1990.

c. Nonsugar manufacturing

After declining by 4.2 percent in 1992, nonsugar manufacturing grew by 5.6 percent (Table 2) in 1993, led by a rebound in garment manufacturing. Nonsugar manufacturing still focuses on the processing of raw materials and the production of beer, cigarettes, soap, and cement. There has been a shift, however, to other industries, particularly garment production, since the introduction of the Tax-Free Factory/Tax-Free Zone (TFF/TFZ) scheme in 1988. 10/

Garment production has increased at an average rate of 22 percent since 1988, and cumulative investment increased from the initial F$6 million to more than F$80 million in 1993. The garment industry is now one of the major employers in the economy and has been largely responsible for the growth in paid employment in manufacturing, reaching some 10,500 employees in 1993 or about 10 percent of total paid employment in the economy (Table 3).

Table 3.

Fiji: Tax-Free Factories Sector, 1988-93

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Source: Data provided by the Fiji authorities.

Cumulative totals.

Developments in the garment industry were initially heavily dependent on the availability of preferential access to the markets of Australia and New Zealand under the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA). However, as Most Favored Nation (MFN) tariffs in Australia and New Zealand have been reduced, the level of preference afforded by SPARTECA has been eroded. Consequently, the marketing efforts of the industry are now more broadly focused, with successful penetration of the U.S. market and increasing attention to the European market. 11/ The prospects for the garment industry have improved after New Zealand agreed to lower, initially for three years, the qualifying area content requirement under SPARTECA to 45 percent, and Australia, while maintaining the requirement at 50 percent, agreed to calculate it more flexibly. 12/ This should permit garment industries to further economize on their local costs, and to move upmarket for which they must import more expensive cloth.

d. Tourism

Tourism is a key sector of the economy, accounting for about 24 percent of foreign exchange earnings and, directly and indirectly, for about 17 percent of GDP and 16 percent of total employment. Visitor arrivals increased by 3.2 percent in 1993, following a 7.4 percent growth in 1992. Tourist expenditures grew even more rapidly (10.8 percent in 1993) reaching F$363.6 million, after having grown 14.6 percent in 1992 (Appendix Table 17). Although the majority of visitors continued to originate from Australia, the share of arrivals from the United States, Japan, and the United Kingdom has risen in recent years.

Growth in tourist arrivals has, to some extent, been constrained in recent years by the lack of adequate new investment and of convenient air services. The supply of rooms increased by only about 10 percent between 1988 and 1993. Capacity constraints are especially severe in four- and five-star hotels which are reporting near full occupancy. On the other hand, many lower-priced hotels are experiencing low occupancy rates. Critically dependent on airline services, tourism in Fiji stands to benefit from the start in 1994 of direct connections between Nadi and Los Angeles, and Osaka and Christchurch.

e. Building and construction

The building and construction sector, which accounted for 6.5 percent of GDP in 1992, dropped by more than 25 percent in 1993 (Table 2). This was due to the temporary suspension of a major tourist development project near Nadi as the foreign investor went into liquidation. Although the overall output for the sector declined, building construction in the residential sector was buoyant.

f. Mining and energy

Output in mining and quarrying accounts for less than 1 percent of GDP. Gold, however, accounts for about 4.5 percent of export earnings. At present there is only one operating mine, the gold mine near Vatukoula. After declining sharply in 1991, when production was affected by an industrial dispute, mining output rebounded by 35 percent in 1992 and was followed by a further 2.2 percent in 1993. Nevertheless, the level of output remained below that of 1990 (Table 2).

Mineral exploration is picking up, and applications for two more small gold mines are pending. Discussions are under way concerning the possible establishment of a large copper mine near Namosi on the main island of Viti Levu. Before allowing developments to proceed, the Government wants to ensure that it is likely to earn a satisfactory rate of return from the mineral resource; that the interests of the landowners are suitably accommodated; and that environmental issues can be resolved. If the mine were to become operational, construction could commence in 1998 and production in 2000 or 2001. Capital costs of the mine would be about F$l billion, employment about 1,500 people, and annual exports about F$400 million.

Fiji’s energy requirements are met from a number of primary sources, including imported petroleum products and coal, and domestic bagasse (sugarcane stalks), fuel wood, and hydropower. Domestic sources account for about 65 percent of domestic requirements. The Fiji Electricity Authority (FEA) is responsible for the electricity supply to all urban centers. It produces 82 percent of the country’s total electricity from the Monasavu Hydro Scheme; 8 percent of total electricity is thermal, mostly diesel, and the rest from bagasse (data for 1991). The Government attaches a high priority to rural electrification and is prepared to subsidize 90 percent of the capital costs of an installation.

3. Investment and savings 13/

Gross fixed capital formation fell to some 13 percent of GDP following the political developments of 1987, about 6 percentage points below the average of the preceding five years (Appendix Table 14). Gross capital formation increased from 13.1 percent of GDP in 1992 to 15.1 percent of GDP in 1993, as a result mainly of aircraft leases. However, private investment has remained weak, declining to 4.7 percent of GDP in 1993. Partly as a result of the Government’s decision to reallocate funds from capital expenditure to the current outlays in order to provide rehabilitation and relief after cyclone Kina, central government capital formation declined to its lowest level so far (1.9 percent of GDP) in 1993. On the other hand, owing mainly to the leasing of an aircraft, public enterprises’ gross capital formation increased to 7 percent of GDP in 1993 from 4.5 percent of GDP in 1992. With consumption growth remaining strong, gross national savings declined from 14.4 percent of GDP in 1992 to a record low of 13.2 percent of GDP in 1993.

4. Price trends and regulation

Consumer price inflation in Fiji, measured as the 12-month rate of increase, had declined to about 3 percent by July 1992, at which time the introduction of the VAT and the Public Rental Board rent increases caused a 4.9 percent jump in the price level. This onetime price rise was responsible for monthly increases in the annual average inflation rate--the most commonly cited inflation measure in Fiji—through June 1993. It reached 5.2 percent by end-1993 before declining to 2.1 percent in June 1994 (Appendix Table 19 and Chart 1). However, from July 1992 to June 1994 the price level increased by only 4.1 percent, of which 1 percentage point in January 1993 was due to the effects of cyclone Kina on food prices. During the first half of 1994, the 12-month rate was below 2 percent. This good inflation performance has been greatly helped by the slowdown in inflation in Australia and New Zealand (Chart 2), which together account for more than 50 percent of imports, as well as by a reduction in petroleum prices. Monetary policies aimed at steadily reducing banking system excess liquidity reinforced these trends.

Despite a gradual deregulation, Fiji still maintains price controls on a broad range of goods, both at the wholesale and retail levels. The price controls are administered by the Prices and Incomes Board (PIB). The last time goods were removed from controls was in May 1993, and it is estimated that controls now apply to about 37 percent of the CPI basket. Most controls are in the form of a fixed markup over the lowest observed landed costs of the goods in question; the goods subject to controlled prices include petroleum products, flour, and bread. The PIB also implements rent controls except for commercial rentals, which were decontrolled in 1992.

5. Labor market

a. Labor force and employment

Labor force developments have been strongly influenced by high rates of emigration in recent years. 14/ Total emigration of workers, excluding dependents, from 1987 to 1993 is estimated at 35,929, of which about 15,000 were from the active labor force, equivalent to 6-7 percent of the 1986 labor force. Some 90 percent of emigrants were Fijians of Indian origin, and the remainder divided between Fijians and others. Emigration slowed moderately to 4,621 in 1992 and to 4,107 in 1993, continuing the downward trend since it peaked in 1990. Nevertheless, this remained above the pre-1987 level (in 1986 the number was 2,799). 15/ Emigration has created serious shortages in the categories of the work force where it was concentrated, especially "administrative and managerial," followed by "professional and technical" and "clerical and related" (Table 4). In response, the Government has embarked on a program of enhanced training involving the Fiji Institute of Technology, the Fiji National Training Council, and the Fiji College of Advanced Education, as well as the University of the South Pacific.

Table 4.

Fiji: Reported (Net) Emigration of Workers by Major Occupational Group, 1987-93

(In number of persons)

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Source: Fiji Bureau of Statistics.

b. Wage determination

Following the lifting in August 1991 of the provisions of the Counter-Inflation Act relating to wages (“the statutory wage guidelines”), the Government legislated in November 1991 a set of labor market reforms aimed at enhancing trade union accountability and competition and thereby reducing the institutional bias toward wage increases. Among other things, the reforms included a tightening of trade union recognition, a broadening of the definition of what constitutes a strike, and the requirement of a secret ballot among members before calling a strike. However, the Arbitration Tribunal continues to play a key role in industrial relations. Presently the functions of this tribunal are being discharged by a Permanent Arbitrator, who is appointed by the Government for a three-year term but is independent in his decisions. The Permanent Arbitrator provides binding arbitration, normally with the consent of both parties to a dispute; in extraordinary circumstances the Government may refer a dispute to the Permanent Arbitrator without consent of the parties. Before arbitration is sought, the Permanent Secretary for Labor will attempt to mediate or conciliate.

No longer constrained by government guidelines, wage awards have become more differentiated, with the range of most settlements narrowing from 3-10 percent in 1991 to 5-8 percent in 1992 and declining to 4-7 percent in 1993 (Table 5). From available data it appears that the average wage award has been trending downward since 1991, but it remains above the inflation rate. There is no automatic indexation to the CPI, and the Permanent Arbitrator ruled in 1992 that CPI indexation is now an inappropriate basis for wage settlement. Still, the inflation rate continues to play an important role in private sector wage setting and remains even more important in setting the public sector wage award. Lack of information on enterprise performance is one factor that stands in the way of a greater role for productivity developments. Recourse to arbitration has been declining gradually with some 80 percent of wage claims resolved in-house in 1992-93. The agreements in 1992 and 1993 that were arbitrated resulted generally in lower awards than the in-house agreements.

Table 5.

Fiji: Logs of Claims and Wage Increases, 1991-94

(In percent change)

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Source: Fiji Employers’ Federation.

June 1994.

Following the removal of restrictions on the formation and recognition of trade unions, about a dozen new trade unions were registered between 1991 and 1994. Strike activity does not reveal any clear trend: in 1993 the number of strikes and lockouts was 12 (34,000 workdays not worked), compared with five in 1992 (11,000 workdays), and 11 in 1991 (98,000 workdays).

c. Labor productivity

In the absence of statistics on unit labor costs, some information on productivity developments can be gleaned from indices of GDP (or value added) at constant price per employee (Table 6). Value added per employee in the nonagricultural sector increased by 10 percent (1.5 percent per year) from 1980 to 1986, then dipped by about 5 percent in 1987, recovered by about 10 percent by 1990, and has been stagnating since. The expansion of the garment industry pulled down the average value added for manufacturing between 1988 arid 1991. A recent study found productivity of Fiji’s garment industry to be some 40 percent below that of countries at a similar level of development. The distribution and hotel sector, which is under strong pressure to remain internationally competitive, shows increases in value added per employee almost every year.

Table 6.

Fiji: Indices of GDP at Constant Prices per Employee, 1986-93

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Source: Fiji Bureau of Statistics.

III. Public Finance

1. Overview

Fiji’s fiscal performance deteriorated for the third consecutive year in 1993. While the 1993 budget aimed at narrowing the central government deficit to 2.5 percent of GDP from the 3.3 percent of GDP in 1992, the fiscal deficit actually widened to 3.9 percent of GDP (Table 7 and Chart 3). Total revenue and grants were lower than budgeted by 3.8 percent, mainly on account of a shortfall in the VAT. Overall expenditure was kept broadly in line with the budget, contrary to the previous two years. Within expenditure, however, current outlays increased sharply as the Government redirected funds from the capital budget to rehabilitation and relief after cyclone Kina and to the wage bill which was 4 percent above the budgeted level.

Table 7.

Fiji: Central Government Finances, 1988-94

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Source: Government of the Republic of Fiji, Supplement to the Budget Address, various issues.
CHART 3
CHART 3

FIJI: PUBLIC FINANCE INDICATORS, 1988-94 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1995, 010; 10.5089/9781451813319.002.A001

Source: Data provided by the Fiji authorities.1/ Data for 1994 are staff estimates.2/ Includes VAT expenditure.3/ Current expenditure minus tax revenue.4/ Current balance minus interest payments.5/ Excludes contingency financing.

The 1994 budget, approved in April 1994, aimed at reducing the fiscal deficit to 2.9 percent of GDP, mainly through expenditure restraint. The budget also reaffirmed the Government’s commitment to fiscal consolidation, labor market reform and wages policy, tax and public enterprise reforms, and privatization.

2. Revenue and expenditure

a. Revenue and grants

Since 1988, the ratio of total revenue and grants to GDP has remained stable at about 29.5 percent. However, the composition of total revenue has changed considerably as a result of tax reforms undertaken throughout the early 1990s. These reforms aimed at reducing high marginal rates of income tax and broadening the indirect tax base, while shifting the emphasis of indirect taxation from international trade to domestic consumption. On direct taxation, effective July 1, 1992, marginal individual income tax rates were lowered, with the top marginal tax rate aligned at 35 percent with the resident corporate tax rate; the individual income tax base was broadened; and the number of income brackets was reduced from ten to three. 16/ Furthermore, to partly eliminate double taxation of dividends, the individual income tax credit for company tax paid on dividends was increased. 17/ As a result of these reforms, taxes on income and profits dropped from 36 percent as a share of total revenue and grants in 1989-90 to 29.4 percent in 1993 (Chart 3).

As regards indirect taxation, in July 1992, a VAT replaced at a flat 10 percent rate most fiscal and excise duties, hotel turnover tax, and the miscellaneous services turnover tax. Import duties for most products were also gradually lowered to no more than 25 percent in 1993. As a result, taxes on international trade declined in recent years as a percentage of total revenue while taxes on goods and services rose from 12 percent of total revenue and grants in 1989 to 30 percent in 1993 (Chart 3).

Since its introduction in 1992, the implementation of the VAT has encountered various difficulties. A lack of training and management expertise on the part of auditors and the slow development of adequate computing resulted in larger-than-expected administrative problems, compounded by a low degree of compliance. No substantive modifications to the VAT have been made to date, other than zero-rating fertilizers (to encourage farmers to deregister) and introducing a 12-month (optional) tax period for cane farmers.

Total revenue and grants for 1993 were F$26.2 million (3.8 percent) lower than budgeted (Appendix Table 21). Much of this shortfall can be explained by the poor performance in VAT revenue collections which fell below the budgeted level by F$21.4 million. The lower-than-expected level of economic activity was partly responsible for the shortfall but there were also unforeseen refunds dating back to July 1992 and ongoing compliance problems. 18/ In addition to the VAT shortfall, receipts for international peacekeeping activities and external grants inflows were substantially lower than budgeted.

b. Expenditure

Government expenditure has tended to exceed budget targets over the past few years, sometimes by wide margins (the main exception being 1993). Public sector wage settlements have been a major cause of overspending owing to the granting of general wage increases and hiring that was unauthorized in the budget. As in the private sector, public sector wage claims are typically settled through an arbitration procedure that makes compromises between the claim put forward by the public service unions and the offer made by the Government. In addition, overspending by some ministries continued, notably the Ministry of Home Affairs, which includes the Fiji Military Forces, the Ministry of Infrastructure and Public Works, and the Ministry of Health. 19/ The overspending in some of these ministries is mostly the result of a higher-than-budgeted work force, particularly caused by seasonal and unestablished workers.

Total expenditure increased from 32.1 percent of GDP in 1992 to 33.4 percent of GDP in 1993 (Appendix Table 22 and Chart 3). Current expenditure, which has been steadily increasing as a share of GDP since 1989, reached 29.1 percent of GDP in 1993, exceeding the budgeted levels by 7 percent. Expenditure on goods and services rose above the budgeted level by F$43 million (46.6 percent) owing to a reallocation of resources from capital expenditure to provide relief from the damages inflicted by cyclone Kina. The wage bill also exceeded budgetary appropriations, albeit by a smaller amount (4 percent), reflecting overspending in the defense-related, public works, and health areas. Total overspending in those three areas amounted to F$28 million, partly offset by not filling vacant positions. 20/ As a result of the reallocation of resources, capital expenditure was F$32.2 million below the budgeted level, with capital grants and transfers taking the brunt.

c. Expenditure control

A number of measures were introduced during 1993 to improve expenditure control. These included: ensuring that all expenditure proposals are sent to the Cabinet only via the budget process; the issuance of quarterly rather than annual warrants; surcharges on unauthorized overspending, subject to the discretion of the Minister of Finance; and making provisions in the budget for appropriate wage increases and then attempting to ensure that actual awards are held in line with those provisions. So far these measures have had only limited success. In particular, the quarterly warrants have not been adequately observed by the larger ministries and departments.

3. Budget financing and public debt

The fiscal deficit continued to be financed through domestic channels in 1993 (Table 7 and Chart 3), with nonbank financing, particularly by the FNPF, accounting for a growing share. Outstanding public debt grew by 9.8 percent to F$920.9 million in 1993. As a share of GDP, public debt increased from 40 percent in 1992 to 41.5 percent in 1993. External debt continued to decline from F$200.6 million (9.6 percent of GDP) in 1992 to F$187.5 million (8.4 percent of GDP) in 1993 (Table 7 and Appendix Table 23). Domestic government debt, on the other hand, grew by nearly 15 percent to F$733.4 million in 1993 (33 percent of GDP). The share of treasury bills in public debt increased from 10.5 percent in 1992 to 16.8 percent in 1993. The FNPF holds 78.3 percent of the stock of public domestic debt, up from 75.5 percent in 1992.

4. The 1994 budget

The 1994 budget aims at reducing the fiscal deficit to 2.9 percent of GDP. It also contains a number of initiatives in areas such as labor market reform and wages policy, tax and public enterprise reforms, and privatization, as well as measures to further liberalize trade and relax exchange controls. While reiterating that a balanced budget remains a longer-term objective, and that the size of government should be reduced to 25 percent of GDP, the Budget Statement affirms that a fiscal deficit of 2.5 percent of GDP should be sustainable over the medium term.

The budgeted improvement in the fiscal position is intended to be achieved through a decline in total expenditure in relation to GDP by 1 percentage point, mainly on current outlays. In particular, expenditure on goods and services is expected to decrease to 4.4 percent of GDP from a record high of 6.1 percent of GDP in 1993. Part of the restraint in current expenditure would also reflect the modest budgeted increase in the public sector wage bill of less than 1 percent to cover the COLA running from August 1, 1993 through July 31, 1994. 21/ In addition, provisions equivalent to 2 percent of the wage bill were made to cover the wage adjustments that may follow the job evaluation exercise. 22/ The decline in current expenditure would be partly offset by an increase in capital expenditure.

Revenues are budgeted to remain at about 29.4 percent of GDP. Lower revenues from corporate taxes, peacekeeping receipts, and other sources would be offset by a small increase in VAT revenue (1 percent over the 1993 outcome) and by new measures announced in the budget. These include: a realignment of fiscal duty rates; an increase in excise duties for beer, cigarettes, and alcoholic beverages; and the introduction of fiscal duties on canned fish, rice, and dairy products. These measures are expected to add a further F$10.8 million to total revenue. 23/

The 1994 budget also announced that the Government plans to assess its success in simplifying the tax system. A detailed review is now under way of all existing tax incentives, import duties, and other concessions, including an assessment of the various incentive schemes such as the Company Tax (Export Incentive) Scheme, the TFF/TFZ, and the Hotels Aid Act. On the double taxation of dividends, although the introduction of a full imputation scheme was deferred to a later date, the level of dividend exemption was increased from January 1, 1994. 24/ The capital gains tax proposed in the 1993 budget has also been further delayed. The 1994 budget also announced plans to re-examine the competition and privatization elements of the Fiji Public Enterprise Reform Program adopted in October 1993.

5. Public enterprises

The public enterprise sector consists of 24 major public enterprises of which 16 are fully government owned. 25/ These enterprises perform a wide variety of functions, ranging from agricultural marketing and distribution to the provision of financial services. In 1992, the total net worth of the major enterprises was F$1.8 billion (86 percent of GDP), a 23 percent increase over 1991; net operating profits amounted to F$109 million; and total budgetary appropriations were F$33.8 million or 5 percent of total expenditure (Appendix Tables 24-26).

The overall financial performance of the public enterprise sector improved in 1992, with the net operating surplus increasing by almost 10 percent (Appendix Table 25). 26/ Much of the financial improvement was attributable to the agricultural-related enterprises and the financial institutions. In the case of the agricultural sector, operating profits grew by about 24 percent to F$15.8 million in 1992. In the case of the financial public enterprises, all institutions, with the exception of Home Finance Limited, registered significant increases in their operating surpluses. However, a number of enterprises, mainly in the civil aviation and telecommunication sectors, experienced either a decline in operating surpluses or an operating loss.

Despite the general improvement in the financial performance of the public enterprise sector, little was transferred back to the government budget in 1992 in the form of profits and dividends as most of the operating surpluses were utilized to strengthen the enterprises’ capital base. The RBF transferred the most, about F$12 million in 1992, out of operating profits of F$16 million (Appendix Table 21). 27/ Transfers from all other enterprises to the budget averaged about F$11.5 million in 1992 and 1993. Despite the improved financial performance of the sector, budgetary appropriations remained at about F$33 million.

Partly in response to the still high level of budgetary appropriations, the Government initiated a public enterprise reform policy aimed at increasing enterprises’ efficiency through corporatization. However, the early experience with corporatization was disappointing, and a comprehensive review of the reform program was planned. After a revised corporatization model was unveiled in the 1993 budget, the Privatization Committee was established in August 1993 to oversee the development and implementation of the Government’s public enterprise reform policy, and the Public Enterprise Reform Program was approved in October 1993. Within the Privatization Committee, a Public Enterprise Unit would monitor policy development and implementation. The Public Enterprise Bill is expected to be finalized by end-1994 and presented to Parliament in early 1995.

IV. Financial Sector

1. Background

The financial sector in Fiji consists of the RBF (the central bank), six deposit money banks (five of which are branches of overseas banks while the remaining one is government owned); the Fiji Development Bank (FDB); the FNPF; several other nonbank financial institutions (NBFIs, specializing in housing, trade, machinery and motor vehicles, and investment credit); several insurance companies; a number of credit unions and cooperatives; and the Unit Trust. Total assets of the (narrow) financial system, defined as bank and nonbank financial institutions, stood at F$3,975 million at end-1993; as a percent of GDP its size increased from 130 percent in 1985 to 180 percent in 1993 (Appendix Table 27). The latest addition to the financial sector was the Bank of Hawaii which opened offices in November 1993.

The basic objectives of monetary policy are to support sustainable economic expansion while reducing inflation and protecting international reserves. For this purpose the RBF has at its disposal a range of instruments, but in practice it relies mainly on indirect control via weekly tenders of short-term notes to affect bank liquidity. With these tenders, the RBF pursues a target level for banks’ balances in their settlement accounts with it, usually referred to as bankers’ demand deposits (BDD). These balances are unremunerated and maintained by banks largely to discharge their obligations in the interbank payment system. Another major instrument is the statutory reserve deposits (SRD) banks must maintain in a special account with the RBF. The reserve requirement is presently 6 percent of deposits and similar liabilities. Unlike the BDD, statutory reserves earn interest, currently 3 percent. In addition, banks must meet an Unimpaired Liquid Asset Ratio (ULAR), which the RBF regards as partly a prudential and partly a monetary instrument. The ULAR requires banks to invest the equivalent of 16 percent (unchanged since 1985) of deposits and similar liabilities in eligible government or RBF securities. Any lending by the RBF under its lender-of-last-resort facility is at the Minimum Lending Rate (MLR). Because historically there has been very little lending to banks, the MLR serves mainly as a signal. In addition to its own notes, the RBF tenders government securities, using whatever room it has, given that it must sell certain volumes, to influence interest rates in these primary markets. The RBF’s only direct controls are a minimum requirement for lending to agriculture of 7.5 percent of deposits, which banks have well exceeded, and a nonquantitative, and presently not strictly enforced, directive to banks to give priority in lending to “sectors that generate employment and foreign exchange.” Specifically, the RBF exerts no direct control over any of the commercial banks’ interest rates.

2. Monetary policy and conditions

In 1989 and 1990, the RBF managed to sterilize with its notes the excess liquidity in the banking system resulting from the restoration of international reserves after their substantial drawdown in 1987 and 1988 (Tables 8-9 and Chart 4). Against the background of renewed strong growth in international reserves, and with growth in private sector credit slowing, excess liquidity in the banking system again became a concern for monetary policy in 1992. During the first half of 1992, the focus of monetary policy was still on stimulating credit growth. Toward this end, the BDD target was progressively raised from F$10 million in January 1992 to F$40 million in April, before being lowered to F$35 million in August (Chart 4). As noted, the RBF also reduced its MLR from 8 percent to 6 percent in November. However, by the middle of the year, concern over the accumulation of excess liquidity prompted the RBF to step up the issuance of its notes, and by end-1992 the outstanding stock had doubled to about F$160 million. None the less, the combined effect of these factors was that the BDD rose from F$21 million at end-1991 to F$38 million at end-1992. While domestic credit growth slowed from 23 percent in 1991 to 13 percent in 1992, broad money continued to grow in 1992 at 14 percent (Table 8 and Chart 4).

Table 8.

Fiji: Monetary Survey, 1988-94

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Sources: Reserve Bank of Fiji, Quarterly Review (various issues); and IMF, Economic Information System.

Ratio of GDP to broad money (averages of March, June, September, and December for 1988-93).

Ratio of broad money to reserve money (December).

On 12-24 month time deposits of less than F$250,000.

Table 9.

Fiji: Reserve Money Management, 1989-94

(In percent of initial stock of reserve money)

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Source: Data provided by the Fiji authorities.

Year to June 1994.

A plus sign denotes an absorption.

CHART 4
CHART 4

FIJI: MONETARY INDICATORS, 1988-94 1/

Citation: IMF Staff Country Reports 1995, 010; 10.5089/9781451813319.002.A001

Source: Data provided by the Fiji authorities.1/ Data for 1994 refer to June.2/ Annual percentage change.3/ Defined as vault cash plus settlement account balances.4/ Settlement cash target; introduced in January 1992.

Monetary policy for 1993 was designed in light of the high level of international reserves reached at end-1992, and the attendant excess liquidity. With gross international reserves standing at over six months of import cover, well in excess of the four months the RBF at that time judged comfortable, the monetary authorities decided to proceed with a gradual relaxation of foreign exchange controls, incorporating in the monetary policy program an anticipated F$70 million loss in international reserves. Because of lackluster private sector credit growth and, none the less, high bank lending rates, the RBF also decided to maintain its BDD target for 1993 at F$35 million, and to partially offset the monetary base contraction resulting from the decline in foreign assets by not rolling over the full value of its maturing notes.

As a result of these policies, through the first half of 1993 the stock of RBF notes fell by about F$90 million (Appendix Table 28); the decline in gross reserves over that period was about the same, but of that only F$30-40 million could be attributed to the relaxation of foreign exchange controls. Moreover, domestic credit was growing at an annual rate of 11 percent during those six months, with private sector credit increasing by 10 percent in the second quarter alone. In light of these developments, concern about slow credit growth gave way to concern about official reserves, and the RBF decided to tighten its monetary stance: it lowered its BDD target to F$25 million in July, and again to F$15 million in September, and achieved this target by year-end owing to the issuance of about F$35 million in RBF notes between September and December. This was accomplished without raising the average yield (weighted by maturities) of RBF notes, but it did put some upward pressure on the interbank rate. None the less, over the year as a whole, the average bank lending rate dropped 1 percentage point under the influence of the decelerating inflation (Appendix Table 30 and Chart 4). In the end, broad money grew by 6.7 percent over 1993 and domestic credit by 11.7 percent.

The stance of monetary policy at the outset of 1994 was derived from a year-end target for official reserves of about F$400 million, equivalent to approximately four months of imports. Given the economic growth assumption and inflation target, this was judged consistent with 10 percent domestic credit growth over the year, and with a target level for BDD at year-end of F$7.5 million. In the event, in April the RBF lowered its BDD target to F$7.5 million. The tightening of liquidity conditions was reflected in some (further) increase in the promissory note rate and the interbank rate. However, subsequently actual BDD increased substantially, reaching F$20 million by end-June, as new RBF claims on official entities (the FDB and Sugar Growers Fund Authority) added to base money growth. Banking system domestic credit expanded by over 8 percent during the first half of 1994, mainly on account of credit to the Government. The reason for this was that the Government had been forced to finance its expenditures with treasury bills held by banks rather than with bonds held outside the banking system as its long-term borrowing authorization under the 1993 budget had run out and passage of the 1994 budget was delayed.

3. Operations of commercial banks

The sectoral composition of loans and advances of commercial banks (Appendix Table 32) shows that 1993 continued the pattern of 1992: credit growth was strongest for wholesale and retail trade (which includes hotel and restaurant activity) and to private individuals; together these two sectors account for half the credit outstanding. Credit for agriculture and manufacturing, on the other hand, was stagnant or declined.

The profitability of the commercial banking sector improved, with before-tax profits as a percentage of average assets increasing from 0.7 percent in 1991, to 1.6 percent in 1992, and to 1.8 percent in 1993 (after-tax 0.5 percent, 0.8 percent, and 1.0 percent, respectively). With operating income (about equally divided between interest and noninterest) decreasing from 1991 to 1993, the major gain stemmed from reduced charges for bad and doubtful debts and reduced operating expenditures from lower staffing costs. The average net interest margin (net interest income as a percentage of average earning assets) for all banks, which was 3.9 percent in 1992, down from its peak of 5.2 percent in 1989, remained unchanged in 1993, but masked quite divergent trends for different banks.

Pending the revision of the Banking Act, the RBF in 1993 already obtained the banks’ agreement to voluntarily comply with capital adequacy standards as endorsed by the Basle Committee on Bank Supervision. Since March 1993, all banks have been submitting quarterly reports of their capital position in Fiji. During a phase-in period, the minimum capital adequacy ratio has been established at 4 percent for 1993, which all banks meet, rising to 8 percent by December 1997.

4. Nonbank financial institutions and capital markets

The two largest nonbank financial institutions in Fiji are the Fiji National Provident Fund and the Fiji Development Bank (Appendix Table 35). Two NBFIs were recently established: the Merchant Bank of Fiji was licensed in 1992 as a credit institution, permitting it to mobilize deposits but not to offer checking services, and is partly owned by the International Finance Corporation; and the Credit Corporation Ltd. is a Papua New Guinea-owned finance company, which in 1993 entered the business of short-term equipment and motor vehicle finance. Out of concern about disintermediation, the RBF imposed in early 1994 a 10 percent liquid asset requirement on NBFIs, analogous to the ULAR applicable to banks.

The Fiji National Provident Fund is a superannuation fund that is compulsory for all wage and salary earners in Fiji. It is by far the largest institutional investor in Fiji, with assets of F$1,287 million at end-1993 or some 72 percent of the NBFI (unconsolidated) total. Contributions amount to 14 percent of gross pay, shared equally between employers and employees. The share of total FNPF lending to the Government and statutory bodies was 58 percent and 28 percent, respectively, at end-1993. The increase in credits outstanding during 1993 was divided as follows: 44 percent to the Government; 41 percent to statutory bodies; 11 percent to the Housing Authority; and 4 percent to the private sector. The FNPF faces a shortage of viable private sector investment opportunities. In recent years it has ceased lending to agriculture because of the high risks stemming from uncertain land tenure arrangements. As of 1994, the FNPF is permitted to invest up to F$10 million abroad. 28/ The FNPF’s declared interest, which is the interest credited to members’ accounts, was reduced from 9.8 percent in 1992 to 9 percent in 1993.

The second largest NBFI is the Fiji Development Bank which provides long-term finance to the private sector. It derives most of its financial resources from issuing domestic notes and bonds that are government guaranteed; in addition it on-lends some loans from international organizations, and it was recently given permission by the RBF to mobilize a limited amount of deposits. Its assets at end-1993 stood at F$274 million, which was 15 percent of the NBFI total. The FDB’s financial position is still encumbered by the bad loans that emerged after the rapid expansion of its lending following the events of 1987. The FDB’s lending to agriculture is subsidized to make up for the high losses typically incurred on this type of lending. The government budget pays the FDB 5.5 percentage points on top of the 8 percent interest paid by the debtor. Over the years, the FDB’s lending to agriculture has steadily declined in favor of lending to industry, with the shares at end-1993 respectively at 23 percent and 77 percent. On the same subsidized terms as lending to agriculture, the FDB offers a special lending program to promote businesses owned by indigenous Fijians. A shortage of bankable projects in its traditional areas of lending has prompted the FDB to extend into residential mortgages.

The Suva Stock Exchange Limited which used to be a wholly owned subsidiary of the FDB, was recapitalized in 1993 by bringing in four new shareholders (the FNPF, the Merchant Bank of Fiji, the Credit Corporation, and an insurance company). The Board of the Exchange was reconstituted accordingly. Furthermore, the listing rules, adapted from those of the Sydney Stock Exchange, were reviewed in 1993 to make them more appropriate to Fiji’s circumstances, and new rules came into effect on November 22, 1993. Among other changes, the admission criteria were substantially simplified, as were the continuing listing requirements, and the issue of nonvoting shares was allowed. The number of companies listed on the Exchange is down to three from a onetime peak of eight because several companies were delisted after having been taken over.

V. External Sector

1. Overview

After having recorded surpluses in 1991 and 1992, the current account and the overall balance moved into deficit in 1993 (Table 10 and Chart 5). The level of gross official international reserves, which had risen to 6.1 months of import cover (c.i.f.) at end-1992, declined to 4.5 months of import cover at end-1993. The current account shifted from a surplus of 1.5 percent of GDP in 1992 to a deficit of 2.2 percent of GDP in 1993. The trade deficit widened substantially to 16 percent of GDP from about 9 percent in 1991 and 1992. The services account, although showing a considerable increase spurred by a recovery in tourism receipts, did not offset the trade account trend as it did in 1991 and 1992.

Table 10.

Fiji: Balance of Payments, 1988-93

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Sources: Fiji Bureau of Statistics; and Reserve Bank of Fiji.

In percent of exports of goods and services.

CHART 5
CHART 5

FIJI: External Developments, 1988-93

(In percent of GDP, except as otherwise indicated)

Citation: IMF Staff Country Reports 1995, 010; 10.5089/9781451813319.002.A001

Source: Data provided by the Fiji authorities.1/ Standardized percentage change.2/ In percent of exports of goods and services.3/ In months of imports of goods and services.

Net capital inflows declined substantially as larger-than-expected capital outflows offset increased direct investment inflows, mainly associated with the importation of an aircraft. As a result, the overall balance recorded a deficit of 2.1 percent of GDP in 1993 after averaging surpluses in excess of 2 percent over the last three years. Continued official net outflows helped to further reduce the debt ratio by more than 3 percentage points of GDP to 17. 4 percent in 1993, while debt service also declined from 7.6 percent in 1992 to 6.6 percent in 1993.

The export base remains concentrated in a few products, with sugar, garments, gold, and fish accounting for 80 percent of total domestic exports. Sugar and tourism still account for 40 percent of foreign earnings. As to the direction of trade, a significant diversification has been taking place on the export side in recent years, with Australia accounting now for more than a fourth of Fiji’s exports, whereas the pattern of imports has remained largely unchanged.

2. Current account

The current account shifted from a surplus of 1.5 percent of GDP in 1992 to a deficit of 2.2 percent of GDP in 1993, as a widening of the merchandise trade gap more than offset a sizable increase in the invisibles surplus.

After declining in 1991 and 1992, merchandise exports increased by 1.1 percent in 1993 (Appendix Table 36 and Chart 5). As a share of GDP, total merchandise exports declined to below 30 percent in 1993 down from 38 percent in 1990. Export unit values declined by an estimated 11.5 percent in U.S. dollar terms, offsetting an otherwise significant 12.6 percent increase in export volumes. Domestic exports, which account for 90 percent of total exports, increased by 3.4 percent, spurred by recovery in garments (7.5 percent), other nontraditional exports (7.1 percent) and, to a lesser extent, sugar (1.6 percent). Total re-exports (f.o.b.) declined in 1993 to US$61.6 million from about US$70 million in 1991 and 1992. Mineral fuels continued to represent the largest share of re-exports.

Sugar accounts for slightly less than 40 percent of total domestic exports, down from 44 percent in 1988. About 60 percent of it was exported in 1993 under preferential marketing agreements to the EU and the United States at above prevailing international prices (Appendix Table 37). Although the volume of sugar exports increased by 20.3 percent in 1993, this rise was offset by a substantial decline in unit values (15.5 percent). 29/

Garment exports recorded a modest recovery in 1993 after a 12.5 percent decline in 1992. As to the garment quota to the U.S. market, negotiations were concluded at the beginning of 1994, retroactive from January 1993 through January 1995. The quota concerned mainly knitwear. The new quota is considerably larger (900,000 units) and the utilization rate is currently at 70-80 percent. Owing to the flexibility and carry-forward provisions within the Multifiber Arrangement (MFA), the actual quota was above one million units. The quota to the EU market was based on a two-year derogation under the Lomé Convention, because normally, garments from Fiji would not qualify for the EU market according to rules of origin. The utilization rate of the EU quota is still fairly low.

Merchandise imports increased by 14 percent in 1993 after having declined for two consecutive years by 14.3 percent and 2.3 percent, respectively (Appendix Table 38 and Chart 5). Import penetration surpassed 45 percent of GDP. Food, fuel, chemicals, manufactured goods, and transportation equipment accounted for 85 percent of total imports. Import growth reflected substantial increases of food imports (19.5 percent) and miscellaneous (mainly consumer-related) goods (38 percent) following the disruption of domestic food supplies caused by cyclone Kina, and the importation of an aircraft worth US$16.6 million (2.3 percent of total imports). On the other hand, crude materials, manufactured goods, and chemicals recorded modest increases reflecting the low level of investment in the economy.

Fiji’s direction of trade has seen significant diversification on the export side in recent years (Appendix Table 40). Australia’s share increased from an average of 20 percent during the 1990-92 period to 25.6 percent while EU’s share declined from a peak of 33 percent in 1992 to 26 percent in 1993, reflecting a sharp reduction in export share to the United Kingdom from 32 percent in 1992 to 24.2 percent in 1993 (mostly sugar and canned fish). Exports to New Zealand continued to fall steadily from a peak of 16.1 percent in 1989 to 5.5 percent in 1993, following a sharp reduction in garment exports. In contrast, Australia and New Zealand have maintained their role as Fiji’s major suppliers, accounting together for some 50 percent of total imports (c.i.f.), Japan remains the third largest supplier, although its share has been declining in favor of the newly industrializing economies in Asia.

A large surplus on net services and transfers has always been a feature of Fiji’s balance of payments (Appendix Table 41 and Chart 5). After having averaged about 10.5 percent during the last three years, in 1993 the net services surplus expanded considerably reaching 13.8 percent of GDP. Earnings of the tourism sector, which account for nearly half of the total services receipts, grew by 11.7 percent in 1993, reflecting an increase in arrivals (3.2 percent) and higher per capita spending. Freight, insurance, and other transportation account for an additional 40 percent of total services receipts. Factor outflows declined sharply by US$15.4 million following a drop in reinvested earnings and private interest payments. Private transfers remained negative, still reflecting emigration trends, although slightly lower than in 1992. Net official transfers increased marginally to US$27.1 million. However, aid in cash dropped considerably from US$9.2 million in 1992 to US$2.9 million in 1993, accentuating a declining trend initiated in 1991 when aid inflows reached a US$12.3 million peak.

3. Capital flows

Following a relaxation of capital controls in 1993, the capital account surplus declined by US$18.7 million to US$6.2 million (Appendix Table 42). The turnaround was mainly induced by commercial banks, which increased their foreign-currency-denominated assets and balances due from banks abroad by US$13.5 million, of which about US$8 million was associated with the forward exchange contracts, and decreased their foreign currency liabilities by US$3.8 million. Direct investment flows increased by US$10.9 million, driven by the lease of an aircraft which amounted to US$59.2 million. Aside from this bulky transaction, direct investment declined as equity was divested and there was no reinvestment of earnings. On the official side, net outflows increased by US$10 million. This partly reflected the decision of the authorities to allow the FEA to prepay part of an external loan (F$5 million). Statutory authorities’ drawings under existing loans were less than US$1 million, down from US$9.6 million in 1992.

4. External debt and international reserves

Fiji has continued to follow its policy of reducing overseas indebtedness in order to minimize its vulnerability to exchange rate fluctuations and lower its debt-service burden. As a result, in 1993 the outstanding external debt declined by US$26.2 million to US$250.6 million at book value (Appendix Table 43). As a share of GDP, total external debt has been almost halved from 32.5 percent in 1989 to 17.4 percent in 1993 (Table 10 and Chart 5). Of this, central government and statutory authorities account for 48.5 percent and 23.5 percent, respectively. The debt-service ratio continued to decline from 13.4 percent of exports of goods and services in 1988 to 6.6 percent in 1993.

Gross official international reserves declined from US$319.3 million at end-1992 to US$270.4 million (equivalent to 4.5 months of import cover) at end-1993 (Appendix Table 44 and Chart 5). Following a typical seasonal pattern, gross reserves declined further to US$219.4 million in May 1994 and subsequently rebounded to US$243 million in June-July as sugar receipts started to accrue. 30/

In 1993, the RBF introduced a number of changes in its reserves management. The RBF approved the use of external fund managers to manage a total of US$40 million of foreign reserves, although a contract has not yet been signed because the Reserve Bank of Fiji Act must be amended first. 31/ An appropriate amendment has been drafted and is presently under discussion in Parliament. The RBF Board also approved in June 1993 the investment in Australian semi-government securities, namely New South Wales Treasury corporation and Queensland Treasury corporation bonds. Finally, the RBF Board also approved the New Zealand dollar as an investment currency at its monthly meeting in July 1994; between 5 and 15 percent of total foreign reserves may now be invested in New Zealand dollars.

5. Exchange rate and exchange controls

Since April 1975, the exchange rate of the Fiji dollar has been pegged to a basket of currencies of Fiji’s five major trading partners: the Australian, New Zealand, and U.S. dollars, the pound sterling, and the Japanese yen. The weights of the currencies in the basket are based on the value of trade, tourist transactions, and external debt over the preceding three years. The unpublished weights were last revised on August 3, 1992. The RBF publishes daily the US$/F$ exchange rate; a spread of five basis points to either side gives the RBF’s interbank buying and selling rates in its dealings with commercial banks. 32/

The nominal effective exchange rate appreciated modestly in the year through December 1993 (1.8 percent), with appreciations against the pound sterling and the Australian dollar having almost been offset by large depreciations against the Japanese yen and, to a lesser extent, the New Zealand dollar (Chart 6). During December 1993-June 1994, the nominal effective exchange rate appreciated by an additional 1.2 percent led this time by an appreciation against the U.S. dollar and a continued appreciation against the pound sterling, which were partly offset by modest depreciations against the Japanese yen and the New Zealand dollar. The pattern vis-à-vis the Australian dollar was almost completely reversed during the first half of 1994, with the nominal exchange rate against the Australian dollar back at the early 1993 levels. Over the period December 1992-June 1994, the Fiji dollar’s real effective exchange rate appreciated by a cumulative 3.1 percent, reflecting the nominal effective exchange rate appreciation and higher, albeit slowing, inflation than in Fiji’s major trading partners.

CHART 6
CHART 6

FIJI: EXCHANGE RATE INDICES, 1987-94

(1980=100)

Citation: IMF Staff Country Reports 1995, 010; 10.5089/9781451813319.002.A001

Source: IMF, Information Notice System.1/ An increase indicates an appreciation of the Fiji dollar.2/ Brazil has been excluded from Fiji’s trading partners and competitors covered by these indices, because despite its small weight, sharp movements in Brazil’s prices and exchange rate distort the indices.3/ Foreign currency per unit of domestic currency based on period average rates.

A number of measures to relax exchange controls were implemented during 1993 and on January 1, 1994. These measures had the dual objective of siphoning off domestic liquidity and gradually easing capital controls. 33/ These measures included: allowing residents to undertake offshore portfolio investment up to certain amounts; raising the limits for repatriation of capital profits and for local borrowing by foreign-controlled companies without prior reference to the RBF; expanding the framework of forward exchange contracts concluded by authorized dealers to include payments for dividends and services; and broadening the range of payments permitted under the exporters’ retention scheme. Indicative limits on foreign exchange travel allowances not subject to prior approval by the RBF were also increased. During the first half of 1994, the measures introduced on January 1, 1994 accounted for a decline in external reserves of F$17.7 million. 34/

6. Trade deregulation and tariff reform

The process of import liberalization was inaugurated in 1989. Since then, nearly all quantitative import restrictions have been replaced by tariffs, and average tariffs have been progressively lowered. The 1994 budget continued this process, replacing import licensing requirements for canned fish, rice, and powered milk with protective tariffs that will be progressively reduced. 35/ This only leaves two products—bulk butter and lubricating oil—under licensing requirements (Table 11). The removal of licensing for bulk butter has already been announced for 1995; import licensing for lubricating oil has been retained so far owing to a legal case pending against the Government, although, in practice, the licenses are granted freely.

Table 11.

Fiji: Items Under Import Licensing, 1989-94

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Sources: UNIDO, Tariff Restructuring Review, May 1993; and data provided by the authorities.

The Fiji Customs Tariff is a single column tariff whereby no preferential treatment is granted to any foreign trade partners. Since January 1, 1989, Fiji has fully implemented the 1983 Harmonized Commodity Description and Coding System of the Brussels Customs Cooperation Council for the classification of imports and exports. Until June 1992, two types of import duties were distinguished: a variable rate fiscal duty and a flat rate customs duty. Effective July 1992, the customs duty was replaced with a 10 percent value-added tax. Apart from the ad valorem tariffs described, the Fiji customs schedule also includes specific import duties as well as alternate ad valorem/specific duties, the higher of which is applied for a number of major revenue-raising items, such as spirits, tobacco, mineral fuels, tires, and motor vehicles. On the export side, a uniform 3 percent export duty is levied on sugar and molasses, silver, gold, and base metals or silver covered with gold. Parts II and III of the Fiji Customs Tariff contain provisions for the granting of duty concessions and rebates to a considerable number of goods, persons, and bodies. 36/ Concessions are most widely granted to manufacturing firms which, in principle, may seek duty reductions or exemptions for the initial establishment of businesses.

Since mid-1989, the maximum general tariff has been progressively reduced from 50 percent to the current 25 percent effective January 1, 1993. The Government has reaffirmed in the 1994 budget its intentions to further reduce the maximum general tariff to no less than 20 percent in the 1995 budget. 37/ In the 1994 budget, fiscal duties on various items such as beer, wine and spirits, fuel oils, and tobacco were raised by 2.5 percentage points to 10 percent. Fiscal duty rates were reduced by 5 percent on cement, tires, PVC pipe fittings, and dentifrices, and by 20 percent on fireworks. In 19 out of the 21 customs tariff sections, the minimum fiscal duty rates have been reduced to zero. Above standard maximum rates are maintained in 5 sections, although effectively apply to a limited number of goods under a total of 6 out of 97 tariff chapters. 38/ Tariff dispersion has also declined.

7. International trade agreements and arrangements

Although it already enjoyed de facto GATT status as a former colony of a GATT member, Fiji formally applied to the General Agreement on Tariffs and Trade and became a full contracting party in December 1993. In March 1994, the Fiji Government submitted its schedules of concessions to the Uruguay Round and signed the Agreement in Marrakesh last April. 39/ No bilateral negotiations were required. The Government had decided to bind tariffs at 40 percent for a wide range of agricultural products, with the exception of powdered milk and rice which have a 46 percent binding tariff. In all of these cases, however, Fiji’s tariffs were already well below the binding tariff. Concessions were also submitted for alcohol and tobacco products, and some services, although these were not required at this stage. As to industrial products, Fiji decided to bind its ten major import items. Fiji’s final concessions were actually much broader as they were based on a two-digit classification. The accession to the GATT and the concessions submitted to the Uruguay Round would only require Fiji to make a few technical adjustments, such as modifying the Excise Act according to the schedule of concessions submitted.

Fiji also participates in the international commodity agreement for sugar, and since 1986 has been a member of the Multifiber Arrangement joining its repeated extensions. Fiji also received trade preferences under the EU-ACP Lomé IV Convention, with the Sugar Protocol offering the most significant advantages. In the framework of UNCTAD, Fiji also participates in the Generalized System of Preferences. Preferential access under this scheme has been granted by the United States and Canada.

At the regional level, Fiji is benefiting from its participation in the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) enacted in January 1981, which aims at redressing the trade deficit of the South Pacific island countries with Australia and New Zealand. Under the Agreement, Australia and New Zealand provide, on a nonreciprocal basis, duty-free and unrestricted access to their markets for all products exported by the South Pacific Forum Island Countries (SPFIC), provided they meet certain rules of origin. Specifically, goods entering Australia or New Zealand must have a minimum of 25 percent SPFIC content and a minimum of 50 percent SPFIC/Australia/ New Zealand content. SPARTECA also includes provisions for general economic, commercial, and technical cooperation, and safeguard provisions relating to dumped or subsidized goods. New Zealand has recently agreed to implement a derogation for Fiji’s garment exports under SPARTECA so that only 45 percent of the total cost of the export item must be comprised of qualifying area content. This derogation is to apply for a period of three years, and it will then be subject to review. It is applicable to all tariff headings relating to clothing. In April 1994, Australia agreed to consider some additional items in the calculation of the local content heading.

The strengthening of regional trade and economic links is a high priority for the Fiji Government. Within the immediate South Pacific region, bilateral agreements are being finalized with Papua New Guinea, Tonga, Tuvalu, and Vanuatu. Also, Fiji is ready to join the Melanesia Spearhead group comprising Papua New Guinea, the Solomon Islands, and Vanuatu. The aim remains, however, to develop all these trade agreements into a more comprehensive multilateral agreement among Pacific island countries at a future stage. The Government is also keen to foster increased participation in Asia-Pacific forums such as Asia-Pacific Economic Cooperation (APEC) and the UN Economic and Social Commission for Asia and the Pacific (ESCAP).