Abstract
This 2002 Article IV Consultation highlights that following the political crisis, Fiji experienced sharp declines in tourism earnings, while external sanctions adversely affected investment and textile exports. As a result, GDP fell 2¾ percent in 2000, and the current account deficit widened to 6½ percent of GDP. Financial stability and the basket peg of the Fiji dollar were maintained through tightening of domestic monetary policy and exchange controls, together with government spending cuts to offset the impact of weaker growth on the fiscal deficit.
Recent Economic Developments
Fiji’s economy rebounded in 2001 with a growth of 3.8 percent after experiencing a negative growth of 2.8 percent in 2000 largely due to the political crisis. The turnaround was due to robust growth in the clothing and footwear sector and quick recovery in the tourism industry.
The economic outlook for 2002 is encouraging, with GDP forecast to grow by 4.4 percent, supported by positive developments in all major sectors of the economy, except the sugar industry. Following the recovery in 2001, the tourism sector has continued to show good performance with a higher than expected number of visitors. In view of expected extraction of high quality ore as well as the recent general improvement in international gold prices, the prospects for the mining sector continue to remain optimistic. Garment production rose in 2001 and is expected to pick up again this year, particularly with the delivery of large consignments to the US market. In addition, production for the Australian market remains buoyant, boosted by favorable economic conditions in Australia. Copra production is also expected to increase, supported by the prevailing high mill gate price. Consequently, the economy is expected to grow by 5.9 percent in 2003, boosted by higher investments and tourism earnings related to Fiji’s hosting of the South Pacific Games.
Inflation in Fiji has remained low, and generally well below the Reserve Bank’s implicit target range of 3–5 percent. CPI inflation moderated further to 2.3 percent at end 2001 and to 1.2 percent in March 2002. The low and stable inflation largely reflected the low inflation rates in its major trading partners. As the domestic and foreign price pressures are anticipated to remain weak, the 2002 year-end inflation is projected at 2.5 percent.
Mainly as a result of a timely policy response by the Fijian authorities, the external sector continued to hold up well in 2001. Despite a higher merchandise trade deficit largely reflecting lower demand for Fiji’s exports and a rise in imports of capital goods, strong recovery in tourism income and improved private transfers have narrowed the current account deficit to 3.6 percent of GDP in 2001. At end March 2002, gross foreign reserves remained at a comfortable level at about $786 million, sufficient to cover 3.7 months of imports of goods and non-factor services.
Fiscal Policy
During 2000, my Fijian authorities implemented corrective fiscal policy measures to contain the adverse economic consequences of the political crisis. A mini-budget, introduced in July 2000, with a tough line on expenditure reducing measures, had contained the fiscal deficit at 3.2 percent of GDP in 2000. However, despite a substantial improvement in VAT collection, the Government’s efforts to stimulate the economy through fiscal incentives and higher expenditures resulted in a higher budget deficit of 6.5 percent of GDP in 2001.
The 2002 budget proposed an expansionary policy with more resources allocated to capital spending, aimed at supporting growth. This reflects the Government’s commitment to a more active role in rebuilding the economy, with greater emphasis on addressing basic needs; improving economic efficiency and competitiveness; and reforming the civil service, public enterprises and public financial management. However, in view of the shortfall in tax revenue and the problem of tax arrears, my Fijian authorities are improving tax compliance and the collection of tax arrears by strengthening its institutional capacity through upgrading the tax information system, recruiting additional staff and providing them with the necessary training and equipment. The expected receipts from the privatization program will also reduce the pressure on the budget deficit.
My Fijian authorities have taken note of staff’s recommendation to take immediate action to cut the fiscal deficit to around 3 percent of GDP in 2002 through a combination of cuts in wage cost and reducing capital expenditures. They agree that there is indeed a need for fiscal consolidation, but they are of the view that the economic recovery has to be firmly in place before any significant additional measures can be introduced. They also agree with staff that it is important to restore fiscal sustainability and to achieve the medium-term target of debt/GDP ratio at 40 percent.
Monetary and Exchange Rate Policy
The easy monetary policy stance, adopted in 1997, was continued in 2000. However, following the coup in May 2000, the Reserve Bank of Fiji tightened its monetary policy through a combination of raising interest rate, imposing ceiling on credit to the private sector and existing exchange controls procedures were tightened, in order to prevent excessive capital outflow and to minimize pressure on the Fijian dollar. No new current account restrictions were introduced. In September of the same year, against a backdrop of a return to normalcy in the political and security situation, and a favorable assessment of economic conditions, monetary policy was eased by cutting interest rates progressively, removing the credit ceiling on commercial banks’ lending and the exchange controls procedures were relaxed. The accommodative stance of monetary policy was continued in 2001 to stimulate demand and support economic recovery. To support the export sector, commercial banks were required, with effect from August 1, 2001, to lend a minimum of 5 percent of their average deposits to eligible exporters and data collected to date shows that commercial banks’ lending to this sector far exceeded this ratio. The lending rate of the existing Export Finance Facility was also reduced from 3.0 to 2.0 percent.
Since September 2000, the RBF has progressively relaxed exchange controls, including the re-introduction of the off-shore investment facility, re-delegation of certain exchange control approvals to commercial banks and authorized foreign exchange dealers, and partial reinstatement of the forward foreign exchange facility. The authorities are committed to further liberalizing exchange controls but they are mindful that it has to be carried out cautiously.
The long-established peg of the Fijian dollar to a basket of currencies of the major trading partners has served the economy well in providing an anchor for inflation and inflationary expectations. With the devaluation of about 20 percent in January 1998, the Fijian dollar has remained competitive. Against this background, my Fijian authorities have indicated their intention to retain the currency peg and to move cautiously to introducing a more flexible exchange rate in line with the recommendation of the MAE technical assistance mission.
Financial Sector
The Reserve Bank of Fiji is responsible for supervising all licensed financial institutions, including banks, credit institutions, foreign exchange dealers and insurance companies licensed in Fiji. The share of non-performing loans for banks has fallen to 6.4 percent in 2001 from 7.0 percent in 2000. In the case of credit institutions, NPL continued to remain high, increasing from 11.9 percent in 2000 to 17.6 percent in 2001.
As reported by staff, the banking sector is essentially healthy and the RBF’s regulatory and supervisory role is adequate and effective. Fiji’s financial sector is dominated by five foreign banks and the Fiji National Provident Fund (FNPF). Assets of the FNPF continued to grow in the past two years, unlike the other financial institutions. Of the total gross assets of the financial system, the non-bank financial institutions (NBFIs), including the FNPF, accounts for around 53 percent, while the other financial institutions accounts for around 47 percent. For these reasons, and taking into account the RBF’s strong reputation and its staff’s capability, the authorities plan to extend the RBF’s supervisory coverage to the NBFIs, starting with the FNPF and the Fiji Development Bank.
The Reserve Bank has carried out an internal assessment of Fiji’s banking supervisory regime for compliance with the minimum standards of the Basle Committee’s Core Principle on banking supervision. Fiji has recently agreed to participate in the joint IMF-World Bank Financial Sector Assessment Program - the project is expected to commence in the latter part of 2003.
Measures on AML/CFT
The authorities have been working on the implementation and enforcement of the anti-money laundering law in Fiji. The Anti-Money Laundering Officials Committee, chaired by the Permanent Secretary of the Ministry of Justice, is currently reviewing the draft legislation to establish a Financial Intelligence Unit (FIU) under the Proceeds of Crime Act. It is expected that the necessary legislation to establish the FIU will be finalized by September 2002. Fiji is a member of the Asia Pacific Group on Money Laundering (APG), and a mutual evaluation exercise was conducted by the APG in mid-February 2002. The findings indicate that Fiji is generally compliant with the regional and international anti-money laundering standards. My Fijian authorities have received the report and are working on measures and systems that may require further strengthening.
Structural Measures
Financial Management Reform
In the 2002 budget, the government announced its plan to support the implementation of a performance management system in the civil service, and to coordinate its implementation with financial management reform. To enhance fiscal transparency, which is an essential element of the financial management reform, the authorities indicated their intention: to strengthen the financial management information system; to revisit the 1999 Public Financial Management Act with a view to ensuring greater accountability; to adopt the IMF standard of fiscal transparency; and to reintroduce official rating on Fiji by an international rating agency. The authorities are also in agreement with staff that an interim monitoring arrangement should be put in place to improve financial control as the first phase of the financial management reform rescheduled for completion by mid- 2003.
Privatization issue
During 2001 and 2002, a portion of the Government’s shareholdings in the Amalgamated Telecom Holdings Ltd. (ATH) was sold to Fijian nationals and the FNPF. The FNPF now owns more than 50 percent of the ATH. The planned sale of 20 percent of the Government’s shares in the Colonial National Bank (CNB) to Fijian nationals, Provisional Councils and the FNPF was postponed as a proposal by a foreign bank to buy 49 percent of the Government’s share in the CNB at an attractive price was submitted to the Cabinet for consideration.
My Fijian authorities indicated that there are no immediate plans for further privatization beyond the planned sale of the Government’s share in the CNB, and that they are focusing their efforts on the improvement of management and commercial operation of existing entities.
Restructuring of Sugar Industry
Sugar production has been declining since its peak in 1994, owing to a number of problems, including the land lease issue, low cane supply to the mills, and transportation and mill inefficiencies. The authorities are fully aware that if these problems are not resolved, the country is likely to face a number of challenges, in particular, lower growth, higher unemployment and a large scale migration of the unemployed rural population that will create additional strains on urban infrastructure and the social fabric. A proposal for restructuring the industry is under discussion and the good will and effective cooperation of the major players are crucial for success.
Improving Climate for Foreign Direct Investment
My Fijian authorities acknowledge that simplification of the FDI approval process and removal of the barriers deterring foreign investment are necessary to attract foreign direct investment. Prompt action has been taken by the Ministry of Commerce, Business Development and Investment. They have employed a consultant to review the approval process, and a review of the Foreign Investment Act is being initiated.
Statistical Issue
On the statistical issue, my Fijian authorities have committed to continue their efforts to further improving the statistical data in the areas of trade and external debt and expenditure GDP, as well as the coverage of the monetary statistics. Fiji also participates in the General Data Dissemination System.
Medium-Term Fiscal Strategy
My Fijian authorities have adopted a medium-term fiscal strategy aimed at achieving a medium-term target of 40 percent for the central government debt/GDP ratio and raising the target share of government expenditure on investment to 30 percent. They have also indicated that staff’s proposal to increase the VAT rate to 12 percent may be considered as an option to increase revenue in the 2003 budget.
Conclusion
In conclusion, my authorities are grateful for the technical assistance directly provided by the Fund and through the Pacific Financial Technical Assistance Center. My authorities welcome regular contact with the Fund and look forward to receiving the Fund’s continued assistance.