Republic of Fiji: 2018 Article IV Consultation—Press Release and Staff Report
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
15 Feb 2019
eISBN:
9781484399484
Language:
English
Keywords:
ISCR; CR; government; pension savings withdrawal; Fiji; appraisal; Fiji investment; growth resiliency; rate target; board member terms; time deposit
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2018 Article IV Consultation-Press Release and Staff Report

Abstract

2018 Article IV Consultation-Press Release and Staff Report

Context, Recent Development, Outlook and Risks

A. Context

1. Fiji’s economic performance has improved in recent years. Despite frequent natural disasters, the economy has been resilient and is on track to achieve its 9th consecutive year of growth in 2018 (Figure 1, top left). The 2014 election, following 8 years of military government, was a turning point as Fiji reengaged with the international community and political stability bolstered business confidence and GDP growth (Text Figure 1). The government was reelected in November.

Figure 1.
Figure 1.

Fiji: Recent Developments

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Text Figure 1.
Text Figure 1.

Fiji: Recent Economic Performance

(annual average; percent)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: FBoS and IMF staff estimates

2. There is, however, ample scope for raising medium- and long-term growth. Although GDP growth picked up in recent years, its average in the last few decades was low compared to other emerging and developing economies (Text Figure 2). Against this background, the National Development Plan (NDP) aims to transform Fiji into a more dynamic and inclusive economy with annual GDP growth averaging 4–5 percent over the next two decades, higher than staff’s current estimates of potential growth (3–3.5 percent). The ambitious growth targets in the NDP are underpinned by an increase in the investment rate to 25 percent of GDP from an average of 19.8 percent of GDP during 2014–17.

Text Figure 2.
Text Figure 2.

Fiji: Real GDP Growth

(percent)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: FBoS and IMF World Economic Outlook

B. Recent Developments

3. The economy is recovering well from several natural disasters. Tropical Cyclone Winston, a Category 5 storm, hit Fiji in February 2016 and caused extensive damage while tropical Cyclones Josie and Keni in April 2018 brought substantial floods. Real GDP growth was 3 percent in 2017 and is projected to reach 3.2 percent in 2018, led by consumption and public investment (Figure 1). Headline inflation rose to 4.1 percent on average (y/y) in 2018, on account of higher excise taxes on tobacco and alcohol as well as higher prices for yaqona (Fiji’s traditional drink) caused by the April floods.

4. The fiscal stance has eased substantially in the wake of the cyclones. The deficit in fiscal year 2017–18 is estimated at 4.8 percent of GDP, up 2.5 percent of GDP from the year before on account of large spending increases that more than offset stronger revenues (Text Table 1). Although part of the expenditure increase (about 1.6 percent of GDP in fiscal year 2017–18) is directly related to post-cyclone rehabilitation, there was also a sizable increase in current spending. The public debt-to-GDP ratio increased to 50 percent by the end of fiscal year 2017–18, reversing a downward trend that started in 2010 (Text Figure 3).

Text Table 1.

Fiji: Central Government Operations

article image
Source: MoE and IMF staff calculations
Text Figure 3.
Text Figure 3.

Fiji: Public Debt

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: MoE

5. External conditions are becoming less favorable. Despite the slight decline in late 2018, average oil prices during 2018 were about 30 percent higher than 20171 and world sugar prices fell 24 percent on average in the first ten months of 2018 (Text Figure 4).2 In addition, growth of main trading partners is projected to slow down, affecting tourism and other exports (Text Figure 5). In the first nine months of 2018, the trade deficit increased by about 2.7 percent of GDP (text Figure 6) on account of higher imports of transportation equipment and fuel (Figure 3, middle right) and lower exports of sugar (Figure 3, bottom left). Foreign reserves declined by 13 percent (US$ 142 million) during 2018 but remain at about 4.5 months of imports (Text Figure 7) by December 2018.

Text Figure 4:
Text Figure 4:

Sugar Price

(US$ cents per pound; end of period)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF
Text Figure 5.
Text Figure 5.

Fiji Trading Partners’ GDP Growth

(percent)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: IMF World Economic Outlook, Oct 2018.
Text Figure 6.
Text Figure 6.

Fiji: Trade Balance

(million F$)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: FBOS and RBF. Excluding aircraft imports.
Text Figure 7.
Text Figure 7.

Fiji: Foreign Reserves

(million US$)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF

6. Financial conditions tightened in recent months while the monetary policy rate has remained unchanged. Commercial banks’ excess liquidity has been declining during 2018 (Text Figure 8) while time deposit rates paid by commercial banks have been increasing (Text Figure 9). Amid this backdrop, the overnight policy rate (OPR) through which the Reserve Bank of Fiji (RBF) communicates its monetary stance has remained unchanged at 0.5 percent (Figure 4, top right).

Text Figure 8.
Text Figure 8.

Fiji: Commercial Banks’ Liquidity

(Demand deposits at RBF; in F$ millions)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF
Text Figure 9:
Text Figure 9:

Fiji: Time Deposit Rate at Commercial Banks

(percent)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF

C. Outlook and Risks

7. Growth is projected at 3–3.5 percent in 2019 and the medium term, in line with estimates of potential growth (Table 5). High public investment, stable FDI, and the elimination of uncertainties surrounding the election are expected to support investment growth. Inflation is projected to decline to 3 percent in 2019–20 as supply disruptions ease (Table 5). The fiscal and the current account deficits are projected to decline gradually as public investment normalizes after the reconstruction from Cyclone Winston (Table 3).

Table 1.

Fiji: Selected Economic Indicators, 2015–20

article image
Sources: Reserve Bank of Fiji; Ministry of Economy; and IMF staff estimates and projections.
Table 2.

Fiji: Financial Corporations, 2010–17

article image
Source: Reserve Bank of Fiji and IMF staff calculations.
Table 3.

Fiji: Central Government Operations, 2016–23

(In percent of GDP)

article image
Sources: Ministry of Economy and IMF staff estimates.

Underlying fiscal balance removes reconstruction spending related to natural disasters.

Table 4.

Fiji: Balance of Payments, 2014–23

article image

Excuding change in reserve assets; negative balance means an increase in net liabilities or decrease in net asset.

Table 5.

Fiji: Selected Medium-Term Indicators, 2014–23

article image
Sources: Reserve Bank of Fiji; Ministry of Economy; Fiji Bureau of Statistics and IMF staff estimates.

Projections of consumption and capital formation start from 2017.

Excluding change in reserve assets; negative balance means an increase in net liabilities or decrease in net asset.

8. Risks are tilted to the downside. Downside risks stem from natural disasters, higher oil prices, slower growth in main trading partners, and delays in implementing structural reforms required to mobilize private investment. On the upside, the new air route to Japan and code share arrangement with British Airways may boost the tourism sector (Annex 1).

Authorities’ Views

9. The authorities broadly agreed with staff’s macroeconomic projections and highlighted a few additional downside risks.

  • They projected growth at 3–3.5 percent in 2019 and the medium term, in line with staff,underpinned by expansion in agriculture, tourism, construction, and insurance activities. They project inflation at 3.5 percent by end 2018 and at 3 percent in the medium term, barring major supply shocks.

  • They also noted a few other downside risks. On external side, these included higher food prices as a risk to inflation and external accounts. On domestic risks, they pointed to labor shortages, especially in the construction sector, explained by the emigration of skilled workers.

Policy Discussions

A. Macroeconomic Policies: Responding to a Changing External Environment

10. Fiscal and monetary policies should be recalibrated to respond to less favorable external conditions. The larger trade deficit, stalled accumulation of foreign reserves, and continued appreciation of the real effective exchange rate (Text Figure 2.1) suggest that the risks of external imbalances are rising. These developments are ultimately linked to the higher fiscal spending and less favorable external conditions. Fiscal consolidation would support external stability and create fiscal buffers. Monetary policy tightening could also contribute to narrowing the current account deficit and preserve foreign reserves in tandem with fiscal consolidation if less favorable external conditions persist.

11. The external sector position in 2018 is moderately weaker than implied by medium-term fundamentals and desirable policy settings. The underlying current account (CA) deficit, defined as the actual CA deficit adjusted for Cyclone Winston and other cyclical factors, is projected at 4.9 percent of GDP in 2018, some 1.3 percent of GDP above the “norm” suggested by the IMF’s External Balance Assessment-Lite model (Annex 2). The underlying fiscal deficit in 2018 is projected at 3 percent of GDP (Table 3), about 1–2 percent of GDP higher than its desirable medium-term level, accounting for the bulk of the gap between the actual CA and the estimated norm.

Fiscal Policy

12. There is an urgent need for fiscal consolidation to rebuild fiscal buffers and support external stability. Fiscal space is assessed to be “at risk” (Annex 3). Sovereign spreads and debt profile indicators are consistent with medium-risk benchmarks, and under adverse scenarios debt does not stabilize in the medium term. Given the external position, with less favorable conditions, the availability of financing is likely to be more limited. Fiscal space should be rebuilt to preserve fiscal sustainability, allow for flexibility in responding to future natural disasters, and support investment needs identified in the Climate Vulnerability Assessment (Annex 4). While private investment will be needed to address some of such needs, the authorities’ also need to lay out a medium or long term fiscal plan that accounts for the government’s contributions. Given the high probability of natural disasters happening in short succession and with increased severity, fiscal space should be rebuilt as soon as possible.

13. The authorities’ fiscal plans are aiming for deficit reduction, but they still have yet to define underlying policies in support of the targets. The 2018–19 budget outlines a medium-term fiscal strategy that targets a gradual reduction of the fiscal deficit from 4.8 percent of GDP in 2017–18 to 2.5 percent in 2020–21 (Text Figure 10), and 1.5 percent in 2022–23. The medium-term public debt target is 40 percent of GDP. The strategy, however, does not include detailed revenue and expenditure projections and the measures required to achieve those targets are not quantified. Moreover, the strategy does not include fiscal and macroeconomic projections consistent with the medium-term debt target.

Text Figure 10.
Text Figure 10.

Fiji: Fiscal Deficit Targets

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: 2018–19 budget

14. Under current policies, fiscal buffers would not be rebuilt, putting the debt position at risk. In the baseline scenario (Text Table 2) staff projects that the fiscal deficit will decline gradually to 2.9 percent of GDP by 2022–23, but public debt will remain broadly constant at 51 percent of GDP. In the event of a large natural disaster, the associated fiscal cost could imply a jump in the level of public debt that could be difficult to sustain (Annex 5).

Text Table 2.

Fiji: Central Government Operations, FY2017–23

(In percent of GDP)

article image
Sources: Ministry of Economy, and IMF staff estimates.

15. Staff recommends a more ambitious medium-term fiscal consolidation strategy compared with the authorities’ current plan. In staff’s preferred scenario (Text Table 3) the fiscal deficit reaches 1 percent of GDP by fiscal year 2022–23 by keeping real primary per capita spending broadly constant. Staff recommends a medium-term debt target of 44 percent of GDP, creating a debt buffer of 6 percent of GDP compared to the current level. Moderating current spending creates space for higher capital expenditure to close the infrastructure gaps identified in the Climate Vulnerability Assessment (Annex 4) and in the National Development Plan. GDP growth is lower in the short run because of the fiscal consolidation but the GDP level in the medium run is unchanged. In this scenario, the public debt-to-GDP ratio declines steadily from FY2019–20 onward and the CA balance gradually improves as the cumulative increase in public saving exceeds the increase in public investment.

Text Table 3.

Baseline and Recommended Scenarios

article image
Source: IMF Staff calculations

16. Fiscal consolidation should be primarily expenditure-based. Government revenues increased sharply in recent years and are relatively high compared to other economies in the region (Figure 2, top left and top right). Hence, the scope for further revenue mobilization is limited. Capital expenditure should be protected to address infrastructure needs. Measures to help keep current primary spending constant in real terms should be identified and could include keeping public employment constant, adjusting public wages and transfers in line with inflation, eliminating unproductive spending, and targeting social programs better. Under the budget, current spending is expected to grow by 18 percent in FY1819, which is too fast and should be avoided. The Public Expenditure Review currently being conducted by the World Bank will help identify inefficient and poorly targeted spending on education, health, and infrastructure (Box 1).

Figure 2.
Figure 2.

Fiji: Fiscal Sector Indicators

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

17. Pension savings used to mitigate the impact of Tropical Cyclone Winston should be rebuilt. The Fiji National Provident Fund (FNPF) allowed 180,000 pension contributors to withdraw up to 30 percent of the pension savings (about 2.8 percent of GDP). This measure was effective in mitigating the adverse impact of Winston on many households. However, it is also important to lay out a strategy to restore these pension savings to ensure that contributors will eventually have access to adequate pensions, especially given that a large fraction of pension members have relatively low pension saving balances at present.

Authorities’ Views

18. The authorities agreed on the need to pursue fiscal consolidation, but viewed their current consolidation plans as adequate. They thought that staff’s preferred scenario was too ambitious. To achieve fiscal consolidation, they saw scope for expenditure rationalization and for improving tax compliance. They will work with the World Bank to identify expenditure measures and will launch a new IT system, allowing for a more thorough cross-checking of information to improve tax compliance.

19. The authorities do not plan to take measures to restore pension savings in the near term. They noted that mandatory pension contributions were increased in 2015 from 16 to 18 percent and that this increase should help compensate for the withdrawal of pension savings in the aftermath of several cyclones in recent years.

Monetary and Exchange Rate policy

20. The fixed exchange rate regime has provided Fiji with an effective nominal anchor. The last devaluation was in 2009 and inflation has averaged 3.3 percent since 2010. Reducing fiscal imbalances is essential to safeguard the sustainability of the current peg. Prudent increases of relatively high national minimum wages for unskilled workers would help preserve competitiveness (Text Figure 11).

Text Figure 11:
Text Figure 11:

Minimum Wage

(In percent of per capita GDP)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: International Labour Organization.

21. The RBF should tighten its monetary policy stance to support external stability. In recent months foreign reserves have dropped and, if less favorable external conditions persist, they could fall below reserve adequacy metrics (Annex 2). In a context of limited capital mobility, tightening monetary policy would raise market interest rates, slow down credit growth, reduce imports, and preserve foreign reserves. The influence of the RBF’s policy rate on lending rates was significant in the previous loosening cycle, despite occurring with a lag (Text Figure 12).

Text Figure 12:
Text Figure 12:

Fiji: Policy Rate and Lending Rate

(percent)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF

Authorities’ Views

22. The current exchange rate regime has worked well. It has been effective in maintaining a relatively stable Fiji dollar, which has served as an anchor for domestic inflation.

23. The authorities were monitoring the evolution of foreign reserves closely and were ready to tighten monetary policy if warranted. They concurred with the view that the external sector position was moderately weaker than the level implied by fundamentals and desirable policy settings. Foreign reserves declined steadily during 2018 due to less favorable external conditions and high public investment. The authorities underscored the importance of coordinating monetary and fiscal policy to support external stability.

B. Strengthening Frameworks to Preserve Financial Stability3

24. The banking sector remains sound overall. The expansion of credit to the private sector has moderated since the second half of 2017 to a pace broadly in line with nominal GDP growth (Text Figure 13). Although banks’ NPLs increased in the past 18 months (Figure 4, middle left), they remain low relative to historical levels and other countries. The overall banking sector is well capitalized (Figure 4, middle right) and backed by solid profitability margins (Figure 4, bottom right). Banking sector stability is underpinned by the presence of large foreign banks that operate as branches and have access to their parent banks for capital and liquidity.

Text Figure 13.
Text Figure 13.

Fiji: Credit Growth

(year-over-year, percent)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF

25. Financial supervision resources are scarce and could be better allocated. The RBF supervises six commercial banks, the Fiji National Provident Fund (FNPF), insurance companies, four credit institutions, and other smaller financial institutions (Text Figure 14). Staff recommends streamlining supervision of bank branches that are subject to robust home supervision to focus on non-bank financial institutions, which are more likely to be at higher risk. Fund staff will provide technical assistance to implement this shift toward risk-based supervision (Box 1).

Text Figure 14.
Text Figure 14.

Fiji: Financial System Composition

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: RBF

26. There has been some progress on identifying systemic risks. The RBF has been publishing its annual Financial Stability Review report since 2016. However, the ability of the RBF to monitor and assess systemic risk is limited by the lack of information/data, especially on borrowers’ side. Filling such data gaps would help the RBF to better identify risks and calibrate macroprudential instruments such as loan-to-value and debt-to-income ratios. On this front, the RBF’s recent study on commercial banks’ mortgage loan portfolio is timely and welcomed. More efforts are needed on collecting financial data of non-financial corporate borrowers.

27. The legal frameworks underpinning financial sector oversight have gaps. Oversight of credit unions and cooperatives by the Registrar of Credit Unions is inadequate. The credit unions lack reliable record keeping and there is increased mistrust among members. The new Credit Union Act that places credit unions and cooperatives under the oversight of the RBF and is aligned with international best practice, as applicable for Fiji, should be adopted. The macroprudential framework adopted in 2012 has gaps as no institution in Fiji has a formal mandate for macroprudential policy. A clear mandate should designate the RBF as the macroprudential authority responsible for identifying, monitoring, and responding to risks to financial stability.

28. The governance of public non-bank financial institutions (NBFIs) has weaknesses that could undermine their economic performance. Public NBFIs include the Fiji National Provident Fund (FNPF), the Fiji Development Bank (FDB), and the Fiji Housing Authority (FHA). Currently, the government can remove board members from public NBFIs without cause during their terms. In addition, board member terms tend to be short, limiting NBFIs’ ability to build institutional knowledge and expertise. Independent and highly qualified board members will be more likely to meet NBFIs’ policy mandates and insulate NBFIs from government’s high priority initiatives (e.g., public investment plans). Staff recommends protecting board members from removal without cause and their terms extended from 2 to 4 years, in line with international best practices.

Authorities’ Views

29. The authorities agreed with staff’s assessment that the banking sector remains sound. They noted that credit growth had slowed down, and the current cycle should not pose systemic risk concerns. They also noted that higher NPLs were not a significant concern for financial stability as they were still low compared with historical levels.

30. The authorities appreciated the IMF’s technical assistance on financial supervision. The authorities noted that they would continue to make progress on the shift toward more risk-based financial supervision. They recently started monitoring and documenting relevant developments at the parent/head office of bank branches. With support from Fund’s technical assistance, further progress in developing a risk-based supervision manual is expected (Box 1).

31. The development of a macroprudential toolkit is a medium-term goal and the RBF will seek to formalize its macroprudential mandate. The RBF is currently conducting an assessment on data gaps. So far, the main gaps include: i) data to monitor the non-bank sector, ii) national real estate price indexes, and iii) data to monitor risk appetite. The RBF will seek a clear macroprudential mandate in the Reserve Bank of Fiji Act.

32. The authorities agreed with staff on the importance of the financial oversight on credit unions. They noted that the Credit Union Act was still in draft form and under consultation. The RBF is working with the Solicitor’s General Office and the goal is to table the Credit Union Bill the second quarter of 2019.

33. On NBFIs’ governance, the authorities acknowledged its importance. The RBF will meet each NBFI in the first quarter of 2019 to develop an implementation plan to strengthen their governance. The RBF plans to work closely with the relevant line ministries and the NBFIs to ensure all relevant recommendations are appropriately addressed.

C. Raising Medium- and Long-Term Growth

34. An improvement in the overall business environment is essential to achieve the ambitious growth targets laid out in the National Development Plan. Such improvement would trigger higher private investment, enhanced productivity, and a more diversified economy:

  • Private investment would need to rise from an average of 7.7 percent of GDP during 2014–17 to at least 15 percent of GDP to reach the overall investment rate target of 25 percent of GDP, bringing private investment rates closer to Asian economies that saw robust growth in recent decades (Text Figure 15 and 16).

  • Higher private investment will enhance market competition and productivity.

  • A more diversified economic structure would strengthen Fiji’s growth resiliency. There is scope for growth in a variety of activities such as film-making, retirement communities, and agriculture directed at the tourism sector.

Text Figure 15.
Text Figure 15.

Fiji Investment

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: FBoS
Text Figure 16.
Text Figure 16.

Private Investment

(average 2015–17, percent of GDP)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: World Development Indicators, World Bank

35. The current legal regime for foreign investment could be improved. The Foreign Investment Act has a provision providing for the expropriation of assets without compensation. The circumstances in which those expropriations can happen are relatively broad and not well-defined. This is a significant departure from international best practices in terms of protection of property rights. Moreover, foreign investors cannot participate in several activities. Staff recommends the authorities to continue working with the International Financial Corporation to strengthen the protection of property rights and align the foreign investment regime with international best practices (Box 1).

36. Fiji’s extensive price controls should be replaced by sound market regulation, as emphasized in previous IMF Article IV Staff Reports. The rationale for imposing price control measures include a lack of adequate competition and the need to protect low-income households. However, extensive price controls discourage new entrants and investment. For example, tariffs in the electricity sector have been frozen for a few years. This deters private investment in the energy sector and is especially problematic in the current environment of higher oil prices. Price controls should be rationalized and replaced by a regulation framework that has tariffs consistent with a reasonable rate of return on investment and promotes market competition (Box 1, Annex 7).

37. The exchange restrictions for payments on current international transactions should be phased out. These include: i) limits on large external payments and ii) the tax certification requirement for the transfer of profits and dividends abroad, proceeds of airline ticket sales, and for making external debt and maintenance payments. These restrictions are inconsistent with Article VIII, hamper Fiji’s international trade, and discourage foreign investment. Staff recommends removing these restrictions with support from the Fund (Box 1, Annex 7).

38. The business environment in Fiji could be enhanced by steps to facilitate starting a business, obtaining credit, and paying taxes (Text Figure 17). Other shortcomings include both the lack of public consultation and impact assessments for new regulations. To start a business, it takes 11 procedures and 40 days, whereas in peer countries it takes 7 procedures and 21 days on average. The absence of a credit bureau, which was shut down in 2016, accounts for Fiji’s low scores on obtaining credit. In March 2018, the RBF granted a license and a new credit bureau is being set up. Both the number of tax payments per year and the time it takes to comply are burdensome in Fiji compared to peers (Text Figure 18).

Text Figure 17.
Text Figure 17.

Business Environment

(Distance to Frontier/best performer)

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources: Doing Business Indicators, World Bank 2018.Note: Uncertainty bands around point estimates are not provided by the compiler.
Text Figure 18.
Text Figure 18.

Tax Compliance Costs

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Sources; Doing Business Indicators, World Bank 2018Note: Uncertainty bands around point estimates are not provided by the compiler.

39. Staff recommends streamlining procedures to do business, accelerating the activation of the credit reporting agency, and reducing tax compliance costs:

  • Enhancing transparency of procedures, conducting meaningful and timely consultations with the private sector, supporting a framework for e-government services, ensuring consistent and predictable application of rules at both the national and sub-national levels, and implementing a risk-based approach to private-sector regulation would help remove impediments to do business (Box 1). Some improvements have been made, including conducting policy budget consultations with a diverse set of stakeholders. (Annex 7).

  • The re-establishment of the credit bureau is a welcomed development (Annex 7). Promptly activating the newly licensed bureau following best credit-reporting practices with the support and participation of all financial institutions is encouraged.

  • Improving tax-payer services and streamlining processes to reduce the costs of tax compliance would be helpful (Box 1).

40. Improving data quality could better guide policy making. The authorities have made important progress on economic statistics with support from PFTAC and international development partners. The more frequent publication of fiscal outturns and the launch of National Summary Data Page (Annex 6) are important steps in the right direction. However, there is significant scope for improving the quality of national accounts, consumer price index, and government finance statistics to guide policy making in a timely manner (Box 1).

Authorities’ Views

41. The authorities were keen to diversify the production structure of the economy. They saw significant scope for expansion in the agriculture, telecommunications, and health care sectors. Within the tourism sector, they want to attract the “large-scale events” industry.

42. The authorities acknowledged the importance of improving the investment regime. They were working to address the existing shortcomings in the current investment regime. They drafted an Investment Bill and articulated an Investment Policy framework with support from IFC and they will send it to Cabinet as soon as it is finalized.

43. They acknowledged the need to rationalize price controls. They will develop a comprehensive competition and consumer protection policy framework to gradually reduce the reliance on price controls.

44. They were not ready to remove exchange restrictions for payments on current international transactions. The tax administration saw risks to tax compliance if the tax certification requirement was eliminated.

45. They agreed that improving the business environment is critical to enhance growth prospects of the economy.

  • They have set up working committees aiming to remove obstacles to doing business and the World Bank is providing technical assistance. One central goal is to reduce the time it takes to start a new business by streamlining processes and requirements.

  • They also emphasized the importance of developing training programs for the labor force to tackle shortages of skilled labor in the garment, manufacturing, construction, tourism, and mining sectors.

  • They expect to gradually improve access to credit, especially for SMEs, when the new credit bureau is operational and when the new registry for movable assets is in place.

46. The authorities asked for support to improve the reliability of the national accounts. They have some doubts with respect to recent price deflator estimates that were hard to square with other data sources.

D. Continue Improving Governance

47. Addressing governance vulnerabilities will help strengthen institutions, limit corruption, and lift potential growth. Available evidence, based on indicators and qualitative reports, points to governance and corruption vulnerabilities, notably in fiscal governance, rule of law, the regulatory framework, financial sector oversight, and AML/CFT. The Fiji Independent Commission against Corruption (FICAC) has been addressing corruption by improving transparency, rewarding whistleblowers, and prosecuting perpetrators; while the Financial Intelligence Unit is tasked with strengthening Fiji’s compliance with international AML/CFT standards.

48. Fiscal governance has improved in recent years but there is substantial room for further progress, which will also help reduce the scope for corruption. In July 2018, the Fiji Revenue and Customs Services (FRCS) received the country’s first Anti-Corruption Policy framework, as well as training, from FICAC to strengthen its governance. With respect to transparency, fiscal outturns for the central government have started to be published regularly and the authorities subscribed to e-GDDS in September 2018 (Annex 6), significantly upgrading data transparency. Although the annual budget document has the basic elements included in the Public Expenditure and Financial Accountability framework, main governance areas to be improved include: i) extending the coverage of government operations to public corporations that pose a significant risk to public finances; ii) publishing public financial assets and their evolution; iii) publishing fiscal outturns on a monthly basis; iv) presenting estimates of the budgetary impact of all major fiscal policy changes; v) producing mid-year budget reports; and vi) following the procurement process (Box 1).

Authorities’ Views

49. The authorities agreed that Fiji faces governance vulnerabilities and considered adopting a more holistic national anti-corruption regulatory framework. While existing regulation covers FICAC’s mandate and operations, the authorities thought that legislation for a national anti-corruption framework could improve anti-corruption efforts. Currently, government entities are not obliged to undergo FICAC’s Corruption Impact Assessments or follow-through on tailored anti-corruption plans. They also highlighted the extensive improvements in meeting AML/CFT international best practices and noted that the score on AML/CFT is likely to improve.

50. The authorities plan to continue enhancing fiscal transparency. In addition to increasing the frequency of publishing fiscal outturns via e-GDDS, the authorities indicated they will publish mid-year reports and the budgetary impacts of new or revised policies.

E. Staff Appraisal

51. Economic growth has been resilient. Despite the recent wave of natural disasters, the economy is expected to record its ninth consecutive year of positive GDP growth in 2018, underpinned by strong consumption and public investment. Growth is projected at 3–3.5 percent the medium term, in line with estimates of potential growth.

52. However, external conditions have become less favorable, underscoring the need to increase the economy’s resilience. Higher oil prices, lower sugar prices, and weaker growth in Fiji’s major trading partners increase risks to external stability and warrant a recalibration of macroeconomic policies.

53. Fiscal buffers should be rebuilt as soon as possible to support fiscal sustainability and external stability. The fiscal deficit and public debt increased sharply in recent years and put fiscal space at risk. Fiscal consolidation should proceed quickly to put the debt-to-GDP ratio on a clear downward path. This will help maintain fiscal sustainability, create fiscal space to respond with flexibility to natural disasters in the future, and alleviate the current pressure on foreign reserves by containing imports. Consolidation measures need to be spelled out expeditiously and should be mainly expenditure-based, given the limited scope for further revenue mobilization.

54. Monetary policy may need to be tightened to further support external stability. A tighter monetary stance could contribute to narrowing the current account deficit and preserving foreign reserves in tandem with fiscal consolidation, if less favorable external conditions persist.

55. Continuing to undertake financial sector reforms, following the recommendations of the 2018 FSSR, is encouraged. Priority reforms include: adopting a more risk-based approach to banking supervision; development of macroprudential toolkits by passing legislation to formalize the RBF’s mandate over such activities and filling existing data gaps; enhancing the governance of NBFIs; and adopting the new Credit Union Act.

56. Pension savings used to mitigate the impact of Cyclone Winston should be restored. Low levels of pension savings could jeopardize the adequacy of pensions for a large fraction of contributors. Although allowing pension savings withdrawals was effective in containing the adverse impact of Winston on many households, it is also important to safeguard adequate savings for retirement.

57. To boost growth potential, reforms should focus on attracting and supporting private investment. High-priority measures include: an improved investment regime that can better protect the property rights of investors; an adequate regulatory framework that allows to shift from far-reaching price controls to enhancing competition; and improving the ease of doing business (e.g., fewer procedures to start a business and a decrease in the number of hours that tax compliance requires).

58. Governance would be improved by enhancing fiscal transparency and strengthening the rule of law. Fiscal transparency would be improved by: extending reporting of government operations to include public corporations that pose a significant risk to public finances; publishing in a timely manner the annual reports of major SOEs and statutory bodies; and issuing mid-year budget reports. Rule of law would be improved by upgrading the investment regime in line with international best practices.

59. The exchange restrictions for payments on current international transactions should be removed. The limits on large external payments and the tax certification requirement on the transfer abroad of profits, dividends, and proceeds of airline ticket sales are inconsistent with Article VIII and discourage investment.

60. Improving data quality will help better guide policy-making. National accounts, consumer price indexes, and government finance statistics should be improved with support from PFTAC and development partners.

61. It is recommended that the next Article IV Consultation take place on the standard 12-month consultation cycle.

Integrating Fund Surveillance and Capacity Development

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Figure 4.
Figure 4.

Fiji: Monetary and Financial Indicators

Citation: IMF Staff Country Reports 2019, 057; 10.5089/9781484399484.002.A001

Annex I. Risk Assessment Matrix 1/

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Annex II. External Sector Assessment

The external sector position in 2018 is moderately weaker than implied by medium-term fundamentals and desirable policy settings. This reflects the need to tighten fiscal policy to ensure external stability.

1. Foreign Asset and Liability Position

Background. The net international investment position (NIIP) was about -85 percent of GDP by 2018Q2. External assets and liabilities were 34 and 120 percent of GDP, respectively. Reserves held by the Central Bank accounted for about 58 percent of total external assets. Key components of external liabilities included FDI liabilities (90 percent of GDP) and external debt (about 25 percent of GDP), of which about slightly more than half was public debt. The commercial banks’ net foreign assets position was positive.

Assessment. The structure of the external balance sheet, especially the large share of FDI liabilities in total external liabilities and adequate reserves, entails relatively low vulnerabilities.

2. Current Account

Background. The average CA during 2015–17 was about -3.9 percent of GDP and was financed by FDI inflows. The decline in the CA in 2017 (from -3.2 percent of GDP in 2016 to -6.2 percent) was mainly explained by the jump in investment income outflows after the removal of foreign dividend tax withholding (Figure 3, top right). The CA in 2018 is projected at -5.9 percent of GDP, reflecting a decline in investment income outflows, an increase in remittances, and a larger trade deficit relative to 2017.

Figure 3.