Republic of Fiji: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Fiji
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1. The Fijian economy has rebounded strongly from the pandemic, although with mixed trends at the sectoral level. Real GDP recovered by around 30 percent cumulatively in 2022-23, erasing sharp pandemic losses. The negative output gap is closing1, with output in tourism-related sectors rebounding swiftly, while slack remains in many sectors2. The recovery in the labor market is still underway, although hiring activity remains below pre-pandemic levels; at the same time, nearly 34,000 Fijians left to reside in other countries during 2022-23 (equivalent to about 4 percent of the population), which is leading to recent upward pressure on nominal wages, especially in specific skilled segments (Text Figures and Annex VIII).

Context

1. The Fijian economy has rebounded strongly from the pandemic, although with mixed trends at the sectoral level. Real GDP recovered by around 30 percent cumulatively in 2022-23, erasing sharp pandemic losses. The negative output gap is closing1, with output in tourism-related sectors rebounding swiftly, while slack remains in many sectors2. The recovery in the labor market is still underway, although hiring activity remains below pre-pandemic levels; at the same time, nearly 34,000 Fijians left to reside in other countries during 2022-23 (equivalent to about 4 percent of the population), which is leading to recent upward pressure on nominal wages, especially in specific skilled segments (Text Figures and Annex VIII).

2. The legacies of the pandemic continue to limit macroeconomic policy space. The room for policy responses to economic shocks is limited due to elevated public debt and the historically low monetary policy rate. The authorities have partially implemented past Article IV advice to rebuild this space, particularly on raising fiscal revenues (Annex IV).

3. The coalition government is developing a program of growth-enhancing reforms to help maintain momentum. Previous staff advice to adopt a comprehensive and ambitious reform program is being pursued, although not as rapidly as staff had recommended in the 2023 Staff Report. The cabinet has established a "Growth Reset Committee” and is formulating a new National Development Plan (NDP; expected by mid-2024), aiming to foster sustainable growth, social equity, private investment, and environmental stewardship.

Recent Developments

4. The economic recovery remained strong in 2023, driven by the rebound in tourism. The rapid restoration of air travel and robust tourism demand (including during the off-season) helped 2023 tourist arrivals reach 104 percent of 2019 levels. With GDP growth at an estimated 8.0 percent, output surpassed pre-pandemic levels in 2023, witnessing a faster recovery than other tourism-based Pacific Island countries (Text Figure and Table 1). Tourism demand remained buoyant in early 2024, with moderation in tourist inflows from Australia offset by ongoing recovery in tourist inflows from Asia.

5. After falling sharply in 2023 H1, inflation has ticked back up. Inflation averaged 1.3 percent yoy during January-July 2023 but picked up starting in August 2023, due largely to the temporary effect of the hike of value-added taxes (VAT) - which was estimated to add nearly 2.0 ppts to monthly inflation - and settled at 4.6 percent yoy in March (Text Figure).

6. The current account balance improved significantly after deteriorating during 2020-22. The current account deficit narrowed to an estimated 7.6 percent of GDP in 2023, driven by a strong rebound in tourism-related earnings (Text Figure and Table 2). With Fiji's inflation below that of trading partners, the REER maintained its depreciation trend. The EBA-lite model suggests that Fiji's external position in 2023 was weaker than the level implied by fundamentals and desirable policies settings (Annex II). FX reserves declined somewhat, in part due to a slowdown in government's net external borrowings but remained adequate at 5.2 months of prospective imports.

7. The fiscal deficit continued to narrow, and debt fell relative to GDP. The overall deficit dropped from 12.1 percent in FY2022 (August-July) to 7.1 percent of GDP in FY2023, driven by a strong revenue recovery (35 percent yoy growth), but also an under-execution of capital spending and the wage bill (Text Figure; Table 3a and Table 3b). The public debt-to-GDP ratio declined to 83 percent in FY2023 from the peak of 90 percent, reflecting the recovery of GDP (debt in nominal terms rose slightly).

8. The monetary policy stance and financial conditions have remained accommodative. The Reserve Bank of Fiji (RBF) has kept the policy rate unchanged at 0.25 percent since the onset of the pandemic. While the authorities have begun tightening liquidity, by withdrawing the liquidity support under its unconventional pandemic-related lending facilities and easing controls on profit repatriations, the excess reserves within the banking sector remain elevated (Text Figure), keeping interest rates at historical lows. Private sector credit growth remains positive, led by stronger demand from tourism-related sectors (Text Figure and Table 4).

Outlook and Risks

9. Supply-side constraints in tourism-related sectors will likely weigh on the near-term economic outlook (Text Figures). Tourism-related sectors remain the main driver of Fiji's economic growth. As in 2023, hotel capacity in 2024 - while growing slowly - is expected to remain below pre-pandemic levels, while labor shortages and supply-chain challenges in the construction sector will hold back the existing pipeline of investment projects in the tourism sector. Considering these factors, staff projects GDP growth to moderate to 3 percent in 2024 — similar to the prepandemic average — with downside risks. Subsequent GDP growth is expected to return to the prepandemic historical trend of 3¼ percent, aided by gradually rising hotel capacity, policies to cut red tape and immigration bottlenecks (thereby boosting construction and other activity), and one-off effects from a new gold mine and an increase in Fiji Water's production. As the temporary impact of the VAT hike fades, inflation is projected to soften to 3 percent yoy by end-2024 and remain around trend - close to 3 percent - over the medium-term. The current account deficit is projected to remain high in 2024, owing to elevated global commodity prices, slower growth in tourism earnings and remittances, and renewed deterioration in the primary income balance, predominantly profit repatriation and reinvested earnings. The FX reserve cover is expected to remain adequate in the near term while falling slowly, owing in part to government's slower net external borrowings and weak FDI inflows.

10. Domestic developments and global shocks pose downside risks to the economic outlook (Annex I). Worsening labor shortages could further delay the pipeline of projects, particularly in the tourism sector, and accentuate wage pressures. Renewed acceleration in global commodity prices, higher shipping costs, wage pressures, and possible second-round effects of the VAT hike pose upside risks to inflation. Slower tourist arrivals due to the loss of competitiveness or a global slowdown could weigh on Fiji's growth prospects, as would continued high emigration and delays in investment projects. The fiscal path under current policies could limit the fiscal space to respond to future shocks. On the upside, stronger reform momentum and improvements to the business climate could stimulate private investment and FDI, boosting growth.

Authorities' Views

11. The authorities broadly agreed with the staff’s assessment while highlighting upside and downside risks to the growth outlook. The authorities pointed out that growth going forward could be further supported by an acceleration in budget execution (particularly capital expenditure), the pipeline of large private investment projects, increases in hotel capacity starting end-2024, and ongoing measures to improve immigration processes. At the same time, the authorities acknowledged risks to the economic outlook posed by signs of softening tourism demand, and the impact of emigration on skilled labor supply and consumer spending.

Policy Discussions

A. Fiscal Policies: Rebuilding Buffers and Supporting Inclusive Growth

12. The tightened fiscal stance reflected in the FY2024 budget is broadly appropriate, as the negative output gap is closing and monetary conditions remain accommodative. The Fijian authorities have made impressive progress in mobilizing domestic revenue, although spending has also increased. The FY2024 budget appropriately included substantial revenue enhancing measures, including increasing the rates for VAT, corporate income tax, and departure taxes and removing certain tax concessions and incentives; total fiscal impact for FY2024 is estimated at 4.6 percent of GDP (Text Table). While motivated by important social concerns, the maintenance of a zero VAT rate for 22 basic items will nevertheless complicate administration and compliance. At the same time, planned expenditure increased by 2.4 percent of GDP, rightly prioritizing spending on social protection and infrastructure investment. The FY2024 budget envisages an overall fiscal deficit of 4.8 percent of GDP, while staff currently projects a smaller deficit of 4.4 percent of GDP, reflecting some modest expected under-execution of spending on wages and capital investment.

Main Revenue Measures in FY2024 Budget

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1/ Twenty-two items are on zero rate, with majority of them being basic food. Sources: Fiji authorities; staff estimates

13. Over the medium-term, rebuilding fiscal buffers should be a top priority given Fiji’s vulnerability to shocks. The deficit reduction in the FY2024 is an important first step in reversing the public debt trajectory. Nevertheless, staff analysis shows that further fiscal consolidation is needed to put debt on a clearly downward trajectory over the medium-term. Staff’s baseline projections - based on announced policies, rather than announced targets - projects that the overall fiscal deficit would remain above 4 percent of GDP over the medium-term, with public debt declining very slowly to around 79 percent of GDP in FY2029 (Text Figures). The risk of debt distress is assessed as moderate, thanks to favorable terms and maturities; nevertheless, the fiscal space to absorb future shocks while minimizing social costs - as done during the pandemic - would remain limited (DSA Annex III). The authorities are rightly targeting additional fiscal consolidation (achieving a small primary surplus starting in FY2025), as reflected in their Medium-Term Fiscal Strategy (MTFS); however, additional concrete measures are needed to achieve this path, including its budgetary targets for FY2025. In addition, a more ambitious adjustment path than the MTFS can help rebuild fiscal buffer at a faster pace and enhance policy resilience. Staff suggests enhancing fiscal consolidation to achieve a primary surplus of around 2 percent of GDP by FY2029 (compared with a primary balance of -0.5 percent in the baseline and +0.5 percent in the MTFS), which - if sustained -would reduce the debt to GDP ratio to 50 percent (pre-pandemic level) by FY2034.

14. A combination of revenue and expenditure measures can achieve the consolidation path while supporting inclusive growth.

  • Further mobilizing revenue. Given the already significant revenue measures, the near-term priority should be enhancing efficiency and simplifying administration, which could include: further reducing exemptions and incentives (including phasing out the export income deduction3), simplifying the personal income tax structure (including lowering the initial threshold), introducing a dividend tax, increasing the VAT for items with zero rate and unifying the VAT rates (while allocating targeted resources to protect the poorest, see below), and strengthening revenue administration and tax compliance. These measures would yield at least 1.5 percent of GDP in additional revenue (Text Table).

Baseline and Proposed Adjustment Scenarios (In percent of GDP)

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Source: Ministry of Finance; staff calculations
  • Enhancing the efficiency of spending while promoting inclusion. Following an increase in transfers in FY2024 budget (1.3 percent of GDP), the authorities should limit the future increase of transfers while improving the targeting. Measures could include: limiting the increase of spending on programs that are allocated to less vulnerable households, such as the Social Pension Scheme (SPS) and cutting broad-based utility subsidies; rationalizing subsidies to poorly performing SOEs and sectors (such as sugar); rebalancing resources to more effective poverty reduction programs; reviewing the eligibility criteria to improve targeting4; and setting up a comprehensive social registry over the medium-term. Enhancing the efficiency of other current spending, including on supplies and consumables, could generate additional savings for promoting inclusion priorities, such as health, education, training, and climate adaptation. The authorities should launch the planned public sector employment review and civil service reform to right-size the public sector while improving efficiency and service delivery. Staff estimates that limiting the increase of low-efficiency expenditure, while increasing targeted spending on inclusion, could generate overall savings of 2 percent of GDP by FY2029.

  • Scaling up growth-enhancing expenditure and enhancing implementation capacity. Implementing the above revenue and expenditure measures can create room for more capital investment (by up to 1 percent of GDP) while still reducing debt levels, which supports sustained inclusive growth. Improving public investment management, including addressing the gaps on project planning, prioritization, costing, and monitoring, is also important to effectively implement investment projects, as identified by the 2020 Public Expenditure and Financial Accountability Assessment. A Climate-Public Investment Management Assessment (C-PIMA) planned for this year can help identify improvements to institutions and processes to build climate-resilient infrastructure.

  • Further enhancing transparency of public procurement. The authorities continue to publish public procurement information5 and are finalizing the amendments to Procurement Regulations 2010 which establish a central online procurement platform, enhance access to procurement information, and set up a debarment committee. Staff recommends that the authorities further enhance procurement transparency by collecting and publishing beneficial ownership information for awarded procurement contracts, which are key to reduce corruption vulnerabilities.

15. Continued improvement in the oversight and performance of state-owned enterprises (SOEs) can reduce fiscal risks (Text Figure, Annex VI). The overall financial performance of SOEs appears to be improving following the impact of pandemic, and public guarantees to SOEs were stable in nominal terms in FY2023. However, sizable guarantees (9 percent of GDP end-FY2023) and government subsidies (over 1 percent of GDP annually) that benefit SOEs continue to pose risks and burdens on public finances. The authorities should continue to strengthen SOE oversight, governance, and performance. Measures could include: expanding the regulation and governance standards under Public Enterprises Act 2019 to all SOEs; enhancing the capacity to assess and mitigate financial vulnerabilities of SOEs; developing a plan to limit SOE guarantees; and addressing shortcomings in financial reporting, as identified by the Office of the Audit General. The authorities recently made progress in improving the selection and appointment process for board directors, enhancing SOE risk analysis, and reducing the backlog in the audit of SOE financial statements. 6

16. Strengthening the institutional framework for fiscal policy can reinforce sustainability, communication, and confidence. The authorities continued to submit the MTFS to parliament and public annually, helping enhance medium-term planning and transparency. In light of the need for sustained fiscal consolidation and debt reduction, the authorities could consider revising the Public Finance Management Act to introduce an explicit fiscal anchor (e.g., on debt ratios) to guide policy design and the MTFS. The authorities could also consider the introduction of fiscal rules (e.g., on primary balance or current expenditure) and a fiscal council to support the implementation of the MTFS and strengthen fiscal oversight.

Authorities' Views

17. The authorities agreed with the importance of fiscal sustainability but also emphasized the spending needs to support inclusion and growth. They remain committed to continuing consolidation and debt reduction, as envisaged in the latest Medium-Term Fiscal Strategy (FY2025-FY2027). On revenue mobilization, the authorities intend to keep the tax regime broadly stable and predictable following recent significant tax measures, while agreeing on the value of exploring additional targeted revenue measures such as introducing a dividend tax, further increasing the departure tax, focusing on streamlining tax exemptions, and improving tax compliance. On expenditure measures, the authorities plan to restrain overall spending over time and agreed with the objectives on improving expenditure targeting and efficiency. In the meantime, they also emphasized the priority on spending for social needs and infrastructure to support inclusive growth. In this context, they concurred with the importance of enhancing implementation capacity to address under-execution of capital spending and highlighted that the recently approved guidelines and procedures for capital projects under the Public Sector Investment Program are expected to improve project planning, procurement, and management.

18. The authorities also broadly agreed with staff’s recommendations on further strengthening public financial management and fiscal institutions. They highlighted their recent progress in strengthening fiscal risk analysis related to SOEs and contingent liabilities, including through engaging with the Pacific Financial Technical Assistance Centre (PFTAC) to broaden the scope and coverage of fiscal risk analysis and reporting. They planned to further strengthen the disclosure of fiscal risks including expanding related discussions in annual budgets and publishing previous SOE fiscal risk analysis. They also expected to further enhance fiscal transparency through the planned amendments to procurement regulations and publishing more SOE annual reports. The authorities agreed to examine how they might further strengthen the fiscal institutional framework, including consultations with the IMF.

B. Monetary and Exchange Rate Policies: Preserving Price Stability and Enhancing Resilience

19. The monetary policy stance should gradually move to neutral to be ready to counter any persistent inflationary or balance of payments pressures. Under an exchange rate peg with limited capital mobility, the Reserve Bank of Fiji (RBF) has broadly achieved its objectives for reserve adequacy and price stability in recent years. Nevertheless, excess liquidity within the banking system remains high relative to pre-pandemic levels, although it has declined to 16.1 percent of GDP in January from 19.7 percent a year ago. As the negative output gap is closing, the RBF should begin to gradually normalize monetary policy by addressing remaining excess liquidity and raising policy rates, with tools including open market operations (e.g., introducing a fixed rate fill allotment), to create policy room to manage downside risks and any potential impact from the recent uptick in inflation on expectations (Text Figures and Figure 4). In addition, monetary tightening, combined with fiscal consolidation, would help strengthen the external position and support FX reserves. The normalization of the monetary policy should be supported by a proactive communication strategy to manage market expectations and help develop more effective transmission mechanisms to support price stability and reserve adequacy. The prolonged loose stance can weaken these mechanisms, including the inter-bank market and secondary market for government bonds.

20. Progress has been made in easing some pandemic-related exchange controls, but more should be done. As announced in April and effective in June 2023, Fiji completely reversed some of the pandemic-related tightening of exchange controls, such as those on emigrant transfers and offshore investment by companies and non-bank financial institutions. Meanwhile, exchange controls on profit repatriation, loan repayments, investment withdrawal via shares and asset sale, and deposits into FJD external accounts, were eased, but not back to the pre-pandemic levels7. Some of these exchange controls constitute exchange restrictions on current transactions subject to approval under Article VIII, Section 2(b) of the IMF's Articles of Agreement, and some constitute Capital Flow Management Measures (CFMs) under the Fund's Institutional View. The remaining pandemic-related exchange restrictions and CFMs should be reversed in the near-term. Moreover, the pre-pandemic current account exchange restrictions should be phased out in a sequenced manner, in line with the Article VIII obligations. Such exchange restrictions impose costs on businesses and individuals. In addition, a carefully planned relaxation of certain pre-pandemic CFMs could also serve as a part of Fiji's strategy to encourage foreign investment.

21. Fiji’s current exchange rate peg continues to provide an effective nominal anchor to the economy.8 Nonetheless, as Fiji's development strategy evolves, the exchange rate regime could be periodically assessed, including the composition of the currency basket9.

Authorities' Views

22. The authorities broadly agreed with staff’s advice on the direction of monetary policy, while differing on the timing of measures. The RBF has opted for a wait-and-see approach, including to assess downside risks to growth and the impact of the upcoming National Budget on its monetary policy objectives and growth. The RBF noted that premature tightening of monetary policy may harm growth, while it is expecting to meet both its primary objectives on price stability and foreign reserves adequacy over the near term. The RBF will continue to monitor risks to inflation and foreign reserves, revising monetary policy as needed by raising Overnight Policy Rate and through open market operations.

23. The authorities emphasized a careful and progressive approach to reviewing exchange controls, while broadly sharing staff’s assessment on the exchange rate regime. The authorities highlighted the measures undertaken since last year to streamline documentation and tax clearance requirements for several transactions. While managing risks related to FX reserve volatility and current account outflows, the authorities planned to review the pandemic-related exchange restrictions on current transactions in connection with the budget, in line with standard practice, and also expressed interest in understanding cross-country experiences in phasing down such restrictions.

C. Financial Sector Policies: Safeguarding Financial Stability and Promoting Inclusion

24. The banking sector is sound although high NPLs at some banks are a concern (Table 5). The banking sector is well capitalized, liquid, and profitable (Text Figure). NPL-to-total loans ratios have improved but remain elevated relative to pre-pandemic levels, and the adequacy for provisioning for NPLs merits continued attention (Text Figure). Some vulnerabilities remain from high NPLs at certain banks, as well as perhaps from recent margin compression amidst heightened competition. The authorities should continue to strengthen financial sector oversight, particularly for banks with high NPLs (including evaluating credit risk management, intensified on-site supervision, and ensuring adequate provisioning). With Fund support, the authorities are currently reviewing the Fiji Banking Act (expected to be completed by December 2024) and the Credit Union Act; however, the authorities still need to address remaining recommendations from the 2018 Financial Sector Stability Review (FSSR) (Annex V), including the review of the RBF Act (plans are expected by mid-2025) and the expansion of RBF's supervision remit to cover non-bank financial institutions (NBFIs), such as the Housing Authority.

25. Recent improvements to the financial infrastructure should further enhance financial inclusion and efficiency of the financial sector. The RBF recently implemented an Automated Clearing House, which helps to improve efficiency of the payment system and reduce transaction costs. In addition, the authorities are currently developing a national FinTech Strategy to be completed by end-2024. The RBF should prioritize plans for a National digital ID and e-KYC facility, to facilitate financial access for underserved groups. The authorities should also pursue additional measures to improve financial inclusion, including reviewing the Agent Banking Policy and the Fair Reporting of Credit Act 2016.

26. Fiji should continue to address the remaining weaknesses in its anti-money laundering and countering-financing of terrorism (AML/CFT) framework. Fiji issued an e-KYC Guideline in September 2023 and has joined the Global Forum on Transparency and Exchange of Information for Tax Purposes to facilitate its removal from the EU's list of non-cooperative tax jurisdictions10. However, Fiji still needs to address certain AML/CFT deficiencies relating to entity transparency, beneficial ownership, and risk-based supervision of the financial sector. The authorities are reviewing relevant legislation to address these deficiencies, including with assistance from Asia/Pacific Group on Money Laundering for the Non-Profit Organizations sector. Fiji should ensure that legal changes are followed by measures to ensure their effective implementation in practice. In relation to virtual assets, the legal framework should be updated to ensure compliance with the new international AML/CFT standards relating to Virtual Asset Service Providers.

Authorities' Views

27. The authorities agreed to continue close supervision and monitoring of the financial sector, particularly of banks with high NPLs. The RBF will continue to closely supervise institutions with higher-than-normal NPLs, including follow-up onsite examinations. The RBF will also closely monitor banks' application of credit underwriting standards, given the historically low margins and high levels of liquidity (which could promote imprudent risk-taking).

D. Structural Reforms: Addressing Impediments to Growth and Unlocking Potential

28. The authorities are pursuing ambitious growth-enhancing reforms. Most importantly, the authorities are developing a National Development Plan (NDP) to be issued with the budget in June. The three-year/five-year/20-year plan will have a near-term focus on improving public service delivery and addressing legal and regulatory bottlenecks to private investment. The authorities have also established a multi-stakeholder Growth Reset Committee to tackle immediate impediments to growth from immigration processes, electricity sector, investment regulations, and land planning. Other efforts underway to cut red tape and boost business activity include: developing a centralized digital portal for new business onboarding to reduce the time to start a business from 71 days currently to 14 days; developing a National Single Window System for international trade; and setting up a Farm to Fork initiative to increase hotels' domestic sourcing.

29. Given the public sector’s capacity constraints, the growth strategy needs to be carefully prioritized with a focus on full operationalization to attain higher growth. In particular, the NDP should focus on prioritizing and speeding up the implementation of reforms (including effective monitoring) and should be aligned with the MTFS and Public Sector Investment Program (PSIP). In addition, as the post-pandemic rebound runs its course, urgent action will be required to address immediate binding constraints to boost near-term growth, including immigration bottlenecks and red tape (including permitting) holding back already planned private investment projects. The key near- to medium-term reforms include:

  • Addressing skilled labor shortages in affected sectors. The authorities need to improve immigration procedures for priority sectors and expedite the approval process. In addition, strengthening technical training institutions, increasing industry-led training, and improving the quality of tertiary education would help narrow the workplace skills gap and mitigate the loss of human capital due to emigration. Facilitating female labor force participation, including by promoting affordable childcare services and flexible working arrangements, could enhance labor supply (Text Figure).

  • Effectively cutting red tape. Drawing on lessons from the shortcomings of the previous Single Window System, the upcoming centralized digital onboarding system for new businesses and foreign investors should ensure a process-driven reform with buy-in from all agencies. It is crucial to streamline the large number of time-consuming duplicate approval and due-diligence processes across agencies, including preferably for taxation and immigration.

  • Addressing bottlenecks in utility services. The authorities need to improve the electricity connection process, urgently identifying and addressing the causes for high cost and prolonged time. The authorities and Energy Fiji Limited (EFL) should also work to facilitate the installation of renewable energy by businesses. In the water sector, ongoing efforts and investments should intensify to improve access, reduce water disruptions, and minimize waste by upgrading infrastructure, particularly the pipe system.

  • Enhancing tourism’s contribution to inclusive growth. Fiji's inclusive development could benefit more from tourism if it were more diversified geographically and better linked to the rest of the economy. These efforts will require improving infrastructure facilities across the country, tapping into human and natural resources across the economy (e.g., the World Bank-backed plan to expand tourism access on the second island of Vanua Levu). Increasing the domestic value-added in tourism, from related services and especially agriculture, will help foster employment and inclusive development.

  • Diversifying the agriculture sector. A gradual diversification in agriculture toward higher value-added products (and perhaps away from sugar) would yield higher incomes and faster agriculture development. Enhancing the economies of scale, improving agriculture logistics, and encouraging the growth of agro-processing are important to ensure consistent quality and supply.

  • Enabling growth in IT and BPO sectors. The rapid growth of the BPO sector provides scope for diversification and job creation, including for value-added services, if complemented by economies of scale, streamlined onboarding process for new BPOs, and additional climate-resilient infrastructure, including high-speed internet. Plans for new satellite and cable broadband connections will support these rapidly developing sectors.

30. The authorities are working to improve governance, which staff welcomed, considering significant vulnerabilities to corruption. Efforts are underway to improve the quality, independence, and efficiency of the judicial system, and to formulate a national anti-corruption policy, which is a pressing priority. Further progress should be made to improve governance, increase transparency in the public sector through legislation, and align with international standards. It is essential to establish a stand-alone whistleblower law and pass the Code of Conduct Bill to establish an Accountability and Transparency Commission and enforce asset declaration for appointed and elected public sector officials and politically exposed persons.

31. Climate change is a central challenge to Fiji’s inclusive development, and the authorities need to follow through on plans to intensify their responses. The elaboration and implementation of plans to enhance climate resilience is one of the most challenging elements of Fiji’s development agenda. Economic vulnerability is aggravated by Fiji’s dependence on the marinebased "blue economy,” including tourism, which is highly vulnerable to climate change (Annex VII). The government has adopted various climate-related documents, including National Adaptation Plan 2018, Climate Change Act 2021, and Climate Finance Strategy 2022. However, a significant financing gap hamstrings implementation - the 2017 Climate Vulnerability Assessment identified the need for investment equivalent to 75 percent of 2024 GDP over 2017-2027 to strengthen Fiji’s resilience. The authorities recently launched additional initiatives to address climate financing challenges, including securing sovereign parametric insurance and issuing its first domestic blue bond.11 To make the most of limited financing, they should strive to identify priority projects and investment needs more effectively, which the C-PIMA will help (above).

32. Investment in renewable energy production should be accelerated to achieve Fiji’s national target.12 Increasing renewable energy sources will generate environmental benefits, make electricity access more resilient to natural disasters, and enhance macroeconomic resilience by reducing the reliance on imported fuel.13 The government and EFL should continue to pursue options for renewable energy, including Independent Power Producers such as hotels from solar installation. The authorities could also consider raising environmental taxes (e.g., increasing excise on diesel and fuel oil to cover externalities) and introducing feebates for spending on climate investment, as recommended by recent FAD TA.14

Authorities' Views

33. The authorities stressed that they are developing plans to boost inclusive growth. The authorities highlighted initiatives under the new government and plans under the NDP to push forward reforms, attract private investment projects, and achieve 5 percent economic growth over the medium-term. The authorities also underlined their commitment to reinforce governance and transparency in the public sector. The authorities highlighted that they are setting up a taskforce to assess the incidence of unexplained wealth, especially from a tax compliance perspective. They also highlighted their broad consultative processes, including around 275 country-wide meetings on the NDP and the multi-stakeholder process to improve the ease of doing business (above).

34. The authorities concurred on the vital importance of enhancing climate resilience but emphasized financing and capacity constraints. They are currently exploring additional initiatives to better access financing, including accreditation of the Ministry of Finance to the Green Climate Fund and the Adaptation Fund. However, they underscored that a sizable financing gap remains, while noting that access to affordable climate finance is lagging across the Pacific region. Building on their Climate Finance Strategy, they are working with development and regional partners to further prioritize climate-related projects and expect to facilitate the implementation.

Capacity Building

35. Further improvements to capacity building and data quality could help guide policymaking. Data are broadly adequate for surveillance (Informational Annex). Going forward, priority areas should be: improving the GFS compilation, public sector debt statistics, strengthening Public Financial Management, and improving Financial Sector Supervision; undertaking Macroeconomic Programming and Analysis, publishing quarterly national accounts; improving the quality of CPI and GDP data; and increasing the Fiji Bureau of Statistics' capacity. The authorities are reviewing how to strengthen the bureau, including through its budget.

Staff Appraisal

36. Fiji’s economy has achieved a remarkable rebound while rebuilding resilience. Tourism activity has surpassed pre-pandemic levels, keeping the tourism-led growth model intact, while inflation outside of the VAT hike remains well-contained. The financial sector and the external sector have remained largely resilient against the backdrop of large external shocks in the recent years. Post-pandemic, the fiscal stance has rightly moved towards gradual fiscal consolidation, with increasing focus on growth-enhancing policies.

37. Maintaining this momentum will likely require continued strengthening of macroeconomic and structural reform policies. Although strong tourist inflows continue to support growth, the near-term economic outlook has become more uncertain. Hotel capacity constraints, labor shortages, red tape for immigration and investment permitting, the slow pace of private investment projects, and under-execution of government spending would likely weigh on near-term growth in the absence of immediate policy action. Recognizing these priorities, the government has been developing appropriate responses and is beginning to implement them. Successfully operationalizing these plans now poses the main near-term challenge.

38. The authorities have achieved notable progress in boosting revenue and buttressing fiscal sustainability, although continuing gradual consolidation is needed to rebuild buffers. The substantial revenue measures in the FY2024 budget are commendable, helping narrow the deficit and reverse the public debt trajectory. The current fiscal stance is broadly appropriate. Nevertheless, going forward, debt indicators will improve only marginally without further measures; accordingly, continuing gradual fiscal consolidation is needed to rebuild fiscal space to respond to future shocks, even while the risk of debt distress is assessed as moderate. Additional revenue mobilization and expenditure rationalization measures would not only rebuild fiscal buffers but also generate room for new spending to support inclusion and growth priorities. In this context, improving implementation capacity and execution of public investment is critical to achieve a growth-friendly consolidation path. Further enhancing fiscal transparency, strengthening SOE oversight, and reinforcing the fiscal institutional framework can help enhance and protect fiscal sustainability.

39. Monetary policy should gradually shift to a more neutral stance to help build policy space to respond to shocks. Although the RBF's twin objectives of price stability and reserve adequacy appear secure over the near term, pressures may emerge as the recovery runs its course and the negative output gap closes. Staff recommend a normalization of monetary policy, by reducing excess liquidity and raising policy rates, to put the RBF in a better position to manage any future inflationary or balance of payments pressures. Remaining pandemic-related CFMs should be reversed in the near term. In addition, current account exchange restrictions should be phased out in a sequenced manner, in line with obligations under Article VIII, Section 2(b) of the Fund's Articles of Agreement.

40. While the financial sector remains generally sound, staff advise strengthening financial sector oversight particularly for banks with high NPLs. The RBF should continue to closely supervise and monitor the impact of high NPLs on individual banks' financial stability and follow up on recommendations to improve credit risk management at specific banks. The effects of compressed lending margins (amidst heightened competition) on banks' profitability warrants vigilance. Staff supports the continued effort to improve the financial supervision framework. Staff encourages authorities to implement remaining recommendations of the 2018 FSSR—particularly those related to corrective action, bank recovery, coordination with home authorities, and bank resolution.

41. To improve medium-term growth potential, it is critical to adopt and operationalize a carefully prioritized growth strategy. The authorities rightly aim to increase growth beyond prepandemic levels to promote inclusion, resilience, and public debt sustainability. Reforms should aim to: enable diversification, both within and beyond the tourism sector; increase the domestic value-added in tourism; and improve infrastructure to promote agriculture and broader regional development. To mitigate the impact of emigration, it is imperative to enhance human capital formation (especially technical training and tertiary education) and improve immigration processes for priority sectors to target skill shortages. Measures to promote female labor force participation could complement these efforts.

42. Advancing Fiji’s climate plans can help enhance its resilience to climate shocks and safeguard economic stability. Implementation of Fiji’s climate adaptation and mitigation plans will boost Fiji’s economic strength, by enhancing resilience to climate-related shocks, diversifying energy sources, and reducing volatile fuel imports. Given the significant financing and capacity constraints, proper prioritization is critical to accelerating the implementation.

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

Figure 1.
Figure 1.

Fiji: Recent Developments

Citation: IMF Staff Country Reports 2024, 159; 10.5089/9798400278211.002.A001

Figure 2.
Figure 2.

Fiji: Fiscal Sector Indicators

Citation: IMF Staff Country Reports 2024, 159; 10.5089/9798400278211.002.A001

Figure 3.
Figure 3.

Fiji: External Sector Indicators

Citation: IMF Staff Country Reports 2024, 159; 10.5089/9798400278211.002.A001

Figure 4.
Figure 4.

Fiji: Monetary and Financial Indicators

Citation: IMF Staff Country Reports 2024, 159; 10.5089/9798400278211.002.A001

Table 1.

Fiji: Selected Economic Indicators, 2021-29

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Sources: RBF, Ministry of Finance, and IMF staff estimates and projections.
Table 2.

Fiji: Balance of Payments, 2021-29

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Sources: RBF and IMF staff estimates. 1/ External Debt=Central Government External Debt+External Private Debt.
Table 3a.

Fiji: Central Government Operations, CY2021-29

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Sources: Ministry of Finance and IMF staff estimates.
Table 3b.

Fiji: Central Government Operations, FY2021-29

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Sources: Ministry of Economy and IMF staff estimates.
Table 4.

Fiji: Monetary Survey, 2020-26

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Sources: Reserve Bank of Fiji, and IMF staff esti mates. 1/ Weighted average.
Table 5.

Financial Soundness Indicators, 2018-23

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Sources: Haver Analytics; and Reserve Bank of Fiji.