Public Information Notice: IMF Concludes Article IV Consultation with Fiji
October 1, 1998
|Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.|
On September 14, 1998 the Executive Board concluded the Article IV consultation with Fiji.1
The Fiji economy continues to maintain macroeconomic stability and has benefited from several reform programs in the 1990s. However, GDP growth has been low, averaging less than 2 percent per annum in 1991–97. The disappointing growth performance is attributed mainly to sharply falling investment rates. Gross domestic investment fell from an average of 25 percent during 1980–85 to less than 13 percent in recent years. Public investment spending has been constrained by large current expenditures. Private investment, at less than 5 percent of GDP in the last five years, has been hampered by long-standing structural factors.
More recently, economic activity has weakened considerably mainly due to weather-related shocks to sugar production, the Asian crisis, and the uncertain policy environment. Real GDP declined by nearly 2 percent in 1997 and is expected to decline by 4 percent in 1998. The economic downturn has intensified as the drought—now believed to be among the worst in Fiji’s recent history—continued through 1998 and the Asian crisis further dampened tourist arrivals. The government has also made only limited headway on key structural issues that are hampering investment. The longstanding and sensitive issue of the renewal of agricultural land leases is being examined by a Parliamentary Select Committee, but without its resolution, tenants have stopped investing in agricultural land and banks are unwilling to lend unless land leases are renewed. In addition, foreign direct investment is subject to considerable regulation which further discourages investment.
Inflation continued to decline in 1996–97, falling to the 3–4 percent range due to falling oil prices, low inflation in trading partner countries and weaker domestic demand. Subsequently, the January 20, 1998 devaluation of the Fiji dollar by 20 percent put upward pressure on prices and wages. End-period annual inflation during the first half of 1998 was nearly 5 percent and is expected to rise to 9–10 percent by end-year.
The fiscal position worsened considerably during 1996–98 owing mainly to policy slippages and higher bank restructuring costs. Excluding privatization receipts and bank restructuring costs of the National Bank of Fiji (NBF), the underlying fiscal deficit deteriorated sharply, rising to 6.5 percent in 1998 from 2.2 percent in 1997. On the revenue side, collections improved in 1997 and privatization receipts, roughly equal to 3 percent of GDP, are expected in 1998 from the sales of two state-owned enterprises. However, government expenditures rose steadily during 1996–98, in large part reflecting higher wages and transfers, and in particular, higher interest costs and discretionary spending on agriculture in 1998.
The Fiji government has made significant progress on public enterprise reforms since the passage of the enabling legislation in 1997. Reforms of radio broadcasting and partial divestiture of the national airline have been completed, while further progress continue to be made in the forestry industry, telecommunications, energy, civil aviation, water, and ports. Privatization receipts, resulting from these reforms, are being used to retire public debt. Government debt is expected to be 45 percent of GDP at end-1998.
Monetary policy has generally been accommodative during 1996–98, as reflected in the Reserve Bank of Fiji’s (RBF) benchmark indicator (the 91-day interest rate on RBF notes) declining from over 3 percent in the first quarter of 1996 to 2 percent in May 1998. Broad money aggregates grew moderately in 1996, in line with output growth. However they sharply contracted in 1997 due to the onset of recessionary conditions and the fall in the money multiplier, resulting from the effect of the restructuring of the NBF. The banking sector’s health has improved following the restructuring of the NBF and the cessation of its commercial activities. In response to the crisis, the authorities adopted tighter prudential requirements and strengthened banking supervision.
External debt continued to be low, reaching 11 percent of GDP by end-1997, external debt-service was 2.9 percent of exports of goods and services, and foreign exchange cover, at 3.4 months of imports, remained comfortable. The current account recorded a surplus in 1996–97 due to higher tourism earnings, garment exports and weak import demand, but is expected to go into deficit (2 percent of GDP) in 1998 as all major export earnings decline. The real effective exchange rate appreciated by almost 7 percent during 1996–97 and has depreciated by nearly 14 percent in the year to June 1998, reflecting the January devaluation.
Executive Board Assessment
Directors commended Fiji’s historical record on several fronts: inflation rates, fiscal deficits, and external debt had typically been low. They noted that the authorities had paid special attention to maintaining a sustainable external position and were impressed by the ability of the RBF to remain independent. They believed that the fixed exchange rate regime had provided a stable macroeconomic environment and that monetary policy had been effective in reigning in inflation. In this context, they welcomed the authorities’ recent decision to increase transparency by announcing the weights of the currencies in the basket by year-end. They also commended the authorities for showing flexibility and adaptiveness in confronting serious problems head on, as reflected in the recent resolution of the NBF crisis and the enactment of the new constitution last year.
Notwithstanding these achievements, Directors noted that the external environment had now substantially worsened, the fiscal balance had deteriorated sharply, and key structural reforms had been stalled for a long time. They were concerned that, for the first time since independence in 1970, there was a real danger that the economy could enter a prolonged recession. To prevent the economy from contracting further, they stressed that decisive policy action on many fronts could no longer be postponed.
To preserve macro stability and prevent private sector investments from being further crowded out, Directors urged the authorities to reverse the recent deterioration in the fiscal accounts as soon as possible. They stressed that the 1999 budget formulation would be crucial in setting the pace for the next few years. In particular, they underscored the need to curtail discretionary and unproductive spending and to reduce the public sector wage bill.
Directors noted that the Fiji dollar had appreciated significantly in real terms during the 1990s, particularly against the currencies of its main trading partners, Australia and New Zealand. In light of this appreciation and the recent adverse terms of trade shock, Directors believed that the authorities’ decision to devalue the Fiji dollar this year was appropriate. At the same time, they stressed that the gains from the devaluation could only be realized if wage growth was contained and the economy was deregulated further. In addition to wage restraint, they stressed that a tightening of the monetary stance would also be needed if the economy showed signs of heating up, if inflation picked up, or if external reserves came under pressure. While noting the absence of short-term external liabilities of the RBF and the assurance of adequate foreign exchange import cover so far, Directors cautioned that this situation could be threatened if policy uncertainty was not addressed quickly.
Directors believed that the adverse effects of the unfavorable global environment and the negative weather-related shocks on output in the immediate future could be tempered by removing fundamental structural impediments in the economy. In this light, they urged the authorities to implement a credible structural reform agenda as soon as possible. Key reform measures included the renewal of land leases, the removal of the uncertainty regarding labor laws, the reduction of the public sector by accelerating privatization, and the deregulation of thereal and financial sectors. In their view, such reforms were needed not only to revive output in the short run but also to raise potential growth in the medium term.
Directors noted that the authorities’ own policy formulation and Fund surveillance were hampered by the lack of data in some important areas. In view of the high degree of openness of the economy and its vulnerability to real shocks, Directors urged the authorities to regularly compile and publish reliable data on terms of trade, exports and imports, and capital items in the balance of payments. In addition, they encouraged the authorities to conduct surveys on wages, unemployment, consumption, and investment from time to time. They also believed that GDP deflators need to be constructed to enable the estimation of GDP in constant prices.
|Fiji: Summary Indicators, 199398|
|Output and inflation (percent change)|
|Real GDP (at constant factor cost)||2.6||5.1||2.5||3.4||-1.8||-3.7|
|Consumer prices (period average)||5.3||0.6||2.2||3.0||3.4||6.5|
|Consumer prices (end-period)||2.9||1.2||2.2||2.4||2.9||10.0|
|Savings and investment (percent of GDP)|
|Gross national saving||11.2||10.4||12.2||13.9||12.6||10.0|
|Gross domestic investment||15.8||13.9||13.1||11.0||12.4||12.0|
|Foreign saving (current account deficit)||4.6||3.5||0.9||-2.9||-0.2||2.0|
|Central government budget (percent of GDP)|
|Revenue and grants||25.9||26.1||25.7||25.1||26.5||31.1|
|Of which: Privatization||0.0||0.0||0.0||0.0||0.0||3.1|
|Of which: NBF restructuring||0.0||0.0||0.0||3.4||4.3||0.0|
|Money and credit (percent change; end-period) 2|
|Of which: Private sector||12.9||8.7||2.9||4.8||-13.0||-14.5|
|Broad money (M2)||6.7||2.7||4.3||0.9||-8.7||-4.0|
|91-day annualized interest on RBF note||2.3||3.3||3.5||2.8||1.4||1.9|
|Balance of payments (US$ mns.)|
|Current account balance||-75||-63||-19||61||4||-33|
|Capital account balance3||13||28||72||-14||-7||1|
|Overall balance/deficit (-)||-46||-11||77||70||-29||-13|
|Gross official reserves (US$ mns.; end-||270||273||349||427||360||3574|
|(In months of imports of goods and||3.2||3.0||3.4||4.1||3.4||3.9|
|External debt (US$ mns.; end-period)||292||283||269||256||227||205|
|(In percent of GDP)||17.9||15.5||13.5||12.1||10.8||12.7|
|Debt service (US$ mns.)||63||79||52||54||34||30|
|(In percent of exports of goods and||7.1||7.1||4.7||4.2||2.9||2.9|
|Real effective rate (period average)6||107.6||107.1||105.0||106.9||112.2||92.32|
|F$ per US$ (end-period)||1.54||1.41||1.43||1.38||1.55||2.084|
Source: Data provided by national authorities and IMF staff estimates.
1 Excluding National Bank of Fiji restructuring costs and privatization receipts.
2 Data for 1998 refers to May 1998.
3 The figures exclude errors and omissions.
4 June 16, 1998.
5 Adjusted for reexports.
6 IMF, Information Notice System index, 1990=100.
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.