IMF Executive Board Concludes 2009 Article IV Consultation with FijiPublic Information Notice (PIN) No. 10/11
January 25, 2010
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 January 11, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Fiji.1
Growth has been sluggish in recent years because of delays in economic reforms, worsening terms of trade, and political developments that have strained Fiji’s international relations and hurt business confidence. Fiji’s economy is expected to have contracted by 2½ percent in 2009, reflecting the adverse impact of the global crisis on exports and tourism. The economy was also hit by flooding in January 2009 that damaged tourism, crops, and infrastructure. As a result of slow growth, the unemployment rate rose to 8½ percent, and would have been higher if not for an increase in emigration.
The real effective exchange rate appreciated by 10 percent between 2000 and 2008 as the terms of trade deteriorated by 15 percent because of lower export prices for sugar and higher oil prices. The current account deficit widened from 4 percent to 18 percent of GDP over the same period, and in early 2009, foreign exchange reserves fell to US$300 million, less than two months of imports. In April 2009, the Reserve Bank of Fiji (RBF) devalued the currency by 20 percent and intensified exchange controls. Following the devaluation, weak economic activity and lower commodity prices helped contain inflation.
Tourist arrivals fell by almost 25 percent year-on-year in early 2009 because of the global crisis and January floods. However, tourism recovered mid-year, as the devaluation of the Fijian dollar against the Australian dollar made Fiji a more attractive destination.
Foreign exchange reserves doubled between April and November 2009, to reach US$593 million, almost four months of imports, explained by a pickup in remittances and an improvement in the trade balance. About half of the increase was also explained by the SDR allocation (US$93 million) and repatriation of foreign assets of the Fiji National Provident Fund (FNPF, a public pension fund). Despite high current account deficits in recent years, external debt is low at 13 percent of GDP in 2008, as deficits were financed mainly by foreign direct investment (FDI) in the tourism sector.
Recent developments have put considerable pressure on the budget. Tax revenue was hit by the fall in economic activity, with a shortfall of about 10 percent relative to the budget in the first 10 months of the year. Government restrained current spending, including by containing wage increases, and the fiscal deficit increased to about 3 percent of GDP in 2009 from near balance in 2008, in line with the budget. Central government debt is expected to rise to 53 percent of GDP by end 2009. Central government guarantees of public enterprise debt and contingent liabilities arising from poor performance of public enterprises amount to about 70 percent of GDP (excluding the public pension fund).
Bank liquidity has risen sharply in recent months to more than 13 percent of deposits as foreign exchange reserves have recovered. However, credit growth is likely to have contracted in real terms in 2009, as banks took a cautious approach in light of heightened political and economic uncertainties. The RBF increased the statutory reserve requirement on banks from 5 percent to 7 percent of deposits to reduce excess liquidity. It has also removed bank-by-bank credit ceilings and announced the removal of ceilings on banks’ lending rates and spreads by January 2010.
Executive Board Assessment
Executive Directors noted that Fiji’s economic performance in recent years has been negatively affected by a difficult political situation, delayed structural reforms, natural disasters, and the global crisis. Faced with increasing budget pressures, the authorities have made commendable efforts to restrain current spending and limit the overall fiscal deficit in 2009, while the devaluation of the Fijian dollar has helped reverse the sharp decline in foreign exchange reserves. The economic situation nevertheless remains challenging, and downside risks remain high. Directors therefore stressed the need for further decisive actions to restore macroeconomic stability and implement structural reforms needed to lift growth and ensure debt sustainability over the medium-term.
Directors agreed that a substantial reduction in the fiscal deficit is necessary to ensure macroeconomic stability and stabilize public debt. While acknowledging the difficult economic situation, most Directors recommended a faster pace of consolidation starting from 2010 than is currently envisaged. They considered that infrastructure rebuilding needs should be offset by expenditure measures, including civil service reform, while revenue could be strengthened by rationalizing tax incentives, improving tax administration and raising excise taxes. Directors encouraged the authorities to adhere to their earlier target of reducing central government debt to 45 percent of GDP by 2014.
Directors supported a tight monetary policy to ensure that inflation returns to low levels and to protect foreign exchange reserves. They welcomed the recent increase in the statutory reserve deposit ratio and the removal of ceilings on bank lending rates and spreads, and called for further measures as needed to absorb excess liquidity.
Directors encouraged the authorities to move toward a more flexible exchange rate. They considered that the shift to a more flexible exchange rate regime will help Fiji absorb external shocks and protect its reserve position. Directors noted that exchange rate flexibility should be accompanied by a strengthening of monetary and fiscal policies.
Directors welcomed recent improvements in bank supervision. They expressed concern about the vulnerability to adverse shocks of some smaller banks and recommended remedial action where appropriate. Directors called for fundamental reform of the FNPF. In particular, they stressed the importance of measures to put the FNPF on a sound actuarial footing, of an independent management responsible to beneficiaries, and of strengthened supervisory oversight.
Directors considered that structural reforms are crucial to ensure fiscal sustainability, address competiveness problems, lift potential growth and create jobs. They called for well-designed reforms of the civil service, of the public enterprises with a view to eventual privatization, and of the land-lease system, accompanied by price liberalization. Well-targeted measures should help address the social impact of these reforms.
Directors welcomed the authorities’ intention to work closely with the Fund on the design and implementation of their economic policies. They noted that a Fund-supported program would require continued strong commitment to macroeconomic adjustment and structural reforms to address remaining vulnerabilities, close the external financing gap, and attract donor support.