Press Release No. 10/430

Press Release No. 10/430
November 12, 2010

An International Monetary Fund (IMF) team led by Mr. Jonathan Dunn visited Fiji during October 28–November 12 to hold Article IV discussions with the Fijian authorities and other stakeholders.¹ The team met with Prime Minister and Minister for Finance Bainimarama, Reserve Bank of Fiji (RBF) Governor Reddy, Minister for Public Enterprises Aiyaz Sayed-Khaiyum, Permanent Secretary for National Planning Pita Wise, Acting Permanent Secretary for Finance David Kolitagane, other senior government officials, the private sector, labor representatives, academics, and development partners. Representatives from the Asian Development Bank and the World Bank joined the mission. The team expresses its appreciation to the authorities and other stakeholders for the frank and constructive discussions.

Fiji’s economy contracted by 3 percent in 2009 due to the ongoing decline of the sugar industry and the global crisis. The growth of tourism and positive developments in some primary industries will likely raise growth just above zero percent this year. GDP growth of around 1 percent is likely in 2011, driven by the ongoing rebound in tourism and a recovery in agriculture. Medium-term growth prospects are likely to remain weak in the absence of fiscal consolidation, structural reforms, and an improved business climate. Inflation—after rising to over 10 percent one year after the April 2009 devaluation—declined to one percent by September 2010 due to steady commodity prices, sluggish domestic demand, and the government’s efforts to contain the public sector wage bill. International reserves have risen to about US$640 million, 4 months of import cover, on the back of stronger tourism earnings. Reserves are, however, supported by exchange restrictions.

The fiscal deficit in 2010 is projected to be around 2.9 percent of GDP, somewhat lower than budgeted, as a result of higher than expected indirect tax receipts, lower capital spending, and restraints on the public wage bill and hiring. Central government debt is expected to reach 56 percent of GDP in 2010 and is high by regional standards. In addition, the government has contingent liabilities of around 17 percent of GDP.

Fiji faces considerable downside risks given its vulnerability to shocks. Economic growth could be negatively affected by volatility in global commodity prices, natural disasters, investor confidence, the complexities of structural reform, and the uneven global recovery.

Fiscal consolidation will be critical to maintain macroeconomic stability over the medium term. The current high level of central government debt (about 73 percent of GDP when contingent liabilities are included) constrains the government’s ability to cushion the economy against future shocks. Limiting the budget deficit to around 3 percent of GDP in 2011, including the cost to restructure the Fiji Sugar Corporation, would contain the increase in the debt-to-GDP ratio next year and reduce financing pressures.

Raising the VAT rate and increasing the yield of excise taxes would be the most effective immediate revenue measures to contain fiscal deficits and help ensure a sustainable level of public debt. Revenue can be further bolstered in coming years by simplifying tax incentives and improving tax administration. To ensure that the wage bill can be contained over the medium term, the government should conduct a review of the civil service to determine its appropriate size. Borrowing by the government from the Fiji National Provident Fund (FNPF) and other lenders should continue to be at market-determined rates.

The mission welcomes the new monetary policy framework introduced by the RBF in May 2010. In view of tightened liquidity, steady reserves, weak credit demand, and moderate inflation, the mission supports the current stance of monetary policy. The RBF should, however, stand ready to tighten monetary policy if core inflation moves above its stated target of 3 percent. Monetary policy should also be tightened if excess liquidity increases and strong credit growth returns. Deposit and lending rates should be allowed to respond freely to the demand for and supply of funds. The mission recommends that Fiji adopts a more flexible exchange rate regime to help the country better absorb external shocks and protect its international reserve position. Relaxing restrictions on dividend repatriation would help improve investor confidence. The mission welcomes the authorities’ plans to adopt a revised RBF Act to strengthen central bank independence and endorses the reforms underway to make FNPF actuarially sound and strengthen its risk management and investment framework.

Accelerating structural reforms would spur growth and help protect macroeconomic stability. The mission welcomes the efforts of the Sugar Task Force to develop a sugar industry reform framework and encourages the government to seek the best professional advice available globally to help develop and implement a detailed reform plan. Tariff adjustment to achieve cost recovery in public enterprises should continue. The recent adjustment of electricity tariffs by the Fiji Electricity Authority is a positive step. The government’s decision to create a land bank should help support greater utilization of land and spur development and diversification of agriculture. The mission encourages the government to eliminate price controls that may dampen private investment, including in small scale agriculture. The government should ensure that well-targeted social assistance is available to vulnerable groups as prices and tariffs for public services are liberalized.

The IMF Executive Board is expected to conclude the Article IV consultation discussions in January 2011.

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¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members. A staff team visits the country (typically on an annual basis) to collect economic and financial information and discuss 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 Executive Directors, and this summary is transmitted to the country's authorities.