Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Fiji
IMF News, January 25, 2010
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- Published: January 25, 2010
Background: economic developments and vulnerabilities
- Growth and shocks
- Growth expected to have contracted by 2½ percent in 2009 due to the global crisis affecting exports and tourism, and January 2009 flooding that damaged tourism, crops, and infrastructure.
- 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.
- Tourist arrivals fell by almost 25 percent year-on-year in early 2009; tourism recovered mid-year after the April 2009 devaluation.
- External sector and reserves
- Current account deficit widened from 4 percent to 18 percent of GDP between 2000 and 2008.
- Foreign exchange reserves fell to US$300 million in early 2009 (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.
- Foreign exchange reserves doubled between April and November 2009 to reach US$593 million, almost four months of imports; about half the increase explained by the SDR allocation (US$93 million) and repatriation of FNPF foreign assets.
- Despite high recent current account deficits, external debt is low at 13 percent of GDP in 2008 because deficits were financed mainly by FDI in the tourism sector.
- Fiscal and public debt pressures
- Tax revenue shortfall of about 10 percent relative to the budget in the first 10 months of 2009.
- Government restrained current spending and contained wage increases; fiscal deficit increased to about 3 percent of GDP in 2009 from near balance in 2008, in line with the budget.
- Central government debt expected to rise to 53 percent of GDP by end 2009.
- Central government guarantees of public enterprise debt and contingent liabilities amount to about 70 percent of GDP (excluding the public pension fund).
- Financial sector and monetary conditions
- Bank liquidity rose sharply to more than 13 percent of deposits as foreign exchange reserves recovered.
- Credit growth likely contracted in real terms in 2009 as banks were cautious amid political and economic uncertainty.
- RBF increased statutory reserve requirement from 5 percent to 7 percent of deposits, removed bank-by-bank credit ceilings, and announced removal of ceilings on banks’ lending rates and spreads by January 2010.
- Labor market and demographics
- Unemployment rate rose to 8½ percent in 2009; would have been higher without increased emigration.
Executive Board assessment: policy guidance and recommendations
- Overall view
- Directors noted negative effects of difficult politics, delayed structural reforms, natural disasters, and the global crisis on economic performance.
- Commended authorities’ efforts to restrain current spending and limit the overall fiscal deficit in 2009.
- Noted devaluation helped reverse the sharp decline in foreign exchange reserves.
- Economic situation remains challenging with high downside risks; further decisive actions needed to restore macroeconomic stability and implement structural reforms to lift growth and ensure debt sustainability over the medium-term.
- Fiscal policy
- A substantial reduction in the fiscal deficit is necessary to ensure macroeconomic stability and stabilize public debt.
- Most Directors recommended a faster pace of consolidation starting from 2010 than currently envisaged.
- Infrastructure rebuilding needs should be offset by expenditure measures, including civil service reform.
- Revenue could be strengthened by rationalizing tax incentives, improving tax administration, and raising excise taxes.
- Directors encouraged adherence to the earlier target of reducing central government debt to 45 percent of GDP by 2014.
- Monetary and exchange rate policy
- Supported a tight monetary policy to ensure inflation returns to low levels and to protect foreign exchange reserves.
- Welcomed increase in statutory reserve deposit ratio and removal of ceilings on bank lending rates and spreads; called for further measures as needed to absorb excess liquidity.
- Encouraged moving toward a more flexible exchange rate to help absorb external shocks and protect reserves; flexibility should be accompanied by strengthened monetary and fiscal policies.
- Financial sector and public pension reform
- Welcomed improvements in bank supervision; expressed concern about vulnerability of some smaller banks and recommended remedial action where appropriate.
- Called for fundamental reform of the Fiji National Provident Fund (FNPF): put FNPF on a sound actuarial footing, establish independent management responsible to beneficiaries, and strengthen supervisory oversight.
- Structural reforms and social considerations
- Structural reforms are crucial to ensure fiscal sustainability, address competitiveness problems, lift potential growth, and create jobs.
- Called for well-designed reforms of the civil service, public enterprises (with a view to eventual privatization), and the land-lease system, accompanied by price liberalization.
- Well-targeted measures should help address the social impact of these reforms.
- Engagement with the IMF
- Directors welcomed authorities’ intention to work closely with the Fund on designing and implementing economic policies.
- Noted a Fund-supported program would require continued strong commitment to macroeconomic adjustment and structural reforms to address vulnerabilities, close the external financing gap, and attract donor support.
Key statistics and projections (2006–2010 as presented)
- Nominal GDP (2008): US$3.6 billion
- Population (2008): 843 thousand
- GDP per capita (2008): US$4,237
- Quota: SDR 70.3 million
- Real Sector (percent change)
- Real GDP growth: 2006: 1.9; 2007: -0.5; 2008: -0.1; 2009 Prel.: -2.5; 2010 Est. Proj.: 2.0
- Consumer prices (average): 2006: 2.5; 2007: 4.8; 2008: 7.8; 2009 Prel.: 4.0; 2010 Est. Proj.: 5.0
- Consumer prices (end of period): 2006: 3.1; 2007: 4.3; 2008: 6.6; 2009 Prel.: 6.7; 2010 Est. Proj.: 3.0
- Central government operations (percent of GDP)
- Revenue and grants: 2006: 26.1; 2007: 25.4; 2008: 24.8; 2009 Prel.: 23.1; 2010 Est. Proj.: 23.0
- Total expenditure: 2006: 29.0; 2007: 27.0; 2008: 25.0; 2009 Prel.: 26.0; 2010 Est. Proj.: 26.4
- Overall balance: 2006: -3.0; 2007: -1.6; 2008: -0.2; 2009 Prel.: -2.9; 2010 Est. Proj.: -3.5
- Total debt outstanding: 2006: 53.1; 2007: 49.9; 2008: 51.2; 2009 Prel.: 52.7; 2010 Est. Proj.: 53.2
- Money and credit (percent change)
- Broad money (M2): 2006: 19.8; 2007: 10.4; 2008: -6.9
- Credit to the private sector: 2006: 23.7; 2007: 2.8; 2008: 11.2
- Treasury bill rate (91-day) 1/: 2006: 10.9; 2007: 0.3; 2008: 0.5; 2009 Prel.: 7.0
- Commercial bank lending rate 1/: 2006: 7.9; 2007: 8.5; 2008: 7.7; 2009 Prel.: 7.6
- 1/ For 2009, interest rates as of September.
- Balance of Payments (millions of U.S. dollars)
- Current account balance: 2006: -582; 2007: -463; 2008: -640; 2009 Prel.: -297; 2010 Est. Proj.: -493
- (In percent of GDP): 2006: -18.7; 2007: -13.6; 2008: -17.9; 2009 Prel.: -9.5; 2010 Est. Proj.: -16.0
- Trade balance: 2006: -897; 2007: -842; 2008: -1,108; 2009 Prel.: -714; 2010 Est. Proj.: -812
- Exports: 2006: 729; 2007: 787; 2008: 944; 2009 Prel.: 637; 2010 Est. Proj.: 673
- Imports: 2006: 1,626; 2007: 1,629; 2008: 2,052; 2009 Prel.: 1,351; 2010 Est. Proj.: 1,485
- Tourism receipts: 2006: 433; 2007: 434; 2008: 483; 2009 Prel.: 368; 2010 Est. Proj.: 406
- Foreign direct investment: 2006: 415; 2007: 329; 2008: 313; 2009 Prel.: 263; 2010 Est. Proj.: 264
- (Other balance item rows presented in the table): 2006: 145; 2007: 91; 2008: -169; 2009 Prel.: 219; 2010 Est. Proj.: -156
- Reserves and external debt (millions of U.S. dollars)
- Gross official reserves: 2006: 460; 2007: 551; 2008: 381; 2009 Prel.: 600; 2010 Est. Proj.: 561
- (In months of retained imports): 2006: 2.9; 2007: 2.7; 2008: 3.9; 2009 Prel.: 3.5
- External debt 2/: 2006: 445; 2007: 461; 2008: 449; 2009 Prel.: 378; 2010 Est. Proj.: 517
- (In percent of GDP) 2/: 2006: 14.4; 2007: 13.5; 2008: 12.6; 2009 Prel.: 12.1; 2010 Est. Proj.: 16.9
- Central government external debt (percent of GDP): 2006: 7.2; 2007: 8.4; 2008: 7.5; 2009 Prel.: 8.3
- Exchange rate: Fiji dollars per US dollar, end of period: 2006: 1.7; 2007: 1.6; 2008: 1.8
- REER (2000=100, end period) 3/: 2006: 106.9; 2007: 109.9; 2008: 114.4; 2009 Prel.: 90.2
- 2/ For 2010, it includes BOP support to fund a US$120 million financing gap.
- 3/ For 2009, REER as of June.
Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Fiji