Catalog

	Table of Contents
p. 43 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics The Pacific Cook Islands East Timor Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia

---

Fiji Islands

The economy grew slowly in 2001. A new administration is adopting a more interventionist approach to economic management to address the long-standing problems of weak employment growth and poverty, low levels of private investment, and restructuring of the sugar industry. The official medium-term outlook is for growth of 3.5% or more.

Macroeconomic Assessment

After falling by 2.8% in 2000 due to political instability and civil disorder, GDP increased by an estimated 1.5% in 2001 (Figure 2.29), largely reflecting the partial recovery of the tourism sector (and despite a temporary decline following the events of September 11th). The trade, restaurant, and hotel sector, and the transport and communications sector expanded by 4.2% and 7.3%, respectively. Mining and quarrying activity rose by 2% due to improved gold ore extraction, while the community, social, and personal services sector also registered modest growth, of 2.2%, mainly because of increased civil service employment. Construction activity grew by 2.9%, primarily as a result of public investment projects completed during the year, while the electricity and water sector strengthened by 3.5%. The primary sector as a whole contracted by 0.5% in 2001, largely due to a 10.2% drop in sugarcane production, reflecting transport problems and underlying uncertainty over the renewal of land leases. Aggregate manufacturing output fell by 5.5%. The finance, insurance, real estate, and business services sector declined by 3.1%, mirroring weaker business and consumer confidence.

The labor market remained sluggish in 2001 as a result of the slow economic growth. In the period from May 2000 to the end of 2001, an estimated 9,000 workers at least were laid off, of whom 2,700, or 30%, were in the garment industry. Further, skills shortages became more apparent in both the public and private sectors, as qualified and skilled citizens emigrated.

In 2001, the nominal and real effective exchange rates of the Fiji dollar remained relatively stable. The average inflation rate in 2001 was 4.3%, following one-off rises in transport and postal charges and reinstatement of VAT on basic food items. There were no demand-side pressures on the price level. These developments permitted progressive relaxation of exchange controls during the year. Monetary policy continued to focus on maintaining low inflation and ensuring adequate foreign reserves, but it was eased over the year to stimulate aggregate demand. The Reserve Bank of Fiji’s minimum lending rate fell from 8.0% in January to 1.75% in October. The commercial banks’ weighted average lending rate fell slightly, from 8.38% in January to 8.21% in November, while rates on savings and time deposits fell more—to 0.77% and 2.43%, respectively. The central bank undertook an initiative intended to stimulate export growth. From 1 August 2001, commercial banks were required to lend a minimum amount to eligible exporters. The lending rate of the existing Export Finance Facility was also reduced from 3.0% to 2.0%.

Money and credit growth in 2001 continued to reflect slow economic growth, and weak consumer and business confidence. Broad money supply contracted by 1.5% as net foreign assets dropped by 11% and total domestic credit declined marginally. Within the latter area, credit to the Government, albeit a small share of the total, increased by 79.5%, while official entities reduced their borrowing by 20.3% and lending to the private sector contracted by 3.8%.

Despite a substantial improvement in VAT collection, operating revenues declined due to a sharp drop in direct taxation revenues, reflecting the lagged effect of the 2000 recession. Revenue arrears were also substantial. On the other hand, operating expenditures rose because of higher personnel spending, transfer payments, and interest payments on public debt. The outlay on general elections in September 2001 also pushed up total spending. Thus, the budget deficit in 2001 of 4.9% of GDP exceeded the target because of supplementary appropriations and a delay in asset sales of the Colonial National Bank. The underlying deficit (excluding asset sales) was 7% of GDP in 2001. Central government debt increased to 42.7% of GDP at the end of 2001. In addition, the Government confronted significant contingent liabilities, largely in the form of loan guarantees for public enterprises, which rose to over 60% of GDP at the end of 2001.

The 2002 budget stated that the Government was committed to a more interventionist role in rebuilding the economy. Priorities include a strong redistributive spending policy aimed at addressing people’s basic needs; improving economic efficiency and international competitiveness; and reforming the civil service, public enterprises, and public financial management. The budget proposed an expansionary fiscal policy along with a deficit of 6% of GDP (with the underlying deficit at 6.3% of GDP) and a rise in public debt to 46% of GDP. It emphasized strengthening tax compliance and arrears collection. Operating revenues were projected to climb by 15.4% from the 2001 level, primarily as a result of higher direct taxation revenues. On the expenditure side, a shift toward capital spending, from 20% to 24% of the total, was projected. Operating expenditures were projected to rise by 3.7%, involving a reallocation away from personnel spending toward transfer payments. Planned spending on poverty reduction and rural development, education, health, and infrastructure development was raised significantly. The risks to these projections arise from their assumptions of continued political stability, nominal GDP growth of 6.1%, and success in substantially improving compliance and recovery of arrears in the area of direct taxation.

Compared with the previous year, exports declined by 17.2% in 2001. (A notable exception was fish, exports of which rose by 6%.) Total imports fell by 12.8%, largely reflecting the decline in imports of intermediate goods due to the contraction of garment production. Tourism earnings improved the services account balance, but net investment income outflows increased, as did private transfers. Official transfers (mostly EU sugar transfers) declined. The current account deficit widened to 4.4% of GDP. The capital account surplus continued to fall as direct investment inflows and government net loan drawdowns fell. The overall outcome on the balance of payments was a deficit of $29.8 million and a lower foreign exchange reserve level of about $360 million, or 4.4 months of import cover. The external debt in mid-2001 totaled F$532.8 million, of which 58% was owed by the private sector. Interest payments on this debt were equivalent to about 1% of merchandise exports.

Policy Developments

The Government is making an effort to stimulate aggregate demand through an expansionary fiscal policy and an accommodative monetary policy. While emphasis on public investment in basic infrastructure and in health and education is appropriate, the crucial issue is ensuring that these efforts do not raise the already substantial public debt burden and threaten macroeconomic stability and growth.

In the 2002 budget, the Government announced its intention to support the implementation of a performance management system in the civil service, and to coordinate this implementation with financial management reform. A key component of the latter is a commitment to greater fiscal transparency. This will involve strengthening the financial management information system, reconsidering the 1999 Public Financial Management Act with a view to ensuring greater accountability, adopting the IMF Code of Good Practices on Fiscal Transparency, and reintroducing an internationally reputable official credit rating for the country.

Since the coup of 1987, the levels of total and private sector investment have steadily declined. Insecurity of property rights remains the major reason for the low level of investor confidence. The maintenance of political stability and consistency in policy implementation are also critical for rebuilding investor confidence. Another important issue relates to public enterprise reform, given the low return on investment. In view of the large public debt, the Government needs to be cautious in extending guarantees for public enterprise loans and in incurring contingent liabilities. It should encourage these enterprises to improve performance and borrow on the strength of their balance sheets.

The resolution of the difficult issue of land tenure arrangements is a major task for the Government. Thirty-year leases for farmers began expiring in 1997 and most have not been renewed, which is a cause for concern over the future of sugarcane production. The Government also needs to reform transport, sugar-milling infrastructure, and industrial relations in the sugar industry. The potential for crop diversification needs to be investigated in this context, given the long-term prospect of losing preferential access to EU markets.

Outlook for 2002-2003

The official forecast is for the growth rate to accelerate to 3.5% in 2002 and to exceed 4% in the subsequent 2 years, notching up to the Government’s long-term target of 5%. This is expected to generate employment growth of just under 2% a year. Based on such growth and targeted interventions, the Government aims to steadily reduce poverty. While growth is expected to be broad based, tourism is the leading sector in this drive. The agriculture, forestry, and fisheries sector is projected to grow at rates of 4–5% after 2002, assuming that sugarcane production recovers, strong growth in forestry resumes, and fisheries expansion continues.

Inflation is projected to be about 3% in 2002–2003. Annual export growth rates of 7.7% and 12.8%, respectively, are forecast for 2002 and 2003, while import growth rates are projected to be 2.7% and 6.1%. As a result, the current account deficit will become negligible by 2003. The capital account surplus is projected to decline further as FDI inflows weaken, but the overall balance of payments should move into surplus by 2003. Import cover is projected to hold at 4 months.

After the expansionary budget of 2002, the budget deficit is projected to decline to 3.7% of GDP in 2003, primarily because the absolute levels of both operating and capital expenditures are reduced. Central government debt is projected to rise further to 46% and 46.2% of GDP, respectively, in 2002 and 2003. Assumptions about a significant rise in the investment-to-GDP ratio may not be realistic, especially when it is explicitly forecast that direct investment inflows on the balance of payments will fall during 2002–2003. However, given the small base and gradual return to normalcy, an annual GDP growth rate of 3% seems achievable in the medium term.

Back East Timor	Next Kiribati