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p. 44 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia The Pacific Cook Islands Fiji Islands Kiribati Republic of the Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia

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Fiji Islands

Economic growth stayed on course in 2002 with tourism continuing to recover from the low of 2000 but with the sugar industry remaining depressed. Key issues that need to be resolved include the long-standing problems of low levels of private investment, insecurity of land tenure, and restructuring of the sugar industry. The outlook is for growth to continue in the medium term, but maintenance of sociopolitical and macroeconomic stability remains critical for this.

Macroeconomic Assessment

GDP increased by 4.4% in 2002, following growth of 4.3% in the previous year. This encouraging performance followed a weakening in the economy in 2000 associated with the effects of political instability and civil disorder. The tourism subsector again grew strongly, with visitor arrivals on a par with the record year of 1999. Several major conferences and sporting events were hosted. The perception in the global tourism market that the country was a safe location due to global and regional security concerns also appeared to have benefited the country.

Growth was broad based, weakened mainly by the poor performance of the sugar, forestry, and financial subsectors. The fisheries subsector grew by 8.0% following a 25.0% surge in 2001, supported by new export markets in Asia. As a whole the agriculture, forestry, and fisheries sector recorded modest growth of 1.1%. Manufacturing grew by 3.9%, while construction activity expanded by 8.0%, mainly as a result of public investment projects. The trade, restaurant, and hotel subsector grew by 8.6% supported by both tourism and resilient local demand. The transport and communications subsector also continued to perform well, expanding by 7.3%. On the other hand, the sugar industry continued to be beset by land lease, quality, and transportation problems and mill inefficiencies.

Labor market conditions improved in 2002, reflecting the overall economic expansion. This represents a significant improvement over 2000 and 2001 when a large number of workers (some 9,000 in the period from May 2000 to end-2001) were laid off as a result of the political instability and civil disorder. The Inland Revenue Department reported a substantial increase in registered taxpayers in 2002 and results from employment surveys indicate improved conditions. Firms' recruitment intentions remained optimistic in several services subsectors. However, skilled professionals are still emigrating and this is creating difficulties for some subsectors, such as education and health.

Notwithstanding overall expansion, private investment continued to be weak, prolonging the trend of the last decade although there were signs that investor confidence was improving in 2002. Many private sector projects remained in the pipeline. Infrastructure constraints and uncertainty related to an important court case about constitutional aspects of the Government seem to be holding back these projects.

For 2002 as a whole, exports increased by 3.6%, reflecting a rise in gold exports. This is a continuation of a recovery that started in the previous year. Total merchandise imports increased by about 9.8%, due largely to increased imports of minerals and fuels, and machinery and transport equipment. The merchandise trade deficit worsened and, together with higher private services and investment income outflows, contributed to a widening of the current account deficit to 5.0% of GDP from 3.6% a year earlier. The capital account surplus contracted significantly, reflecting higher statutory debt payments, lower short-term private capital inflows, and a sharp decline in the short-term credit balance. As a result, foreign reserves declined in 2002. However, at end-2002, reserves were still able to cover 3.4 months of imports of goods and nonfactor services or 5.1 months of imports of goods alone.

During 2002, the Fiji dollar depreciated slightly against the basket of trading partner currencies. The real effective exchange rate index fell by 0.6%, implying a slight improvement in international competitiveness. The inflation rate for 2002 was low, with the yearly average falling to 0.9% from 4.3% for 2001. This outcome reflects the low inflation rate of trading partners as well as the absence of oil price pressures in the domestic market.

Monetary policy continued to focus on maintaining low inflation and ensuring adequate foreign exchange reserves but, with a favorable outlook for these variables, remained accommodative to help stimulate aggregate demand. In December 2001- November 2002, broad money increased by 10.2%. In the same period, total domestic credit expanded by 9.4%. Liquidity levels in the banking system remained high and interest rates declined slightly.

The authorities maintained a highly expansionary fiscal stance in 2002, as seen in a net budget deficit (including asset sales) of 7.0% of GDP following a deficit of 6.5% in 2001. This was higher than expected, reflecting both higher expenditures for public service remuneration and lower tax revenues, particularly from direct taxes. While total revenues (excluding asset sales) changed marginally, total operating expenditures rose by 5%. Total government capital investment increased by 40.0%. The deficit (excluding asset sales) amounted to 8.5% of GDP in 2002 and, as a result, the government debt widened from 43.8% of GDP in 2001 to 46.0% in 2002.

Policy Developments

The developments described above imply that the Government has achieved success in addressing the macroeconomic consequences of the political instability and civil disorder of 2000. Growth has recovered and most macroeconomic parameters have improved. However, the strengthened performance partly reflects the strong fiscal stimulus and accommodative monetary policy of the past 2 years. This raises the issue of growth sustainability.

In this respect, the theme of the 2003 budget, "Securing Sustained Growth", is closely focused on the key issues. A medium-term strategy has been developed to support the theme, and has identified priorities to be addressed in the period 2003-2005. These include maintaining macroeconomic stability, raising investment, promoting security and national unity, implementing structural reforms to promote competition and efficiency, reducing poverty, implementing affirmative action and ensuring social justice, and improving governance.

In an attempt to secure greater macroeconomic stability, the Government is targeting a net deficit of 4.0% of GDP for 2003. The medium-term target for the debt-to-GDP ratio is 40.0% by the end of 2005. The 2003 budget contains measures to both strengthen revenues and restrain expenditures. The major revenue-raising measure announced was an increase in VAT from 10% to 12.5%. Together with some excise tax and tariff increases, this will mean an increase in indirect tax revenues of 30%. Operating revenues are estimated to increase by 15.8% in 2003, constituting the major element in the estimated deficit reduction. The previously proposed reduction in corporate and personal income tax rates from 32% to 30% was postponed. On the expenditure side, total expenditures are estimated to increase by 2.2%, comprising a 3.1% increase in operating expenditures and a 9.1% reduction in capital expenditures from a relatively high base of 22.1% of total expenditures in 2002.

To help meet its medium-term target for increasing overall investment to 25% of GDP, the government medium-term fiscal strategy includes raising public investment to 30% of total government expenditures. To help support such investment, the Fiji Investment Corporation is being established to provide capital to start up eligible ventures that have difficulty in raising funds. With ample liquidity in the banking system, the main issue is one of investor confidence in viable investment opportunities, rather than a shortage of funds.

In relation to the investment approval process, the Fiji Trade and Investment Board has attempted to act as a one-stop shop but anecdotal evidence suggests the approval process is still too lengthy. The Foreign Investment Act and investment approval process were reviewed in 2002 and the Government has indicated that it will pursue options to streamline the approval process. The 2003 budget also announced that proposals will be developed to deregulate the superannuation industry and an export credit guarantee scheme is to be established. In the financial sector, the Reserve Bank will add the National Provident Fund to the list of enterprises under its supervisory responsibility. The Bank will strengthen its supervision of the insurance subsector and develop an appropriate supervisory framework for the superannuation industry as a whole. The Government has also re-engaged Moody's Investors Service to undertake sovereign credit ratings for the Fiji Islands.

To help promote the development of small businesses, the Government has established a National Centre for Small and Micro Enterprise Development. The Centre serves as an umbrella organization and integrates different functions previously carried out by various other departments. In relation to land leases, a formal consultative mechanism will be established on native land to promote efficiency, security, and fairness.

Other key structural reforms relate to the sugar industry, the labor market, competition policy, land reform, and the public sector. A sugar industry task force has been established to identify and pursue reform measures, and a plan to restructure the Fiji Sugar Corporation was endorsed by the Cabinet in 2002. The costs of the restructuring plan are considerable and include F$126 million to upgrade the mills, F$40 million for transport and handling systems, and F$40 million for adjustment assistance for small farmers to leave the industry. There is also the long-term prospect of losing preferential access to the EU market or, at the least, retaining access on less favorable terms. A related issue is the commercial exploitation of the maturing mahogany crop.

In the labor market, reforms will focus on the improvement of linkages between wages, productivity, and skills. Work on a draft National Productivity Plan is under way and a draft Industrial Relations Bill, covering all aspects of employment conditions, will be presented to Parliament in June 2003. In 2002, it was agreed that price controls would be lifted on 146 items and that other price and rent controls would be reviewed in 2003. The institutional arrangements for competition and consumer protection policy as well as the institutional framework for regulation of monopolies would also be reviewed.

Public enterprise reform has been an important government focus for some time. According to the 2003 budget documents, the overall performance of public enterprises improved slightly in 2002. The Government also divested part of its shareholding in Amalgamated Telecom Holdings in 2002 with an initial public offering that was successful in raising F$64.5 million. The Public Enterprise Act is also to be reviewed to ascertain if improvements can be made to the governance framework for public enterprises. The Government confirmed in the 2003 budget that it will continue to support various initiatives to provide for the basic needs of the poor and those living in rural areas.

Outlook for 2003-2004

Since 1987, there has been a trend decline in the ratio of fixed investment to GDP. By 2000, the investment ratio had fallen to about 10%, with the private sector ratio standing at only 3% (Figure 2.25). The economy has experienced an average growth rate of about 2.5% over the past 10 years, and 1.5% since 1985, but this average rate has been characterized by sharp contractions associated with both internal and external shocks. There is a strong relationship between the economy's expansion and that of its major trading partners, highlighting the importance of trade and other economic linkages. Monetary policy has only a marginal influence and fiscal policy an unpredictable impact on GDP growth. Adjustment to short-term supply-side shocks has been relatively quick. The relatively low long-term average growth rate suggests that the government target of sustainable annual overall economic growth of 5.0%, which is well above the trend level, is a challenging task, though the target appears achievable in the short to medium term.

Growth is forecast to accelerate to 5.7% in 2003, reflecting expected good performance by the tourism industry and its flow-on effects. The number of visitor arrivals is anticipated to reach a record level of 426,000, boosted by the South Pacific Games in June 2003, and is projected to stimulate rapid expansion in the trade, restaurant, and hotel subsector, as well as the transport subsector. Construction activity is projected to increase by 9.5%, as construction of major projects continues and as facilities are established for the South Pacific Games. Sugarcane production is projected to decline by 6.4% in 2003 before recovering modestly in 2004. The outlook for nonsugar, agro-based industries, and forestry and fisheries remains favorable. The mining subsector is projected to be very buoyant.

Growth for 2004 is expected to weaken to 3.6% with most sectors recording modest expansion. Tourism is projected to maintain its role as a key source of economic activity, though it is expected to strengthen less rapidly than in 2003. Mining is expected to continue to expand very strongly, and the fisheries and construction subsectors are also projected to register good improvements. Slow growth is projected in the community, personal, and business services subsectors, reflecting the expenditure restraints planned by the Government.

Inflation is projected to increase slightly to 3.0% in 2003 and 3.6% in 2004, partly reflecting the impact of the higher VAT announced in the 2003 budget. The relatively slow global recovery and modest inflation in trading partner countries are expected to help contain inflationary pressures.

Export growth is projected to be 9.2% and 8.3%, respectively, in 2003 and 2004, due to higher receipts from the key export commodities, except sugar and copra. Imports are expected to grow by 10.4% in 2003, largely driven by higher expected domestic demand due to the South Pacific Games. The current account deficit is likely to narrow to 3.7% in 2003 due to the strong anticipated growth in tourism earnings and higher inflows from transportation services; it is then forecast to narrow significantly further in 2004 with a small contraction in the trade deficit and a significant increase in net income from services. Higher direct investment inflows are expected to lead to a widening of the capital account surplus in 2003 and 2004.

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