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p. 49 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions 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. Foreign Direct Investments in Developing Asia

Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia

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Fiji Islands

The economy grew quite fast in 2003, led by the tourism and construction sectors. Against this positive background, the Government remained committed to implementation of economic and public sector reforms, including restructuring of the sugar industry, while seeking to rein in the budget deficit. The medium-term outlook is for growth at modest rates.

Economic Assessment

The economy expanded for the third year in succession in 2003, with GDP strengthening by an estimated 5.0%. Tourism, which accounted for about 10% of GDP, was the leading growth sector, with visitor numbers reaching a new record of 426,000 in 2003, up from about 398,000 in 2002. The hosting of the South Pacific Games and the perception of a safe and affordable destination were major reasons for rising tourist arrivals. Stimulated in part by the latter, and by increased remittances from overseas, the wholesale and retail trade, restaurant and hotels, and transport and communications subsectors registered strong expansion of over 8.0%. Other services subsectors grew more slowly. The construction sector grew by a rapid 17.0% because of government spending on physical infrastructure and the implementation of several large private sector projects in hotels and trade activities.

Manufacturing recovered from a downturn in 2002 as a result of strong rises in all subsectors except sugar manufacturing, which continued to suffer from inefficiencies in milling and transporting of sugarcane. The garment subsector, in particular, rebounded strongly from its 2002 decline. In the primary sector, sugarcane production dropped because of the effects of prolonged drought and the ongoing nonrenewal of land leases, while copra production was weakened by the effects of cyclone Ami, which hit early in the year. The fisheries subsector grew slowly, with poor weather and overfishing possible reasons for low catches. The forestry and mining subsectors each grew by about 1.0%.

Private consumption remained strong in 2003, as evidenced by an 11% rise in VAT revenues (adjusted for the 2003 rise in the tax rate). Imports of investment goods were about 20% higher than in 2002, and a rise in investor confidence was evident in the start of several large private sector tourism projects in the last quarter. Under the Hotel Aid Act, duty exemptions and tax breaks of 10 years for investments of over F$10 million and 20 years for investments of over F$40 million are granted. Confidence among the resident business community was also growing in 2003.

Labor market conditions remained strong. In the period from January to end-December, 9,524 new taxpayers were registered, representing a 14.3% increase on the 2002 figure. Employment surveys showed a rise in job advertisements, and jobs were created in the ICT sector with the establishment of back-office operations in the country. However, in the first 10 months of 2003, 4,800 people emigrated, representing an increase of almost 6% on the corresponding period in 2002. The health and education sectors, in particular, were hit by the continuing brain drain, which began after the two coups in 1987 and accelerated after the mid-2000 coup.

The 2003 fiscal target of reducing the budget deficit to 4.0% of GDP was not met. Current revenues were up by 6.2% on the 2002 level because of strong economic growth and the January 2003 increase in the VAT rate from 10.0% to 12.5%. However, a substantial extrabudgetary appropriation was made in order to deal with the impact of cyclone Ami, and planned asset sales were not made. The budget deficit consequently came in at 6.1% of GDP. At end-2003, the Government's domestic debt stood at 44.7% of GDP, with the Fiji National Provident Fund, which accounts for almost half of financial sector assets, holding 62.0% of it.

Inflation rose from 0.8% in 2002 to 4.1% in 2003, reflecting primarily a rise in food prices attributable to the supply-side impact of cyclone Ami, as well as the drought. Other contributory factors were the one-off impact of the higher VAT rate and a general strengthening of domestic demand. The nominal effective exchange rate index of the Fiji dollar rose by 0.8% in 2003, indicating a slight appreciation against a basket of trading partner currencies. With inflation running at about double the rate of that in the country's major trading partners, the real effective exchange rate index rose by 3.0%, indicating some deterioration in international competitiveness of an economy characterized by relatively high wage costs.

Broad money grew by 15.6% in the year to end-November 2003, largely because of a rise in domestic credit. Net credit to government increased rapidly in order to finance the budget deficit, and there was a significant rise in credit to the private sector, which was concentrated in personal loans and loans to the trade, construction, and food and beverages sectors. The commercial banks' weighted average lending rate fell from 7.89% in January to 7.36% in November. Real interest rates on deposits became heavily negative.

The current account deficit widened significantly to 10.0% of GDP in the first 3 quarters of 2003 as the trade balance worsened substantially (Figure 2.27). Exports were down by about 1% in domestic currency terms on the corresponding period in 2002 because of major falls in gold, fish, and timber exports. Imports picked up substantially in domestic currency terms, especially in the categories of machinery and transport equipment and in manufactured goods. The growth in tourist arrivals contributed to inflows on the services account though higher transport costs linked to imports reduced the surplus on this account. Net inward transfers increased. The capital account moved into surplus because of higher FDI and loan drawdowns by the Government. The overall balance-of-payments deficit rose slightly to 2.3% of GDP. A pickup in exports in the quarter to December 2003 contributed to a current account improvement, but there was nonetheless some deterioration in the balance of payments over the whole year. By the end of the year, foreign reserves had declined to the equivalent of 3.0 months of imports of goods and nonfactor services, compared with 3.6 months at end-2002. The Government's external debt, as of September 2003, was 4.2% of GDP, with debt servicing equivalent to 2.5% of total exports.

Policy Developments

Soon after its election in 2002, the Government announced a target of increasing the sustainable economic growth rate to 5% a year. The key to achieving the target is the reversal of a long-term decline in the investment rate, which had fallen from around 20% of GDP in the 1970s to around 12% in the 1990s, and had been associated with a drop in average annual GDP growth rates from over 8% in the 1970s to under 3% in the 1990s. Declining private sector investment was of particular concern, having dropped from about 14% of GDP in the 1970s to about 4% in the 1990s. Major reasons for the decline were political instability following the coups of 1987, uncertainty over land leases, administrative delays and impediments in the investment approval process, and shortages of skilled workers. These factors remain relevant today. The investment ratio in 2003 was estimated to be 13-14% of GDP, compared with 21.3% in 1977.

Achieving 5% annual growth by raising the investment rate to 25% of GDP is a priority area of the current medium-term strategic development plan. IMF, however, estimates that an investment rate of 30% of GDP would be needed to sustain 5% growth. The Government aims to increase the share of capital expenditures in total public expenditures to 30%, from the budgeted level of 14% in 2004, and to encourage private sector investment by ensuring macroeconomic stability, implementing structural reforms, improving infrastructure, and maintaining existing incentives (e.g., accelerated depreciation for buildings and duty-free importation of raw materials for companies planning to expand their operations). The Government also plans to amend the Foreign Investment Act. Despite the rising investment in tourism in 2003, a general improvement in private sector investment was not evident, with foreign investors, in particular, remaining hesitant because of ongoing concerns over political stability. In addition, increasing public capital expenditures toward the 30% target requires a reallocation of expenditures away from personnel. This will be difficult to achieve in the medium term.

Other priority areas that receive explicit resource allocations in the 2004 budget include rural development, social justice and poverty alleviation, infrastructure, tourism, social and community development, natural resources and environment, and law and order. The Government is committed to reducing poverty by 5% annually. The proportion of households living below the national poverty line rose from about 15% in 1983 to about 26% at the start of the 1990s, and is likely to have increased since then. However, the budget provides for only a 1.3% rise in nominal expenditures on poverty reduction projects, a significant drop in real terms. In addition, nominal expenditures on rural sector and outer island assistance are to fall by 16.5%. The only component of the poverty reduction program to attract significant additional funding is tuition-free education. Social welfare payments, housing assistance, and microfinance also suffer a drop in funding.

The 2004 budget estimates an overall deficit, excluding asset sales, of 3.9% of GDP, which is to be financed by domestic borrowing. Current revenues are forecast to rise by 8.3% from the 2003 level, with collection expected to improve as a result of greater coordination between the processing of income and VAT returns through the introduction of the Fiji Integrated Tax System. The top marginal personal and corporate tax rate is to be reduced from 32% to 31%, the export tax on sugar goes back to 3% from the 10% rate introduced in the 2003 budget, and the number of tariff bands is to be reduced from six to four. Operating expenditures are forecast to rise by 3.5%, with personnel costs increasing by 2.2% and accounting for 48.7% of total operating expenditures. The Government intends to replace wage indexation in the civil service with productivity-based wage increases. A staff freeze is also to be imposed on all ministries except education, health, and the police, and expenditure control is to be improved through the introduction of a new financial management information system. Expenditures on military personnel may prove difficult to limit. Capital expenditures are budgeted to drop substantially.

In 2003, the functions of the Reserve Bank of Fiji were extended to include formal supervision of the Fiji National Provident Fund and an interim Financial Intelligence Unit was established to counter money laundering and terrorist financing, pending passage of enabling legislation. Means of improving rural financial services delivery were under investigation, including restructuring the Fiji Development Bank. Exchange controls are to be relaxed in 2004 by increasing delegation of capital transactions to the commercial banks.

Implementation of structural reforms has generally been a slow process. In late 2003, the Government restated its commitment to the difficult task of restructuring the sugar industry, and will guarantee loans raised by the Fiji Sugar Corporation for a 5-year F$170 million program of upgrading transport and milling infrastructure. The Government will also seek to resolve long-standing land tenure issues within the framework of the Native Land Trust Act, which potentially allows agricultural leases of 50 years. Labor legislation is to be consolidated into a new, comprehensive Industrial Relations Bill aimed, among other things, at supporting collective bargaining procedures and establishing tribunals and courts for dispute settlement.

Outlook for 2004-2005

The forecast is for the growth rate to drop to 3.9% in 2004. With sugarcane production continuing to fall, growth in the agriculture, forestry, and fisheries sector will be slow at an estimated 0.9%. Mining production will grow rapidly as a strong gold price stimulates exploitation of new ore deposits at the existing mine. Continued rapid growth in the construction sector will be driven by completion of private investment projects in tourism, and by some aid-funded infrastructure projects. Manufacturing is forecast to expand by just over 4% as food and beverages production increases and textile, clothing, and footwear producers take advantage of the final year of full preferential access to the Australian market under the South Pacific Regional Trade and Economic Cooperation Agreement. The services sector, which accounts for 58.7% of GDP, is forecast to grow at 3.0%. Tourist numbers are expected to increase by 3.5% on the record 2003 level, assuming that stronger Australian and New Zealand currencies will encourage tourism from the region.

In 2005, growth is forecast to slow further to 3.0%. The agriculture, forestry, and fisheries sector is expected to continue its limited overall expansion, while the growth rates in the mining, manufacturing, and construction sectors are expected to drop. The garment subsector faces removal of quota protection in the US market, and is likely to register little growth. The services sector is forecast to grow at 3.5% on the assumption that tourist numbers will grow by around 6%. Given the growth in supply of tourist accommodation and the possible expansion of aircraft seat capacity with the entry of an additional airline into the regional market, the realization of this projected increase in tourist numbers will depend largely on marketing efforts and cost competitiveness.

Economic growth at rates in the 3-4% range will generate annual increases in formal sector employment of about 2%, which is well below the rate required to absorb the annual net increase in those seeking paid employment. Simultaneously, efforts to increase the capacity of the poor to take advantage of income-earning opportunities will be limited by the real decline in funding for poverty reduction programs, as the traditional family-network support system continues to weaken.

The Government's past projections of declining budget deficits have proven to be overoptimistic, and this may again be the case for 2004 and beyond. Official projections suggest a reduced budget deficit (after inclusion of asset sales) of 0.8% of GDP in 2005. Revenue projections are conservative, but projections of a fall in nominal operating expenditures are unconvincing, and projected cuts in nominal capital expenditures will have major implications for infrastructure development if they are actually implemented. It is unlikely that government debt will track down toward the targeted level of less than 40.0% of GDP by 2006.

Export growth (in domestic currency terms) in 2004 is forecast to be negligible as a decline in reexports offsets a surge in gold exports and strong growth in mineral water exports. At the same time, imports are expected to drop, largely as a result of a fall in imports of machinery and equipment, so that the trade balance could improve. However, the above trends change if trade is calculated in US$ terms due to an expected appreciation of the local currency relative to the US$ (from F$1.9/US$1 in 2003 to F$1.7/US$1 in 2004). In particular, exports and imports in US$ terms are forecast to increase in 2004 by 12.7% and 7.6%, respectively. The current account deficit is likely to increase to about 10% of GDP in 2005 as import growth resumes. The overall balance of payments is expected to record a small surplus in 2004 and 2005.

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