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p. 53 of 77 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 Republic of Palau Papua New Guinea Samoa Solomon Islands Democratic Republic of Timor-Leste Tonga Tuvalu Vanuatu III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia

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Fiji Islands

Economic growth accelerated gently in 2004, inflation and interest rates remained low, and foreign reserves accumulated. A growth slowdown is expected over the medium term as concessional access to key export markets is lost and fiscal policy is tightened.

Macroeconomic assessment of 2004

Economic growth picked up to 3.8% in 2004 from 3.0% in 2003, stemming from a recovery in the agriculture, forestry, and fisheries sector, which rose by 3.7% after declining in 2003, and from a 7.5% expansion in industry, which in turn was driven by a surge in construction. A key element in the construction boom was private development of tourist resorts and residential complexes for overseas buyers. Mining was also a significant component in industry’s strong performance. Though sugar production was stagnant, garment manufacturing grew slowly and mineral water production continued its healthy progress. The services sector as a whole expanded by 1.9%, with the wholesale and retail trade and hotels and restaurants subsectors registering faster growth in response to record tourism levels. Visitor arrivals in 2004 were up by about 13% from the 2003 level, led by an increase in Australian and New Zealand tourists responding to vigorous marketing and the availability of low airfares following greater competition in airline services to the Fiji Islands. On the demand side, economic activity was stimulated by private consumption, which was supported by private remittance inflows and reflected in a 14% rise in VAT revenues in 2004. Investment expenditures on buildings and higher recurrent and capital government spending also contributed to aggregate demand expansion, whereas the contribution of net exports was negative.

Labor market conditions strengthened in 2004, with a 7% increase in the number of newly registered taxpayers, most of whom were in services. Emigration of skilled workers was 4% lower than in 2003, but remained of major concern to employers and the Government. Output and employment growth appear to have been insufficient to reverse intensifying economic hardship for many people. Preliminary analysis of a 2002/03 household survey suggests that the proportion of urban households living in poverty increased from 28% in 1990/91 to 30-40% in 2002/03. Recent studies report community perceptions that hardship has become more prevalent in rural areas.

The domestically financed budget deficit in 2004 was 4.8% of GDP, down from 5.9% in the previous year. This outcome was in excess of the estimated deficit of 3.9% of GDP in the budget, largely because of two additional appropriations for funding costs of flash flooding in April and overbudget spending by three ministries. The level of public domestic debt consequently continued to rise, albeit more slowly, and at end-December 2004 stood at 46.4% of GDP, compared with 45.4% 12 months earlier. The ratio of external public debt to GDP remained low by international standards at less than 5%.

Inflation fell to 3.5% in 2004 from 4.2% a year earlier, largely because the nominal effective exchange rate remained stable and modest wage growth and excess capacity in some sectors helped offset the inflationary effect of higher oil prices and strong domestic demand. Additionally, monetary policy was tightened in May 2004 in response to buoyant consumer demand, with official interest rates raised by 0.5%. The monetary policy stance was unchanged during the rest of the year, and commercial bank lending rates fell slightly to 7.05% at year-end, contributing to a 16.5% rise in credit to the private sector in the year to November. This additional credit was concentrated in personal loans and lending to the construction, trade, and transport sectors.

Merchandise exports were virtually stagnant in 2004 as reductions in sugar, fish, and “other” exports offset stronger gold, timber, and garment exports. Growth in aggregate demand generated a 2.6% broad-based rise in imports from the 2003 level, widening the trade deficit. Further, the deficit on the income account grew, such that the current account deficit widened to 5.3% of GDP. The balance on the capital and financial account was positive, though FDI remained subdued. At end-December, foreign reserves were US$456 million, sufficient to cover 3.5 months of imports of goods and nonfactor services. This was the first year since the 2000 political crisis in which foreign reserves had increased. Foreign exchange controls remained in force, but were relaxed slightly during the year.

Macroeconomic policy developments

After years of running substantial budget deficits and accumulating domestic debt, the Government has adopted a policy of fiscal tightening for 2005-2007. The policy target is to reduce the budget deficit to less than 2% of GDP by 2007, largely by cutting expenditures (Figure 2.26). Most of the progress toward the target is projected to be made in 2006-2007, with the 2005 annual budget estimating a budget deficit of 4.3% of GDP. Total expenditures and net lending at current prices are forecast to rise by 4.4% and revenues (exclusive of asset sales) by 6.3%.

The ratio of operating to capital expenditures is expected to fall slightly to 82:18 as the Government pursues its objective of contributing to a rise in the ratio of gross investment to GDP. However, this reallocation away from operating expenditures will not be achieved by reducing the relative size of the public service wage bill, which is estimated to actually increase its share of operating expenditures, marginally, to 49.4% in 2005 from 49.3% a year earlier. The Government plans to achieve control of the wage bill over the medium term, requiring it to be successful in replacing automatic cost-of-living adjustments with smaller, productivity-based wage increases. Improved controls on the engagement of staff by the education and health ministries and cuts in the size of the military are also programmed. If all of these plans are realized, the wage bill should fall to 47.9% of operating expenditures in 2007 or 9.8% of GDP, compared with 11.1% in 2005. Public domestic and external debt would be contained to a fiscally sustainable level of about 50% of GDP, though this is still well above the Government’s target of 40%.

Most of the growth in revenues in 2005 is expected to come from indirect taxes, both VAT and customs duties. In addition to the revenue pickup occurring automatically as the economy expands, receipts are forecast to pick up as a result of improvements in tax administration and strengthened compliance, which are to be supported by amendments to the Income Tax Act and the Valued Added and Gambling Turnover Tax decrees. The 2005 budget lifted the income tax threshold from F$7,500 to F$8,840 and extended the Employment Taxation Scheme, which allows 150% tax deductions for first-time employees. More generally, measures are being taken to raise the efficiency of the civil service, including the medium-term implementation of the 2004 Financial Management Act, which encompasses measurement of the performance of ministries and departments in delivering their core outputs. The Public Service Commission is also developing mechanisms for overseeing the performance of chief executive officers.

Following the monetary policy tightening in early 2004, the Reserve Bank of Fiji signaled its intention of maintaining a low interest rate regime to stimulate private investment, subject to the paramount aims of low inflation and balance-of-payments stability. The Reserve Bank also emphasized the importance of shifting the demand-side impetus for economic growth from consumption to exports. To facilitate such a shift, it began assessing small exporters’ access to the credit export facility operated through the commercial banks and started investigating the viability of an export credit guarantee scheme. Deregulation of the superannuation industry is to be examined and, possibly, undertaken in the medium term, and an application for a commercial bank license from the Fiji Development Bank is to be assessed in 2005. The passage of the Financial Reporting Transactions Bill strengthened the country’s antimoney laundering framework, and formalized the existence of the Reserve Bank’s Financial Intelligence Unit.

The ratio of gross investment to GDP reached 17% in 2004, the highest level for 17 years but still well below the government target of 25%. Further and substantial progress toward the target requires growth in private investment alongside the Government’s shifting of expenditures from operating to capital expenditures. Policies aimed at facilitating private sector development have been presented in the current strategic development plan and the 2001-2020 affirmative action plan, and some actions were initiated in 2004 in the areas of foreign investment legislation and regulations, labor market reform, civil service reform, and restructuring of the sugar industry. However, the Government acknowledges that further improvements are needed in these areas, as well as in physical infrastructure, reliability and pricing of utilities services, and public enterprise performance. There is also room for reducing the costs of doing business through improving institutional infrastructure: according to the World Bank’s Doing Business Indicators for 10 Pacific island states, the Fiji Islands ranks second highest in days taken to start a business, joint highest in rigidity of employment, and third highest in time to enforce a contract.

Government commitment to trade liberalization was evidenced by continuing work on the implementation of the Pacific Island Countries Trade Agreement and the Pacific Closer Economic Relations, which includes Australia and New Zealand. An Economic Partnership Agreement is also being developed with the EU by the African, Caribbean, and Pacific nations, with negotiations scheduled to end in 2007.

Outlook for 2005-2007 and medium-term trends

Economic growth will slow substantially in the medium term, to less than half the rates achieved in the past 3 years. The major reason for the deceleration is a contraction in manufacturing, which accounts for about 16% of GDP. The largest garment producer, which generates 40% of garment exports and employs 5,000 people, is expected to close over the forecast period because preferential access to the US market ended on 1 January 2005. Preferential access to the Australian clothing and footwear market was extended for another 7 years in 2004, but the value of the preference is declining as Australian tariffs drop, and competition from the PRC intensifies. The sugar industry, which provides a direct source of employment for more than 10% of the economically active adult population, is also expected to contract further in 2005. It faces various issues: the single sugar-milling company is insolvent and requires significant investment and government guarantees to continue operating; problems remain in managing the expiry of leases of sugarcane land; production practices are inefficient by world standards; and a fall in EU price subsidies can be expected in the next few years. The official forecasts factor in a recovery in sugar production in 2006 that is expected to result from externally assisted industry reforms begun in 2004. This expectation may not be realized in full.

The economy-wide impact of the manufacturing contraction in 2005 will be offset to a degree by a further surge in construction, forecast to expand by almost 18% before easing in 2006 and contracting in 2007. Mining, too, is expected to strengthen, by almost 8% in 2005 before slowing in 2006 and 2007. Expansion in agriculture, forestry, and fisheries is forecast to be modest in 2005, before a 2006 acceleration driven by increased sugarcane production, and then to slow in 2007. Forestry production is expected to grow at a strong and sustained rate, while production of other crops (including kava) could exceed expectations if recent health concerns in the EU are allayed and market access is renewed.

The services sector is forecast to grow at annual rates of under 2% as contraction of the Government’s wage bill has a negative impact, although the sector will still be the major contributor to aggregate growth in 2006-2007. The fastest-expanding subsector is expected to be transport and communications, with modest strengthening in finance and business services, wholesale and retail trade, and hotels and restaurants. Services will be underpinned by tourism: visitor arrivals are projected to increase by 7.2% in 2005 as the industry continues to benefit from airline deregulation; and as PRC; Hong Kong, China; and India emerge as source markets. Accommodation capacity is likely to set the ceiling on visitor numbers.

Whether the economy can do better than the official forecasts rests heavily on the rate at which structural obstacles to the growth of private sector activity are relaxed and on the subsequent private sector response. Key areas for immediate attention include means of slowing and correcting the ongoing emigration of skilled labor and resultant labor shortages, the performance of government utilities (the rate of return from government-controlled companies is less than 1%), and the regulatory environment for labor and product markets.

Some uncertainty hangs over the extent to which the Government will be able to successfully implement its medium-term fiscal strategy. The target of an 8% reduction in the level of expenditures and net lending by 2007 should be seen against an average annual increase of 4% over the past 10 years. The Government does not fully control the public service wage bill at present, with cost-of-living adjustments being decided by an independent arbitrator; and developing the systems to control expenditures in the military, education, and heath portfolios may take some time. Perhaps most important, an election is to be held in 2006 in an uncertain political environment. It is therefore possible that budget deficits and public debt will not be reduced as planned.

The foreign reserves level is likely to drop over the medium term as a result of the declining value of sugar and garment exports, which will more than offset projected growth in gold, mineral water, and timber exports. Tourism growth will bolster foreign exchange earnings, but an increase in the current account deficit is expected and a fall in foreign reserves may place downward pressure on the exchange rate.

The growth slowdown, and the imminent loss of jobs in manufacturing in particular, will cause a reversal in the reductions in the unemployment rate achieved between 2000 and 2004. Most probably therefore, the rise in both rural and urban poverty will continue, since accessible alternative occupations for all those displaced from the sugar and garment industries and expansion in formal employment will not keep pace with the population drift to urban areas. Job opportunities will appear in tourism, but significant training and retraining of the local labor force are required before these opportunities can be seized.

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