Regions and Countries

	Table of Contents
p. 3 of 14 BACK | NEXT I. Country Performance Assessment A. Recent Political Developments B. Economic Performance Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Republic of the Fiji Islands : I. Country Performance Assessment

---

B. Economic Performance Assessment

2. The Fiji Islands economy experienced negative growth for the second year in succession in 1998 at -3.2 percent. This was largely due to the effects of a drought on sugar production and reduced gold production. Prospects for 1999 are better with growth projected at around 7.4 percent.³ This improvement in the economy must be set against longer-term trends. The growth rate in real gross domestic product (GDP) per capita in the first decade after independence was close to zero, and from 1987 to 1996 averaged 1.9 percent per year. Although the latter performance is a marked improvement over the earlier period, it is still barely sufficient to provide for the growing needs of an expanding labor force. It is considered that labor force growth rate of 5 percent per annum is required to absorb new entrants, assuming no growth in public sector employment.⁴

3. In 1998, agricultural production was mixed though weak overall as drought-related problems in the sugar industry resulted in a large fall in the output of sugar, which, at some 255,703 tons was the lowest in more than 30 years. Sugar production is set to recover in 1999 and other agricultural output such as copra and yaqona,⁵ is expected to increase. Gold output fell by around 21 percent in 1998 from 1997 levels but production is also expected to recover in 1999. The commencement of mahogany logging will increase the output of the forestry sector in a sustainable manner in 1999. The non-sugar manufacturing output increased in 1998 mainly as a result of strong growth in garment industry production. Tourism also performed well in 1998 with visitors increasing by some 3.5 percent over 1997 levels. Tourism growth was largely due to increased marketing and improved price competitiveness as a result of the devaluation of the Fiji Islands dollar.

4. In January 1998, the exchange rate of the Fiji Islands dollar, which is linked to a weighted basket of currencies of the country’s main trading partners, was devalued by 20 percent. The average annual inflation rate increased to 4.9 percent in 1998 from 3.4 percent in 1997. The moderated rate of inflation was partly due to subdued wage increases at around 3 to 4 percent in 1998 but continued increases in public sector remuneration and a recent increase in garment industry wages is likely to inflate prices. The real effective exchange rate rose by some 7 percent following the devaluation in January.

5. Domestic liquidity remains relatively high with commercial banks holding well over double the liquid assets required by the Reserve Bank of Fiji Islands (RBF). The RBF eased some of the restrictions on overseas accounts and investments with a view to easing excess liquidity. The persistently high levels of bank liquidity reflect a structural problem. The excess liquidity amounts to idle capital that should otherwise be contributing to growth. Interest rates eased, with lending levels falling from around 11 percent in 1997 to 9 percent in 1998. Private sector investment was lower in 1998 than the depressed levels of 1997 when the private investment to GDP ratio was 4 percent, and the public investment ratio was 7 percent. While lending to the construction and tourism industries increased in 1998, lending to other sectors has either been stagnant or fallen. Lending to agriculture fell by 19 percent up to November 1998.

6. The budget balance in 1998 improved from a deficit of 6.5 percent of GDP in 1997 to 3.4 percent in 1998. However, if adjustments are made for one-off expenditures in 1997 arising from the rehabilitation of the National Bank of Fiji Islands, and for 1998 privatization receipts then the underlying balance deteriorated. It is estimated that the increase in total government expenditure, excluding debt repayment, outstripped the increase in total revenue by 11.0 percent to 5.9 percent in 1998. Budget deficit is forecast to increase to 5.6 percent of GDP in 1999. Levels of public investment are low in comparison with recurrent expenditures with revised operating expenditures some 82 percent of total government expenditure spread over some 50 ministries in 1998. Government debt rose by two percentage points to 45 percent of GDP in 1998. Total public sector debt was some 15 percentage points higher.

7. The balance of payments moved into a surplus in 1998, because of a turnaround in the capital account that outweighed a current account deterioration from a surplus of 0.7 percent of GDP to a deficit of 4.1 percent of GDP. The balance of payments position remains strong with a surplus forecast for 1999. As of 3 May 1999 foreign exchange reserves stood at over F$800 million (US$400 million), equivalent to 4.5 months of imports of goods and non-factor services. The external debt service ratio rose from 1.4 percent in 1997 to 2.2 percent in 1998, and the ratio of external debt to GDP rose from 6.6 percent to 8.8 percent.

8. The economy continues to operate at levels below capacity. Continued fiscal deficits and the size of the public debt remain a concern. This calls for greater attention to prioritized government expenditure. Restoring private investor confidence is also a priority, and the renewal of land leases needs to be resolved. The future of the key sugar and textiles industries depends on their ability to adjust to declining preferential trade agreements. A consistent economic policy framework is needed with respect to the improved management of prioritized public finances, the pursuit of competition under an improved regulatory framework, and the security of all properties including land leases. The President’s address at the opening of Parliament on 15 June supports the need to address these areas of policy.⁶

9. Although the new government’s policies remain to be more fully developed, early policy statements stress the need to improve rural infrastructure, including roads, and other public services in support of the agriculture sector and rural development. The Government has also stressed the need for improved public services in urban areas. With reference to public sector management and public finances, the Government is firm in its commitment to improved governance, accountability, and transparency in contrast to earlier weaknesses. Government seeks to maintain the public debt at manageable levels, recognizing that debt management needs to be improved. Government is reversing prior efforts to privatise public enterprises stressing the need for improved commercial operations of existing entities. Public expenditures and revenues are to be increased in support of the Government’s social policy agenda. Government well recognizes the problems of the sugar industry, most especially the need to resolve the impasse over the renewals of land leases.

____________________

Back A. Recent Political Developments	Next C. Assessment of Socio-Environmental Performance