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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2003-2005: Fiji Islands, Republic of the
II. Current Development Trends and IssuesA. Recent Political Developments3. The Fiji Islands have experienced serious political and social upheavals following a military coup in May 2000. The political crisis began with an armed invasion of Parliament on 19 May 2000, a hostage crisis, a military takeover, and later the installation of an interim administration in July 2000. A general election was held in late August 2001 and the Soqosoqo Duavata ni Lewenvanua (SDL) party won 29 out of 71 seats and the right to appoint the Prime Minister, while the Fiji Labour Party (FLP) won 27 seats. While the general election was regarded (by international observers) to have been free and fair, efforts to form a constitutional government have suffered from differing interpretations of the constitution itself. Under the 1997 Constitution, any party that wins at least 10% of the seats must be invited to join the Government. To date, the major parties have not been able to reach agreement on the composition of the new Government. The issue was referred to the Court of Appeal in February 2002, and the Court ruled that the FLP should be included in the Cabinet. Although both parties agreed to abide by the court ruling, SDL has referred the case to the Supreme Court. Recent developments indicate that compromises by both parties to resolve the issue may be expected soon. 4. In recognition of recent political progress, most aid agencies have lifted sanctions and the Fiji Islands was readmitted to the councils of the Commonwealth in December 2001. Early resolution of the constitutional issue is key to the full restoration of democracy and constitutional rule in the country, and will allow the Government to focus on critical issues, such as economic reform and growth, and poverty reduction. B. Economic Assessment and Outlook5. After falling by 2.8% in 2000, due to political instability and civil disorder, gross domestic product (GDP) increased by an estimated 1.5% in 2001, largely reflecting the partial recovery of the tourism sector. There was a sharp drop (of more than 26%) in sugarcane production, which reflected transportation problems, poor quality due to burning, and underlying uncertainty over the renewal of land leases held by Indo-Fijian farmers. Accordingly, the manufacture of raw sugar also declined, which was additionally handicapped by poor mill performance. In addition, the output of clothing and footwear dropped by 15% as fallout from the May 2000 crisis continued. From May 2000 to December 2001, an estimated 9,000 workers were laid off, of whom 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. 6. Compared with 2000, exports and imports declined by 16.5% and 12.1% in US$ terms, respectively. The overall outcome on the balance of payments was a deficit of US$29.8 million and a lower foreign exchange reserve level of F$830 million or 4.4 months of import cover of goods and nonfactor services. 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. In 2001, the nominal and real effective exchange rate indexes of the Fiji dollar remained relatively stable. The average inflation rate in 2001 was 4.3%. 7. 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 Government was also confronted with significant contingent liabilities, largely in the form of loan guarantees for public enterprises, which rose to over F$2 billion at the end of 2001. The priorities of the 2002 budget include a strong redistributive spending policy aimed at addressing the people's basic needs; improving economic efficiency and international competitiveness; and reforms of the civil service, public enterprises, and public financial management. The budget proposed an expansionary fiscal policy along with a deficit of 6% of GDP and a rise in public debt to 46% of GDP (not excessively large by developing country standards). It emphasized strengthening tax compliance and arrears collection. On the expenditure side, planned spending on poverty alleviation and rural development, education, health, and infrastructure development increased significantly. The risks to these projections arise from their assumptions of continued political stability, receipts from asset sales equal to 3.3% of GDP, and success in substantially improving compliance and retrieval of arrears in the area of direct taxation. 8. In the short to medium term, the Government is pursuing an expansionary fiscal policy to stimulate the economy. However, a number of issues have continued to adversely impact the economic performance of the Fiji Islands, including a low level of private investment, insecure land tenure, an imperfect regulatory environment, and weak governance. The economy has not performed to expectations and potential. C. Implications for Country Strategy and Program9. The developments of the past two years, and post-1987, have illustrated the need for the Government to provide the necessary good governance environment that supports economic growth by encouraging private sector participation in major sectors. This will require the Government's commitment to vigorously implement ongoing public enterprise and financial sector reforms. 10. At the same time, and as a consequence of poor growth and political uncertainty, the country had a low level of public and private investment. Poverty has increased, stressing the urgency to create jobs and provide greater assistance to the poor. ADB loans and technical assistance (TA) activities for 2002-2005 will focus on a medium-term to long-term strategy to reduce poverty and strengthen governance. ADB's current and proposed portfolio focuses on projects that can create employment opportunities through alternative livelihood programs, crop diversification, and small and medium-sized enterprise (SME) development supported by essential infrastructure.
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