Regions and Countries

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Country Strategy and Program Update 2005-2007: Fiji Islands, Republic of the

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II. Current Development Trends and Issues

A. Recent Political and Social Developments

2. The political situation in the Fiji Islands has generally improved from that of the previous years. Efforts to form a constitutional government are ongoing. To date, the two major political parties, the ruling Soqosoqo Duavata ni Lewenvanua (SDL) and Fiji Labour Party (FLP) have not reached an agreement on the composition of the multiparty cabinet. In July 2004, the Supreme Court ruled that both parties were wrong in their interpretation of the constitution relating to multiparty Cabinet composition, and urged both parties to work together to resolve the issue. In the meantime, the SDL and FLP leaders have engaged in confidence-building meetings to resolve remaining key issues and some notable progress has been made, especially on land tenure and sugar industry restructuring. To heal the divisions and to restore trust between communities, various initiatives by community organizations, including the Great Council of Chiefs, are also ongoing. The recent death of Ratu Sir Kamisese Mara, the Fiji Islands' first Prime Minister and former President, a leader respected by all communities, has further helped bring various communities closer than before. Recently, based on the considerable progress made toward restoring democracy, the Commonwealth Ministerial Action Group removed the Fiji Islands from the Commonwealth’s watch list. Early resolution of the remaining multiparty Cabinet composition issues between SDL and FLP is crucial for restoring much-needed private sector confidence and accelerating various proposed structural reforms for economic growth and social development.

B. Economic Assessment and Outlook

3. The Fiji Islands' economy expanded for the third year in succession in 2003. Gross domestic product (GDP) growth accelerated to 5.0%, from 4.1% in 2002, mainly due to buoyant consumer spending and an increase in tourist arrivals (Appendix 2, Table A2.2). In 2004, growth is projected to be 4.5–5.0%. Although inflation rose to 3.2% in April 2004, it is expected to remain at around 3.0% in 2004, compared with 4.1% in 2003. Higher oil prices might exert some upward inflationary pressure in 2004. The fiscal stance continued to be expansionary, and in 2003, the budget deficit increased to 6.1% from 5.6% of GDP in 2002. The increase was mainly due to the additional appropriation needed to deal with the impact of the 2003 cyclone, and a delay in planned government asset sales. For 2004, the fiscal deficit target is 3.5%, but this seems ambitious. In 2003, central government debt was 48.9% of GDP (97.0% is domestic debt) compared with 47.7% in 2002. The ratio of external debt service to exports was about 2.5% in 2003. Foreign reserves improved from F$672 million in 2003 to F$752 million by end- April 2004, sufficient to cover 5 months of imports.

4. Recently, the Reserve Bank of Fiji noted that investment spending is rising, reflecting investor confidence, but it is still below the required level. To achieve the Government’s medium-term target of 5% annual growth, the investment rate needs to be around 30%. The current rate of investment is only around 14% of GDP compared with about 21% in the late 1970s. To encourage private sector investment, the Government is committed to increase its share of capital expenditure to 30% from the current 14%. To sustain growth, substantial investment in productive infrastructure is crucial. In the medium term, the Government’s investment target is 25% of GDP, which is about F$400 million of annual investment.

5. To enhance medium-term growth prospects, the Government has restated its commitment to continue with structural reforms, particularly the land, public enterprise, civil service, labor, and financial reforms. Sugar industry restructuring will be implemented in phases from July 2004. There are indications that the long-standing land tenure issues will be resolved within the framework of the Native Land Trust Act, which potentially allows agricultural leases of 50 years compared with the current nonrenewable agricultural leases of 30 years. To improve public service efficiency and accountability, from January 2004, the Government has introduced a merit-based public service contract for heads of departments. A Public Financial Management Bill to accelerate financial reforms, and an Industrial Relations Bill for better collective bargaining and dispute settlement are being finalized. Institutional reforms are also in progress in key sectors. Generally, progress in structural reforms has been slow due to lack of political commitment and institutional capability.

C. Implications for Country Strategy and Program

6. The Government has made considerable progress in accelerating growth and restoring political harmony, but there is much more to be done. The Fiji Islands faces enormous challenges: (i) increasing levels of poverty (5% live in absolute poverty, and another 20% live below the poverty line) and urban migration; (ii) vulnerability to frequent natural disasters; (iii) heavy dependence on the sugar industry for employment and income; (iv) shortage of skilled human resources due to “brain drain;” and (v) poor infrastructure and high utilities costs. The Government and ADB agree that the key issues need to be addressed to increase growth beyond the current 4–5% rate. The absence of sizeable foreign investments in key sectors suggests the need to accelerate structural reforms. ADB will continue to help the Fiji Islands create an enabling environment for private sector development by improving governance. A highly focused medium-term ADB technical assistance (TA) and lending program will help boost private sector confidence and foreign investment. The current CSPU aims to support and address these challenges. A full CSP will be undertaken in 2005 jointly with the Government.

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