Countries and Regions

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p. 3 of 5 BACK | NEXT I. Country Strategy II. Current Development Trends and Issues III. Implementation of the Country Strategy and Program IV. Portfolio Management Issues V. Country Performance and Assistance Levels

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

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III. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

7. Compared with many other Pacific developing member countries (PDMCs), the Fiji Islands has made considerable progress in achieving the MDGs, and is close to achieving targets in education, health, and gender-related goals. (The MDG targets and progress toward them are in Appendix 2, Table A2.1.) Literacy rates are high, with the latest estimates of adult literacy (age 15 and over) reported at 93.2% and youth literacy (age 15–24) at 99.3%. Universal primary education for boys and girls has been achieved, though the quality of education and retention rates remain a problem, particularly in the outer islands. Infant and child mortality rates have decreased and are low. Gender disparities in primary and secondary enrollments have almost been eliminated. However, only about 50% of the population has access to safe water and proper sanitation. Access to sanitation is 75% for urban areas, and only 12% for rural areas.

8. In its 2003 Human Development Report, the United Nations Development Programme ranked the Fiji Islands 81st of 175 countries in the human development index compared with 72nd in 2002, 41st among 94 countries in the human poverty index, and 67th among 144 countries in the gender development index in 2003, down from 65th in 2002 (Appendix 2, Table A2.3). The women-to-men parity index was estimated at 105% for life expectancy, 95.8% for the adult literacy rate, and 97.4% for the combined gross enrollment ratio. Women constitute 35% of the labor force, and are mainly in lower-skilled jobs. In 2005, to enhance gender balance, ADB will support a TA for Women's Action Plan II.

9. The unstable political and socioeconomic situation has led to a significant increase in hardship and poverty. New pockets of poverty are emerging in urban squatter settlements and rural areas. The preliminary findings of the 2002 participatory assessment of hardship¹ suggest that the proportion of the population whose incomes are below the poverty line may have increased from the 25% recorded in 1990/91, however, this can only be verified once the full results of the Household Income and Expenditure Survey are analyzed and released in late 2004. The poor expressed concern over governance issues, declining standards in the delivery of basic services, lack of economic opportunity, especially for those being displaced in the sugar industry and the urban unemployed. The main priorities of the poor, as identified during the 2002 participatory assessment of hardship, were access to jobs and income opportunities, as well as improved service delivery and infrastructure, particularly safe drinking water. To address poverty better, a poverty partnership was finalized and signed between the Government and ADB in 2003. The recently approved (December 2003) Suva-Nausori Water Supply and Sewerage Project will provide safe drinking water to the poor in urban areas around Suva- Nausori. The proposed Alternative Livelihoods Development Project (proposed for Board consideration in late 2004) will significantly address poverty, especially in the western and northern regions. ADB will continue to prepare and implement projects to reduce poverty.

B. Progress in the Country Strategy and Program Focus Areas

1. Good Governance

10. Political and economic instability in the past has been directly linked to poor governance. The Government's SDP recognizes that good governance is key to efficient delivery of services and private sector confidence, and overall poverty reduction. There are concerns over corruption and misuse of public funds, which have affected public confidence and investment. ADB’s strategy emphasizes the need to improve institutional capacity to reduce inefficiency within the bureaucracy. Efforts to strengthen governance² through improved financial accountability and greater transparency (including faster and more accurate disclosure of information) at all levels of government are being pursued through public sector reforms. ADB will support the strengthening of the key government departments to improve capability and capacity to provide efficient delivery of services and strengthen property rights.³ In 2003, ADB provided advisory TAs for Strengthening Public Sector Financial Governance in drafting and implementing a revised Public Finance Management Act, and for Public Sector Banking and Cash Management to improve the Government’s cash-flow management. ADB will also incorporate in its programs and projects performance indicators and roadmaps to monitor governance progress in meeting MDG targets, and institutional and financial accountabilities. In 2005, ADB will help in expediting public sector reforms, and establish an efficient audit system that will harmonize with the new Public Finance Management Act.

2. Private Sector Development

11. Private sector development (PSD) will be critical for the economy in achieving sustained GDP growth and employment generation. The Government’s medium-term priority is to achieve 5% annual growth by raising the investment rate to 25% of GDP. The International Monetary Fund, however, estimates that an investment rate of 30% of GDP would be needed to sustain 5% growth. Despite marked political and economic improvement, private sector investment is still low, at 14% of GDP. The Government recognizes the need for greater private investment for GDP growth, and to attract it, political and macroeconomic stability, structural reform implementation, substantial infrastructure investment, and better incentives to investors are crucial. In April 2004, the Government introduced a Foreign Investment Amendment Bill to clarify and amend clauses in the current Foreign Investment Act 1999, and it is expected that the bill will provide a positive environment for foreign investors. The Fiji Islands Revenue and Customs Authority is reviewing the current incentive package in line with global market changes. The Fiscal Review Committee is also currently reviewing the overall taxation system in the country. Against a backdrop of low private sector investment, government investment in commercial companies (GCCs) and commercial statutory authorities (CSAs) continues to grow. Net equity in GCCs and CSAs grew from F$499 million in 2001 to F$746 million in 2002. The financial performance of the GCCs and CSAs has been poor and returns on equity have remained below 1%, and are below the cost of borrowing.

12. The Government needs to vigorously review, strengthen, and implement PSD-conducive policies, including structural reforms. The Government must also establish a clear strategy to divest its ownership in key commercial enterprises. In April 2004, during the Pacific Forum Summit in New Zealand, the Fiji Islands endorsed the Pacific Plan to enhance international economic and trade cooperation among smaller PDMCs. Consistent and focused effort by funding agencies, to a large extent, can play a major role in PSD, especially in infrastructure, governance, and trade issues. ADB will ensure that its PSD strategy and operations continue to support government initiatives to develop and implement the legal, regulatory, and institutional frameworks that will enhance and sustain private sector activities, including information and communications technology (ICT).⁴ The Government requested support for further capital market development through strengthening of the Fiji stock exchange and bond market, which are critical to PSD and to attaining the annual investment target.

3. Economic Growth

13. The Fiji Islands has the capacity to grow faster and create jobs more rapidly, but the economy has yet to perform to its potential. For the past 20 years, the country has grown at an average of only 2.3%, well below that of most developing member countries. Public and private investment has been low, GDP per capita has been almost stagnant for several years, and the quality of life has deteriorated. The poor growth is attributed to the past political instability that resulted in lack of investor confidence and large migration of skilled workers. The Fiji Islands needs to attract more private investment to diversify its economy to improve its sluggish growth. However, due to high infrastructure, utilities and labor costs, and land tenure issues, private sector investment has been low. As a result, poverty, unemployment, and crime have increased. There is a need for urgent investment in key sectors to stimulate the economy to create employment and address growing poverty. Recently, there have been signs of improvement, but much will depend on the early resolution of pending constitutional and land tenure issues, and progress in the structural reforms.

4. Key Sector Focus

a. Infrastructure Development

14. The chronic lack of investment in physical infrastructure development has an impact on the growth targets. Thus, investment in productive infrastructure is critical for accelerating economic growth. The Government requested ADB support for infrastructural rehabilitation, and ADB assistance under the CSPU will aim to increase support for physical infrastructure development through public-private partnerships in transport, power, water supply and sewerage, and ICT. For augmenting public-private partnerships and improving the access and affordability of services to the poor by concerned agencies, institutional reforms (involving various regulatory issues) and cost recovery need to be addressed.⁵

15. In the transport sector, the Government intends to expedite road development to improve connectivity by addressing road upgrading, safety, and sector reforms. The Government also indicated that build-operate-transfer legislation would be in place soon to ensure that it would be able to secure the most effective funding options for the country's transport sector development, particularly in airports, ports, and roads. Preliminary work will be initiated through savings from TA 2850-FIJ: Road Sector Reform and Safety Improvement. The separation of the road functions of the present Public Works Department, and the creation of a separate Department of National Roads will proceed this year. In the aviation subsector, the Government’s policy is for capital investment to support growth and wider geographic distribution of infrastructure for tourism development. The two international airports at Nadi and Nausori and several domestic airports are currently facing capacity bottlenecks, and the government-owned Airports Fiji Ltd. is planning to address these through a major long-term airports upgrading program.⁶ Although mobilization of private-sector investments will be important, the current institutional environment⁷ requires detailed review and streamlining to improve flexibility and facilitate greater private sector involvement. In particular, the legislative environment for joint ventures, build-operate-transfer-type projects, and privatization involving GCCs requires review and updating. These investment modalities are currently undergoing an extensive consultation process involving a wide spectrum of stakeholders including relevant ministries, agencies, and potential investors. The ongoing project preparatory TA (footnote 6) will identify modalities for potential investment opportunities for airports improvements in the country.

16. In the energy sector, the Government’s rural electrification program seeks to reduce demand for fuel wood and imported fuels. With 60% of the population living in rural areas, affordable electricity will improve the standard of living and stimulate growth. A project preparatory TA⁸ is under implementation for improving access to electricity in rural areas. The Fiji Electricity Authority (FEA) is currently exploring financing options to increase its power generating capacity over the medium term. As part of the SDP, outer islands development is in need of capital investment for infrastructure upgrading and modernization to support expansion of rural production and increased tourism. Small wharves, domestic airstrips, rural roads, and other basic facilities are facing capacity constraints. Urban development is another government priority. ADB has provided TA 3243: Urban Sector Study to review the status of urban services and policies. So far, a national urban policy has been finalized. ICT also has the potential to play a vital role to promote more efficient and cost-effective services. For 2005–2007, the ADB program will support key public sector investments, capacity building, and institutional reforms in infrastructure development. Project preparatory TAs for Road Upgrading in 2004, Urban Sector Development for 2005, and Rural and Outer Islands Development for 2006 have been programmed. ADB is also supporting ICT development through various TAs.

b. Agriculture and Natural Resources

17. About 30% of GDP and 70% of exports can be attributed to agriculture and natural resources activities. Sugar remains of fundamental importance and occupies 50% of arable land, employs 13% of the labor force, contributes directly 9% of GDP, and generates about 30% of exports. Several constraints are prominent in the future of the sugar industry, including uncertainty over renewal of expired land leases,⁹ an inefficient pricing system, outdated and inefficient mills, and the imminent phasing out of sugar price support by the European Union (EU). Currently, nonsugar crops contribute only about 8% of GDP, and about 11% of agricultural exports. To identify alternatives to sugar, a comprehensive review of the agriculture sector was undertaken by ADB in 1995.¹⁰ The study concluded that the country’s competitive advantage lies in the export of high-value products to niche markets and in traditional food production.

18. Fisheries and forestry are the other two important natural resource sectors that contribute about 4.9% and 2.5% of GDP, respectively. The hardwood plantations, including mahogany, have enormous value-adding potential of up to F$200 million annually. However, in 2003, timber exports totaled only F$33 million, about 20% lower than in 2002. Major constraints facing the sector include lack of proper infrastructure, inadequate skilled personnel, poor timber utilization, and the inability to sustain quality and quantity for domestic and export markets. The Fiji Hardwood Corporation has launched some immediate strategies, including seeking strategic partners to promote the development of the industry. Such development requires updating the forest inventory, since the last review was in 1969. Fisheries, with about 1.3 million square kilometers in the country’s exclusive economic zone, have good potential for further development. In 2003, total export earnings were F$85 million, about 6% lower than in 2002. Major constraints include a lack of related infrastructure, such as fishing wharves, and electricity for refrigeration and processing in rural areas. The Government is keen to promote fisheries and forest sectors to generate employment opportunities in rural areas, and to provide food security for isolated communities in the outer islands. Such initiatives will also help to reduce poverty and to permit all communities to participate in overall economic development.

19. ADB’s lending program for 2004 includes an Alternative Livelihoods Development Project for diversification out of the sugar industry. To address the current sugar industry problems, including land tenure issues, ADB has provided ongoing advisory TAs to support the restructuring of the sugar industry.¹¹ ADB will also provide an advisory TA for a Fisheries Sector Review in 2004. For 2006, the Government requested a project preparatory TA for a Rural and Outer Islands Development Project (earlier known as the Ecotourism and Outer Islands Infrastructure Development Project).

c. Environment

20. The Fiji Islands' environment is increasingly fragile, due to a range of natural and developmental pressures, and is highly vulnerable to extreme climatic conditions. The outer islands and atolls are particularly sensitive to these extreme climate and weather occurrences. Additionally, current global and regional climatic scenarios indicate increased cyclonic activity, drought, and flooding. Future climate shifts may exacerbate existing conditions and will entail increased social and economic costs.

21. An expanding tourism industry, cultivation on steep lands, and poor solid and liquid waste and water sanitation management have increased environmental concerns. The Fiji Islands' capability and capacity to respond effectively to these environmental risks are currently limited. The recently enacted Sustainable Development Act¹² (renamed the Environmental Management Act) will help strengthen compliance and regulatory effectiveness. However, there is a need to mainstream and plan for response strategies for addressing these climatic events by better coordination of resources and skills to mitigate potential environmental risks.

22. Currently, ADB is implementing two regional TAs¹³ which will benefit the Fiji Islands through information exchange, dissemination, and capacity strengthening. Further, ADB will seek grant financing from the Global Environment Facility for its proposed Rural and Outer Islands Development Project in 2007. Better environment management is also being supported through TA 4270-FIJ: Capacity Building in Water and Sewerage Services (attached to the Suva-Nausori Water Supply and Sewerage Project) to strengthen environmental regulations and pretreatment of industrial discharges.

C. Highlights in Coordination of External Funding and Partnership Arrangements

23. The Fiji Islands is one of the lowest recipients of official development assistance on per capita basis in the South Pacific. In 2003, funding agencies provided F$61 million of grants, and a similar amount is expected in 2004. The key development partners include Australia, People’s Republic of China, Japan, New Zealand, the EU, and United Nations agencies. The EU and ADB have developed a strong partnership in the agriculture sector, particularly in the sugar industry reforms, and with the International Monetary Fund, United Nations Development Programme, and Australian Agency for International Development, in support of the Pacific Financial Technical Assistance Centre. Effective aid coordination and a unified approach to various reforms among funding agencies are important to minimize duplication and transaction costs, and above all, facilitate better use of development assistance. To ensure selectivity of sectors and to avoid duplication of effort, ADB will, as far as possible, instill better local ownership of its assistance program; widely consult stakeholders in economic, thematic, and sector work and in project and TA preparation and implementation; and coordinate assistance with other development partners. ADB is committed to helping Asian and Pacific developing member countries, including the Fiji Islands, achieve MDGs by 2015. ADB has begun actions to improve development effectiveness by implementing the ADB reform agenda to manage better for development results. ADB is building a strong partnership with the Government, other development partners, private sector, and civil society (including nongovernment organizations). With the establishment of the South Pacific Subregional Office (SPSO) in Suva in June 2004, partnerships and collaboration with all stakeholders will be further strengthened.

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