Countries and Regions

	Table of Contents
p. 2 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 2006-2008: Fiji Islands, Republic of the

---

II. Current Development Trends and Issues

A. Recent Political and Social Developments

3. Significant social tensions that were unleashed in the 1987 coup resurfaced in the coup of May 2000. These tensions, which remain close to the surface today, are not only between ethnic Fijians and Indo-Fijians. They are also within the ethnic Fijian community. Traditional ethnic Fijian leaders feel a strong need to retain their values and position in the society, and worry about losing control. Many Indo-Fijians feel that they do not have a promising future in Fiji, because of lapsing land leases and the reduction in garment sector jobs. As a result, many are seeking to migrate. Over the past 5 years, the so-called brain drain of valuable human capital from the Fiji Islands has become a serious concern. Moreover, the upcoming general elections, scheduled for September 2006, have amplified the prevailing political uncertainty.

4. With gross domestic product (GDP) per capita of F$2,996 (US$2,172, at 1995 prices), Fiji is a middle-income country with great potential, abundant natural resources, and arguably the best human resources in the Pacific. Fiji's social indicators remain high by Asian standards, and the quality of social services delivery is considered good. Moreover, the Fiji Islands are very likely to achieve the social sector MDGs by 2015, particularly those pertaining to higher life expectancies, lower infant and maternal mortality rates, lower gender disparity in primary and secondary education, and universal primary school enrollment. In addition, the health and education sectors receive adequate resources through the Government's fiscal expenditure, as well as assistance from Australia, the European Union, Japan, and New Zealand.

5. Despite relatively high average incomes, poverty is a growing concern. The incidence of poverty has risen from 25.5% in 1991 to 28.2% in 2005. In particular, urban-rural disparities have grown wider. Moreover, evidence suggests that urban poverty is increasing, exacerbated by deteriorating urban and peri-urban squatter communities.

B. Economic Assessment and Outlook

6. In recent years, the Fiji Islands' economic performance has been mixed. Following exceptionally high GDP growth of 9.2% in 1999, the economy contracted sharply by 2.8% in 2000 after the coup. Real GDP growth averaged 3.4% annually from 1999 to 2004, with aggregate growth reaching an estimated 3.0% in 2003 and 4.1% in 2004. Real GDP per capita growth averaged 2.5% per year in the same 5-year period. A quick recovery in the tourism sector and rapid expansion in the construction industry have driven growth since 2000. In addition, remittances have continued to increase over the past 5 years-from F$50 million in 1999 to F$300 million in 2004. Remittances have become the largest source of foreign exchange after tourism, surpassing sugar exports.

7. With steady increases in visitor arrivals, aided by declining regional airfares and the entry of budget carriers, the tourism sector offers the greatest opportunity for further growth. Fiji's natural beauty and pristine environment provides the scope for sustained high growth if appropriate regulation and enforcement are in place. To a lesser extent, information technology-based services and audio-visual industries offer growth opportunities. The forestry sector also is likely to enjoy higher growth as the country's maturing mahogany plantations become ready for harvest in coming years. Fisheries will remain one of the key sectors of the economy. However, the country needs to respond effectively to regional and global developments in these sectors, particularly by promoting sustained private sector participation.

8. Textile and sugar exports face output declines due to the gradual reduction in preferential prices and access to the main markets. For many years, Fiji benefited from preferential quota access to two high-price markets--the US garment market and the EU sugar market. After Fiji lost its garments quota for the US market at the beginning of 2005, a significant number of garment manufacturers closed and shifted to countries with cheaper labor, leaving 6,000 unemployed. As the industry continues to contract, further job losses are expected. Similarly, the sugar sector has relied on a subsidy from the EU, which will gradually shrink by 39% over 4 years starting in 2006 in compliance with international commitments under the World Trade Organization. Despite efforts to improve sector efficiency, many farming households will be displaced and will need to identify alternative livelihood sources. The cost of labor in Fiji cannot compete with low-cost production locations. In addition to the 6,000 sugarcane farmers who have already left the industry, some 154,000 are expected to exit in the next 2-3 years. The expiration of land leases of tenant farmers that are not being renewed is compounding the problems in the sector. The garment industry provided employment predominantly for women. The contraction of the sugar industry will affect thousands of ancillary workers--cane cutters, those transporting the cane to the mills, mill workers, and their families.

9. In light of the significant structural adjustments required in the textile and sugar industries, the immediate challenge is to generate growth that creates jobs in the coming years. In 2005 and 2006, the economy is forecast to grow 1.7% and 2.0%, respectively, driven by construction, wholesale and retail trade, and hotel and restaurant sectors. Growth is forecast to rise above 2.0% in 2007 and 2008.² However, these low levels of growth will be insufficient to generate the employment and incomes necessary to substantially reduce poverty and improve economic welfare.

10. Fiscal deficits have been a persistent characteristic of macroeconomic management. The fiscal deficit was 6.8% of GDP in 2004, down from close to 9.0% in 2003. The Government aims to maintain the deficit below 4% of GDP in 2005 and 2006. In addition, expanding imports and declining exports have generated a trade deficit, which reflects increasing consumer spending, rising oil prices, and declining garment exports. However, trade in services has helped to cut the current account deficit to an estimated 12.7% of GDP in 2005, from 18.4% in 2004.

11. The Government's public debt stands at 51% of GDP, though only 9% of that is foreign debt. Multilateral lenders fund 75% of the foreign debt, of which the Asian Development Bank (ADB) funds 73%. Nearly all of the public debt (92%) represents accumulated domestic borrowing that finances the fiscal deficits. It is held primarily by the Fiji National Provident Fund. Inflation is forecast at 3.0% in 2005, down from 3.3% in 2004. Foreign reserves stand at an adequate 2.9 months of imports (2005). The country's macroeconomic fundamentals-a relatively large public sector, a persistent fiscal deficit, distortional trade and tax regimes, and growing public debt-are a continuing concern. A sound and stable economic environment is needed to encourage increased investment, and to improve productivity throughout the economy.

12. To a large extent, political instability has caused the lower-than-desirable levels of investment, which is a major growth constraint. Aggregate gross fixed investment fell from an average of about 20% of GDP in the 1970s to slightly more than 12% in the 1990s.³ Private investment declined even more sharply, from about 14% of GDP during the 1970s to about 4% in the 1990s. Since 2000, the aggregate gross fixed investment has averaged only 15.2% of GDP, substantially below the average of 20% for developing countries and the Government's target of 25% of GDP.⁴

13. This record of low and falling investment highlights the need to improve the investment climate significantly. Attracting more private investment is essential for generating economic growth. Policy and institutional changes are needed to boost investment, productivity, and business activity, and to upgrade infrastructure in many areas. However, in light of the approaching elections, the Government's willingness to pursue the necessary reforms is constrained.

C. Implications for Country Strategy and Program

14. Overcoming the structural economic challenges facing the country will require a comprehensive economic and public sector reform program. This will provide a strong macroeconomic foundation for establishing an investment climate conducive to private sector-led growth, employment generation, and sustained poverty reduction. In response, this CSPU focuses on assisting the Government in (i) building demand and capacity for economic and public sector reforms, and supporting private sector development; (ii) reducing infrastructure bottlenecks; and (iii) supporting structural change in the economy through the development of alternative livelihoods. The urgency and timing for implementing these critical reforms inevitably will correlate with how fast the garment and sugar industries contract, as well as the political and economic imperatives to expand employment for the many people who will be displaced by these shrinking sectors. Before elections, the risk that key economic and social issues will become entangled in politics increases. The environment for reform is expected to improve after the election in early 2007 and beyond. Due to the timing of these political events, a full results-based country strategy program (RB-CSP) should be prepared only after the 2006 elections, covering 2007-2011. The Government, in close consultation with relevant stakeholders and in harmony with development partners, should prepare this report.

____________________

Back I. Country Strategy	Next III. Implementation of the Country Strategy and Program