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p. 38 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific Cook Islands Fiji Islands Kiribati Marshall Islands Federated States of Micronesia Nauru Papua New Guinea Samoa Solomon Islands Tonga Tuvalu Vanuatu III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia

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Fiji Islands

Following strong growth in 1999, the economy contracted by over 9 percent in 2000 due to political instability and widespread civil disorder. Despite these difficulties, the management of the economy was commendable. However, medium-term prospects will depend on how the country’s internal and external relations evolve.

Recent Trends and Prospects

The economy contracted by 9.3 percent in 2000 (see Figure 2.19), reflecting the impact of political instability in May 2000 and the associated widespread civil disorder and reactions of potential investors, tourists, and the international community. Looting and the destruction of property led to the suspension of operations by many businesses, particularly in the main centers of Suva, Lautoka, and Nadi. The international community’s responses included reduced aid flows, imposition of diplomatic and trade sanctions, and travel advisories to tourists. Government activities were also adversely affected, including basic services such as power and water, and the operation of government departments.

After very rapid growth in 1999 of 9.6 percent, led by the sugar and tourism sectors, the contraction in 2000 was seen mainly in the nonagriculture sectors of the economy: manufacturing output fell by 12 percent, construction by 25 percent, and activity in the trade, restaurant, and hotel sector by 15 percent. Tourism shrank by around 30 percent, as arrivals fell from the record level of 410,000 seen in 1999 to about 280,000 in 2000. Hotel occupancy rates were only 20–30 percent in July and August compared with around 80 percent in the same period of the previous year. Several major investment projects, including new tourism facilities, were postponed. Investment had long been weak and declined further in 2000 to less than 10 percent of GDP. The retail sector suffered from a general decline in consumer spending associated with the civil disorder, particularly in Suva; this decline stemmed from high numbers of redundancies, wage cuts, and fewer tourist arrivals.

The main exception to the drastic downturn was agriculture. A very good sugar crop was harvested, after several poor crops largely attributable to drought.

Conditions in the labor market deteriorated in 2000: many people were laid off in the garment, tourism, retail, and construction sectors, while wages fell generally, with pay cuts in the private sector of 15–50 percent.

Total export earnings for 2000 fell by around 20 percent, following exceptionally strong growth in 1999. Garment exports were lower due to the imposition of temporary boycotts by trade unions in Australia and New Zealand, power cuts, and the uncertainties about preferential arrangements under the South Pacific Regional Trade and Economic Cooperation Agreement. Imports declined sharply with the contraction in the economy so that the trade deficit was much lower than normal. The current account still realized a modest surplus, but at a somewhat lower level than a year earlier as tourism earnings declined and outward private transfers increased. The capital account deficit narrowed slightly, largely as a result of capital controls put in place after the political developments of May 2000 and the return of a leased aircraft. The net outcome on the balance of payments was a small deficit.

In response to the sharp fall in revenue following the political crisis, the new Government implemented an interim budget in July 2000. This presented a reduction in expenditure of F$103 million, or 10 percent lower than originally forecast for 2000. This was to be made up of an across-the-board 12.5 percent cut in government salaries, a 20 percent reduction in operating grants, a 30 percent reduction in other operating payments, and a 30 percent reduction in capital expenditure. The revised deficit target was equivalent to 3.5 percent of GDP in 2000, an increase from the 1.9 percent originally targeted.

At the time of the interim budget, government revenue in 2000 was expected to decline by about 15 percent, or F$146 million, from the 1999 level. The fall was forecast because poor business profits had lowered corporate tax collection, the decline in employment and pay had reduced personal income tax payments, and revenue from tariffs and value-added tax had weakened. In the absence of corrective action, a deficit of F$250 million, or 9 percent of GDP, was projected, which would have taken government debt to more than 52 percent of GDP. However, the interim budget helped contain government debt to around 42.9 percent of GDP in 2000, compared with 38 percent in 1999.

The 2001 budget was released in November 2000, and presented a detailed policy response to the crisis. Paralleling some of the policy responses after the coups in the late 1980s, it heavily emphasized business tax cuts. Soon after the political developments of May 2000, the Reserve Bank of Fiji acted to protect foreign reserves and the exchange rate. It set a credit ceiling on commercial banks (to limit lending to levels as of 19 May 2000), put up interest rates (the yield on 91-day Reserve Bank of Fiji notes rose from 2 to 5 percent), and imposed selective exchange controls. By the end of November, reserves had risen slightly to around six months of imports, or F$800 million, and the exchange rate was fairly stable.

Despite the economic downturn, domestic credit grew by almost 11 percent in the 12 months to September 2000, led by lending on real estate. Narrow money and quasi-money grew by 6 percent and 7 percent, respectively, over the same period. The crisis had little impact on prices, with inflation of 1.1 percent in 2000. Even though monetary policy was tightened on 22 May, interest rates remained quite low. The interbank rate rose to just above 7 percent in June, but quickly fell back to below 4 percent. From early September, the Reserve Bank of Fiji relaxed both monetary policy and some exchange controls. By late October, the credit ceiling had been removed.

On the assumption that the crisis will not flare up again, the economy is projected to grow by nearly 5 percent in 2001 and 2002, driven by recoveries in tourism, manufacturing, and construction. Agriculture, forestry, and fisheries are forecast to show slow growth. Weak commodity prices, industrial unrest in key sectors, trade sanctions, the uncertain future of the garment industry, and negative tourism-related publicity are all key elements in these forecasts.

Exports are projected to be weaker in 2001 due to lower garment exports. Imports are expected to strengthen along with the growth in the economy, resulting in a substantial increase in the trade deficit. Higher investment income outflows and larger outward private transfers are also likely in 2001, leading to a much smaller current account surplus. However, net direct investment is forecast to turn strongly positive, in response to measures announced in the 2001 budget, which should help generate a surplus on the capital account and an overall balance-of-payments surplus. Foreign reserves are forecast to reach 5.5 months of import cover in 2001.

Trade prospects are projected to improve in 2002 and the trade deficit to be similar to that of 2001. The current account is expected to improve as tourism receipts grow. Direct investment is expected to weaken but still remain positive as the impact of tax incentives diminishes. A modest deficit is projected on the capital account in 2002. The overall balance of payments is projected to remain in surplus with foreign reserve cover slightly lower than in 2001.

Inflation is projected to be in the range of 3–4 percent in 2001 and 2002 due to expansionary policies. Interest rates are expected to remain at existing levels or to decrease slightly.

Issues in Economic Management

The key issues in the economy include the instability of the sugar industry due to expiring land leases and the expected cessation of the Lomé Agreement, poor productivity in the sugar industry, and uncertainty in the garment industry over the future of preferential trading agreements with Australia.

Although the new Government tightened expenditure in the interim budget, the cuts in expenditure did not match the expected shortfall in revenue and the budget deficit was expected to rise to around 3.5 percent of GDP in 2000. This fiscal stance is to be maintained over the medium term. The 2001 budget presented a deficit estimate of 4.0 percent of GDP in 2001 and 3.0 percent in 2002. Government debt is thus expected to reach 45.0 percent of GDP by 2003. A boost to aggregate demand is important to help support business activity and to reduce the adverse social impacts of the crisis, such as increased unemployment. But government debt is reasonably high and the budget will soon need to move near balance. This is necessary to stabilize and possibly reduce the debt burden, and reduce the crowding-out of private sector activity.

To help rejuvenate economic activity, the 2001 budget outlined a comprehensive structural reform program. Measures included the adoption of full dividend imputation, lower tariff rates on business inputs, a proposed review of price controls, improved regulation of the financial sector, the removal of the quota system for rice imports, and the pursuance of policies consistent with World Trade Organization guidelines. Another encouraging sign from the budget is the commitment to the Financial Management Reform project (essentially a budget reform program). The budget also emphasizes tax reductions for the business sector, which the Government sees as important for attracting investment. Although the outlook for investment depends heavily on the success of the reform program, political and social stability, and healthy external relations, remain crucial for promoting foreign investment.

Policy and Development Issues

The key to development on a sustained basis is substantially higher private investment. Investment, particularly private, has been very low in the Fiji Islands for many years: private investment averaged only 5 percent of GDP in the 1990s. The 2001 budget noted that a Reserve Bank of Fiji survey identified a lack of clear policy direction, time-consuming bureaucratic procedures, and land issues as factors having adverse impacts on investment. Of the three factors, it seems that uncertainty over property rights and the enforcement of those rights are the primary structural reason for low investor confidence. The reforms to public enterprises proposed in the 2001 budget offer no meaningful strategy to improve their performance on a sustained basis. Consequently, as well as doing more to improve property rights, the Government needs to mark more progress with public enterprise reform.

Poverty reduction appears to be reliant on growth and effective government service delivery, especially in health and education. While such a broad strategy has its advantages, it is likely to leave some vulnerable groups behind, such as the aged, female-headed households, and people with disabilities. This contrasts with the approach—widely adopted during the Asian financial crisis—of providing social safety net schemes for the poorest in times of severe hardship, including food and housing support, and school subsidies.

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