Fiji Economy Profile 2012

The Fijian economy is expected to grow by about 2 % in 2011, by far the best result of the past five years, in part reflecting a bounce-back after two consecutive years of contraction. Medium-term growth prospects, however, appear to be relatively weak, unless structural reforms are accelerated, and the business climate and political situation improved. High food and oil prices, as well as various one-off factors like the increases in Value Added Tax (VAT) and the electricity tariff, have pushed inflation up recently, but it should moderate to 5 % in 2012 and could edge further down over the medium term. High import prices have also kept the current account deficit high this year, although foreign reserves are healthy and projected to remain so. The financial sector is sound, but the Fiji National Provident Fund needs to carry out a pension reform—with appropriate transitional provisions for those in or nearing retirement—in order for it to be made sustainable over the long term.

With regard to macroeconomic policy, the RBF’s monetary stance is accommodative, intended to encourage the banks to lend more in order to stimulate the economy. This policy appears to be consistent with the current context of low underlying inflation and weak growth. Given that the financial system is awash with liquidity, the mission would encourage the RBF to remain vigilant to any signs of incipient inflationary pressure. The fiscal position could be strengthened. Debt is 55 % of GDP—relatively high for a small, open economy vulnerable to shocks—and the government also faces contingent liabilities of more than 15 % of GDP, as well as unfunded FNPF liabilities. The fiscal deficit is likely to remain broadly stable this year at around 2½ % of GDP, which is commendable, and further reductions over time would be prudent. This would increase the authorities’ room to maneuver in case they need to respond to a severe shock emanating from today’s uncertain global environment. Absent such a case, efforts to solve Fiji’s longstanding problem of low growth could better focus on structural reforms.

Such structural reforms—along with resolution of political uncertainties—as the key priority in spurring investment and raising Fiji’s growth rate. There have been many promising initiatives, including on land policy, the sugar sector, the civil service, and public enterprises, and steadfast implementation of these initiatives is now of critical importance. While recognizing that price controls have been reduced, continued controls on a range of products could deter investment and should be scaled back further to yield economic benefits, while still ensuring protection of the poor. Exchange controls have been relaxed, and further moves in this direction could also help attract investment by reducing uncertainty. And in all areas of policymaking, the mission would encourage broad consultation with key stakeholders, including civil society, in order to improve the quality, consistency, and sustainability of decisions.”