Fiji’s good run continues

Despite frequent setbacks from cyclones, floods, storm surges and drought over the past decade, Fiji’s economy has performed remarkably well and managed to avoid a recession. Now the Pacific nation's impressive streak of growth looks set to continue on the back of strong investment flows.

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In 2009, Fiji faced a recession when its economy was impacted by the global financial crisis. 

"Nearly 100,000 jobs have been created over the last 10 years.”

While not suffering from the financial crisis directly, visitor arrivals – a key driver of the economy – collapsed in its wake, sending the tourism industry into a downturn.

Since then, the country has recovered well and gone on to register seven continuous years of growth, absorbing shocks from natural disasters.

Let the good times roll

ANZ Research expects Fiji’s economy to grow by 3.3 per cent in 2018 and 3.1 per cent in 2019, supported by strong private and public sector investment.

Household consumption expenditure, the largest contributor to gross domestic product, is forecast to increase by an average of 3.3 per cent a year over the next two years, supported by employment growth and remittance inflows.

Fiji’s economy is now 25 per cent larger (in real terms) than its previous peak in 2008 and nearly 100,000 jobs have been created over the last 10 years. 

Containing pressure

Consumer price index inflation in Fiji can be volatile, with the food industry particularly vulnerable due to supply disruptions from adverse weather or cyclones.

Looking ahead, ANZ Research expects currency appreciation (against the $A and $NZ) will keep a lid on inflation despite weakening against the $US and the underlying inflation is expected to be contained over the next two years.

Although total government debt was at a new high of $F4,853 million in 2017, the peak in the debt-to-GDP ratio of the current cycle is projected to be similar to that of mid-1990s.

Reining in

Since 1992, Fiji’s government of the day has run a budget deficit in all but two years. As a result, the nominal outstanding debt level has climbed.

Although this is not the time for austerity, ANZ Research would advocate for the budget to be brought back towards balance, over the medium- to long-term especially as the interest cost is likely to increase when interest rates rise.

History suggests that expenditure close to 30 per cent of GDP generally yields the smallest budget deficits.

ANZ Research’s view is that expenditure in Fiji needs to be cut by around 1.5 per cent a year, in order to wind it back to around 30 per cent of GDP over the next five years. This includes showing restraint on public sector wage increases.

Public sector employees have received large double digit wage increases in recent years.

We understand that budgets have to balance commitments, deficit implications for credit ratings and political consequences. However, even allowing for some catch-up in wage increases, these hefty wage increases appear excessive.

The public sector wages bill now accounts for nearly a third of total expenditure from just over 23 per cent in 2011.

Awake at night

Persistent current account deficits are keeping the Reserve Bank from a good night’s sleep.

Current account deficits have to be funded by either foreign direct investment, portfolio equity, overseas bank loans, private placements or by running down foreign reserves and if the level of reserves runs low, then the central bank’s ability to support or underwrite the country’s exchange rate comes under pressure.

Indeed, it was a combination of low reserves and subsequent tight liquidity conditions in the banking system that led the central bank to devalue the currency by 20 per cent in 2009. 

With elections coming up later this year, it is an opportune time for politicians to reset Fiji’s growth agenda.

By doing so, they will be making Fiji a better place for all its citizens.

Dr Kishti Sen is International Economist and Tom Kenny is Senior International Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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