17 Jan 2017
After running an appropriately expansionary fiscal framework last decade, the FijiFirst government was on a path towards fiscal consolidation this decade - aiming to reduce spending while tackling deficits and debt.
However, the COVID-19 pandemic, the subsequent tourism slump and massive decline in jobs and demand has knocked fiscal consolidation off course.
" To cushion the economic impact, Fiji’s government embarked on a pro-growth stimulus package.”
While Fiji avoided a health emergency, with less than 30 confirmed cases of COVID-19 so far, the pandemic has caused calamitous economic damage. Leisure travellers, a mainstay of the economy, have been locked out by closed borders since April, leading to widespread job losses.
But this is not the only problem. ANZ Research thinks remittances (money that families and friends living abroad send back to Fiji) will fall substantially as economic conditions in source markets deteriorate. And this will further dent consumer demand.
To cushion the economic impact, Fiji’s government embarked on a pro-growth stimulus package. The first package was unveiled on 26 March ($FJ1 billion) with further income and lending support schemes announced in April and May. ANZ Research expects additional stimulus to be revealed when the 2020-21 National Budget is handed down in Parliament.
As the government works to counter the adverse impacts of closed borders and weak global economics, ANZ Research thinks government spending, and fiscal policy more broadly, is an important area for attention.
On that basis, ANZ Research makes the following comments in relation to the forthcoming National Budget for Fiji:
Softening the blow
The government kept most of the initially budgeted 2019-20 expenditure in the COVID-19 response (supplementary) budget tabled in March. Some expenditure cuts in recent months would have been inevitable in response to rapidly declining revenue. ANZ Research estimates government payments will come in around $FJ3.2 billion for the 2019-20 financial year, which ends on 31 July.
For the next financial year, ANZ Research believes a hefty operating and capital expenditure budget - something in the order of $FJ3.8 billion - may be required to soften the blow from the pandemic and to keep a decline in economic output in the low double digits as opposed to something worse.
In terms of the stimulus itself, cash payments to lower income groups (who have the highest propensity to spend the cash), small and local projects such as schools and buildings and large nation building and infrastructure projects are likely to have the best affect. ANZ Research is not totally in favour of infrastructure-focused stimulus because it has a long gestation period. Cash handouts and small local projects have a shorter gestation and would support economic activity while planning for the major infrastructure projects is under way.
ANZ Research estimates the government will take a $FJ1.4 billion hit on revenue in 2019-20 due to weakness in economy and tourism tax receipts virtually disappearing in the second half of the financial year. Based on forecasts of lost visitor arrivals and overall economic contraction, ANZ Research thinks revenue will fall from the initial 2019-20 budget projection of $FJ3.5 billion to $FJ2.1 billion.
For the 2020-21 financial year, ANZ Research believes revenue will fall further to $FJ1.9 billion due to ongoing weakness of the economy. Importantly, given the fragile state of the economy, ANZ Research doesn’t think this is the time to take more revenue out of the economy.
Pushing the deficit
Falling revenue and expenditure trimming are likely to result in a deficit of $FJ1.1 billion (−10.3 per cent of gross domestic product (GDP)) in 2019-20. For next year, the deficit is expected to rise to −16.8 per cent of GDP.
…but nothing wrong with that
Leisure travel will be the last thing to recover when the pandemic crisis wanes, as shifting people’s attitude, perception and confidence about international travel will take time. This means the world is unlikely to see a return to pre-pandemic holiday arrivals until the second half of next year - and that is only if a vaccine is available.
The current environment does not call for smaller deficit budgets. The sharply contracting economy needs a counter-cyclical fiscal policy to stimulate demand now. In the absence of an expansionary budget, the expected economic decline will be more severe than the −12.9 per cent ANZ Research is forecasting.
A rough rule-of-thumb gauge of the overall effect of fiscal policy is the change in budget balance as a percentage of GDP (the extent to which government activity is adding to the size of broader economy). If the underlying cash balance is falling, it implies easing in fiscal conditions and a boost to the economy.
A deficit smaller than −16.8 per cent in 2020-21 will cause a drop in GDP that is worse than initially forecast, in ANZ Research’s view.
Deficit financing options
ANZ Research believes a deficit of $FJ1.8 billion can be financed through:
The IMF can allow drawdowns of the maximum special drawing right (SDR) quota under its Rapid Credit Facility. So far, 72 countries have accessed this program since March this year to meet balance of payments (BOP) financing and for budget support. Loans under this facility have 0 per cent interest with a grace period of five-and-a-half years and a term of 10 years. As it stands (without any top-up of SDR allocation by the IMF), Fiji can draw down $US135m or $FJ293m under this facility.
ANZ Research believes a case for such a loan can be made. With tourism export receipts stalled and lower inward remittances, the pressure on foreign reserves to fund the BOP needs would be too much. An IMF loan would reduce the need to meet BOP requirements from foreign reserves, which, in turn, would provide confidence to the current exchange rate regime.
ANZ Research thinks it is unlikely the IMF would impose harsh conditions - such as the need to bring deficits and debt down in a hurry - as the current times are unprecedented. Also it has supported large fiscal programs to mitigate risks from the pandemic. Of course, it will require transparency and good governance but the Fiji government is doing a lot of these things as part of the Asian Development Bank/World Bank support to refinance its maturing $US bond.
However, the IMF loan by itself wouldn’t be enough. The remainder of the deficit could be financed by issuing bonds in the domestic market.
If liquidity is tight, the Reserve Bank of Fiji (RBF) may buy existing government bonds under a repurchase agreement to free up cash for institutional investors. The Reserve Bank Act also allows the central bank to purchase up to $FJ900m of government bonds in the primary market, which equates to 30 per cent of average annual government revenue over the last three years.
That said, ANZ Research expects the government to use the market to raise most of its deficit financing so the Bank retains the autonomy of an independent monetary policy while still having a fixed exchange rate regime.
Debt? Survive the crisis first
Fiscal responsibility - a smaller deficit and debt to appease lenders and keep ratings agencies onside, thereby keeping interest rates on borrowings low - is important too. However, it is tough times now for Fiji and it’s not going to get better quickly. The weak economy needs an expansionary budget and it is premature to think about a plan to return the budget to a stronger position.
Let’s get through the economic crisis and limit the damage to jobs and businesses. ANZ Research believes that’s where the focus should be for now.
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.
17 Jan 2017
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