…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:
- An International Monetary Fund (IMF) loan under its Rapid Credit Facility
- Domestic borrowings through issuance of government bonds
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