Fiji economy: changing gears

International tourism is back in Fiji -and so is the urgency to balance the economy following a difficult few years.

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ANZ Research expects gross domestic product (GDP) in Fiji to lift by 23.2 per cent in 2022 driven by strong inbound tourism demand. The economy will continue to grow in 2023 but at the more moderate pace of 5.4 per cent.

“Fiji has some catching up to do on improving labour productivity, particularly in capital deepening – increasing capital stock such as plant, machinery and equipment relative to the labour supply.”

However, like many economies, conversion of upstream price pressures to retail prices is hurting consumer demand. Although not a threat to economic recovery, a policy response to ease cost of living pressures and to contain consumer prices is being rolled out.

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Consumer price index (CPI) inflation has not been a problem for Fiji for nearly two years. However, minimum wages will increase from $2.68 per hour to $4.00 per hour by 1 January 2023, a 49 per cent increase in weekly wages. This will see some upward pressure on workers higher up the pay scale.

As wages pressure comes through, unit labour costs - wage increases adjusted for productivity increases - will rise too, pushing underlying inflation higher. This means Fiji needs to improve labour productivity, particularly in capital deepening (upgrading its capital stock relative to workforce) and using the existing stock of capital and labour more efficiently. Nonetheless, new wage negotiations under different pay-setting methods (such as enterprise bargaining or individual contracts) will remain a delicate balancing act to maintain real wages, business competitiveness and sustained jobs growth.

Higher pass-through of upstream price pressures, including unit labour costs, is likely to push CPI inflation towards 5 per cent by the end of 2022.

On the demand side of the equation, retail sales are making a comeback following a pandemic-induced downturn. Retail turnover, supported by inbound demand, higher employment, government transfer payments and remittances, is on the rise again. ANZ card transaction data show three-month expenditure to January 2022 at 60 per cent of 2020 level.

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Government consumption expenditure was maintained during the worst years of the pandemic. In addition, government social assistance benefits of about FJD500 million per year were channelled to households supporting consumer budgets and demand.

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Understandably, businesses have remained cautious on investment. But the pipeline will build as confidence returns. New big projects are on hold and activity is on a slippery slope downwards as existing projects reach completion. Public sector civil engineering works, albeit declining, held up well during the pandemic.

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Investment should benefit from microeconomic reforms including reduction of red tape and regulation. Hence, a switch in drivers from government to business investment is expected. Private residential development should also build momentum on the back of government support and reforms.

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Fiji’s 2021-22 budget was revised on 24 March 2022 to reflect improved revenue projections. The new ‘money plan’ recycled better-than-expected revenue into easing cost of living pressures
and additional spending. This has led to a slight improvement in the budget deficit which is now expected at 14.2 per cent of GDP compared with an initial projection of 16.2 per cent.

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Fiji remains a strategic location to service other South Pacific economies as a regional hub. It has a safe, reliable and sophisticated telecommunications infrastructure, opportunities to nurture and develop industry sectors such as commercial agriculture and manufacturing as well as sports and physical recreation activities, in particular rugby.

In addition, Fiji has a young, educated and eager population to sustain its economic development.

Looking ahead, the fundamentals for balanced medium-term growth are promising for Fiji.

Kishti Sen is Pacific 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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