Bold reforms will boost economic growth

In light of the global economic and financial meltdown over the last two years, economies the world over are grappling with policy issues that will usher in economic development, progress and stability.

For most of these countries, major adjustments and paradigm shifts were required.

People needed to think outside of the box and move out of their comfort zone.

The situation also demanded them to think creatively and in some cases implement very unpopular policies to work themselves out of the economic and financial challenges.

In the quest to be more competitive and survive in this world, which is increasingly becoming a challenge for countries like Fiji, we need to constantly review our performance, identify the constraints to our progress and be willing to shift paradigms to realise our goals.

It is logical that change will often be resisted and initially difficult to accept.

But if we are determined in our efforts and have a clear vision of where we want to go and what we want to achieve, then our determination, enthusiasm and creative thinking will not be restrained.

Reforms needed

Our country is at a juncture now when we need to direct our energy to making the economy grow sustainably.

We need to reform.

Reforms enable a country to manage its resources well and gain mileage in their usage. It also facilitates the generation of government revenue and improved government funding position.

Reforms help attract investment.

The ease of doing business in Fiji in this regard therefore becomes critical. The global economy is competing for the same dollar. We have not ranked well under the World Bank’s ranking of the ease of doing business.

Singapore is ranked first in the world. What lessons can we learn from them?

I am positive that we can address this structural issue and improve our world ranking.

Investments will create domestic economic activities and help the country grow sustainably.

The sustained performance of the economy is important for employment generation, poverty alleviation, improving confidence and ensuring stability.

Our growth performance has been less than impressive over the years.

We need to change the way we do things.

We need to address the structural reforms necessary to unleash our economic growth potential. We have identified these structural challenges in various forums over the years and addressing them will be central to building a better Fiji for all.

We need to share a common vision that change is inevitable for us to maximise and put to good use the limited resources we have, improve productivity and efficiency, address poverty and hold our ground in this increasingly integrated global economy.

We have to remain competitive. To do nothing or progress at a snail’s pace would be to our disadvantage.

The global crisis has also significantly affected our trading partners Most of them, namely New Zealand, the US, Euro Zone and Japan are in recession this year with modest recovery expected for 2010.

Inevitable devaluation

Fiji’s economy was affected on many fronts. The demand for a number of our exports was quite adversely affected. Remittances (which formed a substantial part of foreign exchange earnings) virtually collapsed.

Tourism arrivals were significantly affected as well. We also saw that with the massive shifts in global financial flows in the last 12 months, the currencies of our major trading partner countries depreciated significantly against the US dollar.

This actually led to the Fiji dollar appreciating against the currencies of important tourism source markets like Australia and New Zealand.

For a brief period early this year, the Fiji dollar was even stronger than the New Zealand dollar. This made Fiji very uncompetitive in terms of tourism.

These impacts on the Fiji economy had major macroeconomic implications, one of the most significant of which was on our balance of payments.

Fiji’s foreign exchange reserves plummeted rapidly, leading to an extremely tight liquidity in the banking system resulting in difficult credit conditions early in the year.

This situation led to our decision to devalue the Fiji dollar by 20% on April 15.

In terms of GDP, the adverse effects of the global crisis plus the floods in the early part of this year significantly affected the economic growth of Fiji this year.

We initially expected a positive growth of over 2% this year but this has now been revised down to minus 0.3% but expect to register positive growth of about 2% in 2010. We should take comfort in the fact that the Fiji economy has not been as badly affected as many other countries.

Proactive policies

The Reserve Bank of Fiji has announced a number of proactive policies in response to the threat to our balance of payment position owing to the large trade deficit, compounded by the impact of the global recession and natural disasters.

These included tightened exchange controls, capped interest rate (4%) and priority sector lending.

We have also taken a proactive, hands-on approach to develop the key areas of the economy, which are normally beyond the scope of a central bank.

We have established the ‘Financial System Development and Compliance Group’ to examine a number of issues including microfinance and small and medium enterprises development, sustaining remittances flows, financial literacy, rural banking, local value adding and policies to discourage the importation of high value luxury goods.

While the bank tightened exchange controls in April this year, there are no restrictions on any trade transactions whatsoever. All payments in and out of Fiji are as normal as can be expected.

However, we do control Fiji residents’ investments abroad. Policies in this regard are either tightened or relaxed depending on how our foreign reserves perform.

Fiji has never failed to meet any of its foreign obligations. Our reserves are now reaching comfortable levels and I am sure this should give more comfort to our trading partners.

Sada Reddy is Governor of the Reserve Bank of Fiji based in Suva. The above is an edited version of his speech at the Fiji Tourism Forum 2009 held under the theme The Spirit of Fiji: For New Paradigms at the InterContinental Hotel and Resort in Nadi on August 14.