Economy holds but challenges remain

The economy of Fiji is small even by New Zealand standards, which is why we are considered to be a ‘rich country,’ notwithstanding the fact that the country across the Tasman is far bigger, richer and perhaps more prosperous.

The interim government in Suva is currently working on its 2010 budget, which everyone hopes will be larger than $F 1.71 billion under which the economy has been operating this year. Times are hard and the government will be forced to take measures that may not please businesses but no one appeared to be under any illusion that there was a miracle waiting to happen.

Recession bites

Like all other economies around the world – big and small – Fiji has had its share of global recession, compounded by sanctions and worse, bad media publicity.

But the people, including businesses, are as resilient as the economy.

According to the Fiji Islands Trade and Investment Bureau (FITIB), a statutory body established in 1980, the Fijian economy is projected to contract by 0.3% in 2009 compared to the 2.4% growth forecast in November last year.

The flash flood that deluged much of Fiji earlier this year has been attributed as a major cause for the downturn, apart from other factors.

Tourism, sugar and agricultural production were affected, leading to a decline in wholesale and retail trade, manufacturing, agriculture, forestry and fishing.

Although tourism has picked up in recent months, hotel occupancy and restaurant business have also been seriously affected.

An FITIB estimate said Fiji’s exports were also expected to decrease by 12.2% this year due to falling international demand, affecting major export sectors.

“However, the forecast did not take into account the devaluation of the Fiji dollar. On the other hand, driven by the lower oil prices, imports are also expected to decline by 10.6%,” it said.

Based on provisional data, Fiji’s total merchandise exports in May 2009 was $F 36.3 million (down by 20%), compared to imports which stood at $F1.11 billion (down by 15%).

Fish, sugar, garments and mineral water remained high on the export list, while minerals, fuel, larger volumes of machinery, mechanical and electrical appliances and parts dominated the import sector.

The country’s foreign reserves posted an impressive increase of about 59% to reach $F700 million as at July 31, 2009, compared to F$ 441 recorded prior to devaluation of the Fijian dollar on April 15, 2009.

Critical areas

Reserve Bank of Fiji governor Sada Reddy said boosting exports and inward investment would be the critical areas of focus for the economy.

The bank’s economic review for July 2009 posted a mixed performance of various segments of the economy during the first half of this year.

Cane and sugar production declined, mainly affected by unfavourable weather conditions and mill stoppages. Forestry, mineral water and garment exports were also lower than 2008 levels, heavily influenced by low demand abroad.

“While tourist arrivals registered an annual decline of 19.4% cumulative to April, there is optimism in the industry that these numbers will improve, spurred by a weaker Fiji dollar as well as the huge discounts offered by hotels.

“Growth in fish exports remained firm over the year. In addition, gold output continues to improve slowly since operations at Vatukoula commenced in May 2008,” the review said.

Declining consumption

Mr Reddy noted the downside risks to the economy, including the worsening of the H1N1 Flu (popularly known as the ‘Swine flu’), the impact of brucellosis (a disease caused by ingestion of unsterlised milk or meat from affected animals) on the dairy and beef industries.

Plausible adverse effects of El Nino (a periodic weather change in tropical Pacific) on the agriculture and fisheries industries are also considered a risk factor.

The bank’s economic review said the government recorded a net surplus of $F 39.6 million, corresponding to 0.7% of GDP in the first five months of this year. “Government expenditure rose on an annual basis by 7.3%, underpinned by growth in capital (22%) and operating (6%) expenditure.

“The State’s revenue grew by a modest 2.5% led by direct taxes, fiscal duty and hotel turnover collections,” it said.

Decline in Value Added Tax (VAT) collections (2%) on an annualised basis indicated a drop in consumption. Similarly, sale of new vehicles dropped (by 22%), compounded by job losses across the economy in recent months.

According to Mr Reddy, building and construction activity improved during the first quarter of the year, with annual growths in total value of work put in place (28.8%) and the total number (3.5%) and value (67.9%) of building completion certificates issued. Lending for investment purposes also grew on a yearly basis by 9.7% in May this year, he said.

But he said growth in monetary aggregates slowed in the year to June.

“Broad money declined by 6.2% after a steady downturn in narrow money, driven by a fall in demand deposits. The existing weighted average time deposit rate of commercial banks rose by 17 basis points over the month to 4.94% while the new time deposit rate fell by 16 basis points to 6.03%,” he said.

In line with the Reserve Bank’s policy on interest rates spread, time deposit rates are expected to trend upwards in the coming months

Commercial banks’ lending rose by an annual 8.6% in June while the Licensed Credit Institutions’ lending recorded an increase of 3.5% during first half of the year.

“High levels of liquidity continue to subdue lending rates,” he said.

The performance of the Fijian economy must be viewed against the backdrop of the crisis gripping most countries of the world.

Some economies, including that of New Zealand, have begun to show ‘a decline in contraction’ leading perhaps to a trough by the end of the year.

While most governments have provided financial stimulus to businesses, Fiji needs to do more on this front. A number of businesses have said that the recent hike in taxes have had a crippling effect on their activities, and therefore on prices.

Inflation remains a major challenge but the general belief is that with tourism and other sectors taking off, there could be relief and more positive growth in sight.

Editor’s Note: Figures appearing in this article may be in variance with other stories in this Special Report, mainly because of differences in projection estimates, period of compilation (before or after devaluation of the Fiji dollar) and official perception.