Taken from the International Monetary Fund website on this
The statement raises concerns regarding :
- constraints on future growth in Fiji and how the "outlook remains highly uncertain due to political developments, the fragile nature of the global recovery, volatility of commodity prices, the risk of natural disasters, and the complex structural reform agenda";
- downside risks including how "increased liquidity in the banking system poses risks of inflation, macroeconomic instability, and a loss of competitiveness";
- relevance and adequacy of monetary policy instruments used;
- the level of government debt and its sourcing mostly from FNPF funds;
- sustainability of FNPF to pay pensions at current rates and its use to fund government debt.
"Statement of an IMF Staff Mission at the Conclusion of the Article IV Discussions with Fiji
, Press Release No. 09/427November 23, 2009
The following statement was issued today in Suva after the conclusion of an International Monetary Fund (IMF) staff mission to Fiji:
“A team led by Mr. Ray Brooks, Division Chief in the Asia and Pacific Department of the IMF, visited Suva November 10 – 24 to hold Article IV discussions with the government and other stakeholders.1
The team met with Prime Minister Bainimarama
, Reserve Bank of Fiji (RBF
) Governor Reddy
, Acting Finance Minister Sayed
, Finance Secretary Prasad
, other senior government officials, and members of the private sector and civil society. Representatives from the Asian Development Bank and the World Bank also participated in the meetings. The team expresses its appreciation to the authorities for the constructive discussions.
“Economic growth in Fiji has been sluggish in recent years due to political developments, delays in structural reforms, and worsening terms of trade. Job growth has been slow and unemployment rose to 8½ percent in 2008.
“The economy is expected to contract by 2½ percent in 2009 as the impact of the global crisis has been exacerbated by floods that damaged crops and tourist infrastructure early in the year. GDP growth of 2 percent is likely in 2010, driven by the rebound in tourism, the devaluation, the global recovery, and rebuilding after the floods. Growth over the medium-term should rise to 2½ percent with fiscal consolidation and progress on structural reforms.
“Fiji, however, faces considerable downside risks given its external vulnerabilities. Increased liquidity in the banking system poses risks of inflation, macroeconomic instability, and a loss of competitiveness. The growth outlook remains highly uncertain due to political developments, the fragile nature of the global recovery, volatility of commodity prices, the risk of natural disasters, and the complex structural reform agenda.
“We commend the authorities for their efforts to limit the overall deficit in 2009 to the budgeted level of 3¼ percent of GDP. This is being achieved by containing expenditure in the face of an unexpected 10 percent fall in revenue. However, central government debt, at over 50 percent of GDP, is high by regional standards. In addition, government has contingent liabilities of around 15 percent of GDP.
“Fiscal consolidation is needed to reduce central government debt to the government’s target of 45 percent of GDP over the medium term. Limiting the 2010 budget deficit to around 2 percent of GDP—excluding costs associated with civil service reforms—would begin to reduce the debt-to-GDP ratio. In the medium term, expenditure can be contained through a well-designed civil service reform and revenue can be strengthened by rationalizing tax incentives. Transparency in fiscal reporting should be improved by widening the coverage of the budget and publishing quarterly reports on the fiscal outcome.
“Monetary policy should be tightened to contain inflation, protect the reserve position, and lock in the competitive gain from the devaluation. Inflation is projected to rise to 7 – 8 percent year-on-year by early 2010 and any further upward pressure on prices could lead to higher wage demands and macroeconomic instability. Given these risks, the recent increase in the statutory reserve deposit ratio is a welcome step. But further measures are needed to absorb excess liquidity and utilize more market-based instruments. We endorse the authorities’ review of the RBF
Act to provide the RBF
with more independence.
“The Fiji National Provident Fund (FNPF
) should be reformed to make it actuarially
sound. The generous rate of conversion of benefits to annuities should be reduced and management should be made independent of government and responsible to beneficiaries. The government should reduce its reliance on the FNPF
for financing and the FNPF
should not be used to finance public enterprises since these actions undermine the fund’s soundness. We support the government’s intention to conduct a comprehensive study to guide its reforms of FNPF
“The authorities are planning sweeping structural reform that is required to spur growth, create jobs and reduce poverty. Priorities are civil service, public enterprise and land reform, and price liberalization. The social impact of redundancies arising from civil service and public enterprise reform, and the impact of price liberalization, should be mitigated through well-targeted subsidies to vulnerable groups. The government’s decision to corporatize
water, procurement and printing services is a very positive step.
“The IMF Executive Board is expected to conclude the Article IV consultation discussions in January 2010.”
Labels: Banking System Liquidity, Fiji, Fiji Economic Outlook, Global Financial Crisis, IMF, Monetary policy, Reserve Bank of Fiji