Thursday, 26 August 2010

• Fiji: Country Outlook July 2010

  FROM THE ECONOMIST INTELLIGENCE UNIT

  OVERVIEW: Although Fiji remains diplomatically isolated, Fiji's military commander and prime minister, Commodore Voreqe (Frank) Bainimarama, has been consolidating his political influence at home. He has also undermined the influence of the Fiji Labour Party (FLP), by destroying the affiliated National Farmers Union (NFU), the main sugarcane farmers' union. In mid-June the government announced a review of the 2010 budget on the grounds that two cyclones early in the year necessitated unforeseen reconstruction projects. Meanwhile, the Reserve Bank of Fiji (RBF, the central bank) has tightened liquidity by raising commercial banks' statutory reserve requirement and removing the ceilings on bank lending rates and spreads. Following a slump in the first half of 2009, tourism has recovered, driven by a surge in Australian visitor arrivals. According to the RBF, merchandise exports fell by 16.4% in 2009, while imports were down by 22.3%. As a result, the merchandise trade deficit narrowed to F$1.6bn (US$816m), from F$2.1bn in 2008.

  DOMESTIC POLITICS: The prime minister, Commodore Bainimarama, remains an outcast internationally, suspended from both the Commonwealth and the Pacific Islands Forum (PIF, the region's main political grouping). Commodore Bainimarama, who led a military coup in December 2006, has been touring Fiji's provinces and far-flung islands, seeking to get his reformist message across to rural Fijians. Two years ago Commodore Bainimarama launched a People's Charter that promised electoral reform and the creation of a multi-ethnic society. However, the document was heavily criticised by ethnic-Fijian leaders. Since then, he has emerged triumphant from showdowns with traditional chiefs and, in August 2009, with the powerful Methodist Church. In April 2009 the constitution was abrogated and the date for elections was put back to September 2014. Emergency regulations and heavy censorship of the media were implemented and have remained in place. A new media decree was passed on 28 June 2010 that will impose heavy penalties on journalists who breach a new media code and will restrict foreign ownership of newspapers. It is thought that a local newspaper, the Fiji Times, which is owned by an Australian tycoon, Rupert Murdoch, is a particular target of the new decree. The Fijian government will host a meeting of the Melanesian Spearhead Group (MSG, a subregional group) on July 22nd-23rd, and, unusually, has issued invitations to other countries beyond the other core Melanesian member states of Papua New Guinea, the Solomon Islands and Vanuatu (although so far only the Micronesian state of Kiribati has accepted). If other Micronesian states, or the slightly larger Polynesian states, choose to attend, this would challenge the claim of the PIF to be the region's premier political organisation. Unlike the PIF, the MSG, which in 2008 opened its Chinese-built headquarters in Vanuatu's capital, Port Vila, does not include Australia and New Zealand. In the immediate aftermath of the December 2006 coup, Commodore Bainimarama had strong support among Fiji's ethnic-Indian population, which comprises 37% of the population, but little backing among ethnic Fijians, who make up 57% of the population. The ousted government, led by the previous prime minister, an ethnic Fijian, Laisenia Qarase, was much despised by the Fijian Indians, which explains their sympathy for the military takeover. The FLP, which obtained over 80% of Indian votes at the last election in May 2006, at first backed Commodore Bainimarama's interim government. A month after the coup, the then FLP leader, Mahendra Chaudhry, joined the interim government and accepted the finance portfolio, but in August 2008 he fell out with the Military Council and was encouraged to resign. Since then, the FLP has become increasingly critical of Commodore Bainimarama and his government. Commodore Bainimarama has sought to destroy the influence of Mr Qarase and, since 2008, Mr Chaudhry. He is also aiming to undermine the FLP's support base in the sugar industry and among the cane farmers' unions. In January 2010 the government removed the automatic deduction of dues for Mr Chaudhry's NFU. In April the government appointed a new unelected body to replace the Fiji Sugar Cane Growers Council, an industry consultative body that had previously been dominated by elected NFU representatives. In May the NFU was forbidden from holding its annual general meeting. In June the FLP ridiculed Commodore Bainimarama's claims that all was well in Fiji, insisting that poverty had soared to include 45% of the population, the Fiji Sugar Corporation (FSC) was insolvent and the post-coup regime was "the most oppressive and draconian the people of Fiji have ever experienced". The party called for a national referendum on the government's decision to delay elections until 2014.

  INTERNATIONAL RELATIONS: International donors, led by Australia and New Zealand, will continue to exert economic and diplomatic pressure on the government until an election is held. In May 2009 Fiji became the first country to be suspended from the 16-member PIF, after Commodore Bainimarama ruled out an election before the end of that year. In September 2009 Fiji was also expelled from the 53-member Commonwealth. Some aid has been withheld, and travel bans are in place against military personnel and those who have accepted appointments under the regime. The EU has withheld funds intended to facilitate the restructuring of Fiji's sugar industry as it adjusts to the ending of European price subsidies. In March 2010 the EU suspended for six months further development assistance worth about €30m (US$40m) and subsidies to cane farmers for that year worth around €115m. Aid due to be disbursed in 2008 and 2009 was cancelled. So far, however, there has been little sign that the pressure is paying off.

  POLICY TRENDS: The 2009 economic recession hit tax revenue. Nevertheless, severe cuts to recurrent expenditure and delays in capital spending kept the budget deficit reasonably narrow in 2009, although the IMF views some of those spending cuts as "not sustainable". The 2009 deficit stood at the equivalent of around 3% of GDP and the government's 2010 budget forecasts a deficit of 3.5% of GDP. Deficit financing continues to depend largely on the country's state-owned pension provider, the Fiji National Provident Fund (FNPF). Worryingly, central government debt is expected to have reached 53% of GDP by the end of 2009, although 87% of this is domestically financed. In mid-June 2010 the government announced a review of the 2010 budget on the grounds that two cyclones in the early part of the year necessitated unforeseen reconstruction projects. The additional expenditure is expected at F$30m (US$15m). Further difficulties are also on the horizon. The governor of the RBF, Sada Reddy, acknowledged in June that Fiji will have difficulty in repaying a US$150m commercial loan that falls due in 2011. In May the RBF tightened liquidity by lifting the reserve requirement of commercial banks to 5­7% of deposits and removing the ceilings on bank lending rates and spreads, which will allow rates to drift upwards. An IMF team, including the Fund's managing director, Dominique Strauss-Kahn, visited Fiji in April, after the government expressed interest in a US$500m loan, but no agreement has yet been announced. The IMF board's report on Article IV consultations, which was issued in May, expressed concern at the high level of central government debt and liabilities to the state-owned enterprises, and warned of the inflationary dangers of financing by the RBF. The report also recommended a shift to a more flexible exchange-rate regime, through widening the permitted fluctuations around the Fiji dollar's current peg against the currencies of major trading partners. The government says that it wants an IMF loan to fund its reform programme, which includes changes t0 land leasing arrangements (which would be enacted on the advice of the World Bank), revisions to the administration of the FNPF and a downsizing of the civil service (which would be performed on the advice of the Asian Development Bank, ADB).

  ECONOMIC GROWTH: Fiji's economy shrank by an estimated 2.5% in 2009. The ADB expects a further decline of 0.5% in 2010, while the IMF predicts growth of 2% owing to an improvement in the tourism industry, rebuilding in the wake of cyclone-induced floods in early 2010 and as a result of a broader global economic recovery. Following a slump in the first two quarters of 2009, which was also experienced by other resort-rich Pacific island countries, visitor arrivals recovered strongly from the middle of the year, driven by a surge in Australian visitor arrivals, but the Fijian tourism industry has remained in difficulty. Post-cyclone reconstruction has not traditionally been a strong driver of Fijian GDP growth. Aside from tourism, Fiji's key industries are poorly positioned to take advantage of a global economic recovery. The traditional mainstay of the local economy since the 19th century, the sugar industry, is in major trouble, partly for reasons beyond domestic control. The industry has long been protected by artificially high prices paid by the EU for sugar delivered to a UK company, Tate & Lyle. However, World Trade Organisation rules have required the EU to phase out its price subsidies, and EU assistance to Fiji to facilitate the transition to world market prices has been cancelled as a result of the 2006 coup. Prices have fallen by 36% since 2006, but planning for that adjustment has been poor. Restructuring at Fiji's four sugar cane mills (at Lautoka, Ba and Rakiraki on the main island of Viti Levu and at Labasa on Vanua Levu) was facilitated by an F$86m (US$43m) loan from India, but the newly procured equipment has proved incompatible with existing machinery, leading to a big fall in the rate of mill conversion of cane to sugar and a 19.4% decline in sugar output in 2009. The state-owned FSC has continued to borrow domestically from the FNPF, commercial banks and, controversially, from the RBF. In June 2010 Mr Reddy acknowledged that the FSC's position was "dire to say the least". The IMF has advised the closure of non-viable mills, and the privatisation of the remaining viable mills. Other sectors of Fiji's economy are unlikely to drive strong GDP growth. The gold mining industry, centred on the Vatukoula mine on Viti Levu, performed poorly in most of 2009, but began to recover by the end of that year. The RBF has reported a strong performance in early 2010, with 10,000 oz produced in the first two months of the year. However, there are now only around 750 employees at the mine, one-third of the level employed prior to a brief closure at the mine in 2006-07. Fish exports have remained reasonably strong, partly owing to closure of a cannery in American Samoa. The garments industry has contracted sharply since the 2006 coup, and bottled mineral water—which was previously a significant growth industry—has faltered due to negative publicity in the US market.

  INFLATION: Although price pressures receded at the start of 2009, inflation accelerated again following the 20% devaluation of the Fiji dollar in April 2009, reaching 10.5% year-on-year in April 2010. The RBF expects inflation to slow to 2% year-on-year by end-2010, but concedes that the risks to its forecast are on the upside. The Economist Intelligence Unit expects consumer prices to rise by an average of 6.1% in 2010.

  EXCHANGE RATES: The Fiji dollar will remain under pressure. On April 15th 2009, in response to significant pressure on the external accounts that led to foreign-exchange reserves falling to the equivalent of less than two months of imports, the RBF imposed capital controls and devalued the Fiji dollar by 20%. The RBF removed capital controls on January 1st 2010, as foreign-exchange reserves had begun to recover following the IMF's decision in August 2009 to approve a general allocation of special drawing rights (SDRs) equivalent to US$250bn in response to the global recession, of which Fiji's SDR allocation was equivalent to around US$95m. However, the wide current-account deficit will continue to weigh down on the exchange rate.

  EXTERNAL ACCOUNT: According to the RBF, merchandise exports fell by 16.4% in 2009, while imports were down by 22.3%. As a result, the merchandise trade deficit narrowed by 26% from its level in 2008. A structural current-account deficit equivalent to around 18% of GDP has emerged in the past decade, aggravated in recent years by a deterioration in the terms of trade, as EU prices for Fiji sugar have fallen and oil prices have risen. The foreign-reserves position has improved in the past year, mainly owing to a recovery in remittances from overseas workers, the repatriation of foreign assets owned by the FNPF, and an IMF allocation of SDRs equivalent to F$188m (US$94m) in third quarter of 2009.

  July 01, 2010

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