Interim Govt made serious mistake: economist

www.fijilive.com - Tuesday October 23, 2007

The interim Government's policy of insisting on a deficit of two per cent is a serious mistake, says an economist at the University of the South Pacific.

USP Professor and Head of School of Economics, Biman Prasad says the policy is one that will further contract the economy this year and will make it even harder to recover in 2008.

Prasad says it is "not sensible" to reduce spending when all other sectors of the island country's economy are performing poorly.

"If exports are down, if private investment is done, if consumption is down because wages are being cut, unemployment is rising and poverty is increasing, the only option is government spending to keep the economy afloat until other components of the national output begin to show improvement," Prasad told fijilive.

He made the comments when asked on his expectation of the 2008 National Budget, to be announced on November 23 this year.

He says the interim Government policies in the 2007 revised mini-budget in last March will take time to have an effect on the economy and "it is possible that some of the policies put in place by the interim Government could have an impact by next year."

He says the situation this year still looks bleak. Fiji's central bank maintains its forecast of a negative growth of three per cent.

Prasad agrees with commentators like Emeritus Professor of the Australian National University (ANU), Ron Duncan, who says governments should not be driven foolishly to cut deficits and further contract the economy.

"Borrowing in a contractionary period should be considered a sensible policy," he says.

Prasad says the policy adopted with respect to deficit has not worked.

He says if government spending through borrowing is not adopted, Fiji could expect a less than expected recovery in 2008.

"I am hoping the (interim) Minister for Finance (Mahendra Chaudhry) will take the situation into consideration and borrow more in 2008 to, especially, spend on developing infrastructure (if not new) then improving the deteriorating state of infrastructure in the country."

He says spending on infrastructure will send a positive signal to private investors and farmers and could spur investment activities and improve production.

"Increase government spending is also needed to combat increasing levels of crime, cushion the impact of high levels of unemployment through providing relief to those below the poverty line," Prasad says.

He adds these spending are vital to maintaining stability and social cohesion in the community.