October 19, 2007

Wrong Govt polices worsens recession

Thursday October 18, 2007

An academic says that wrong polices adopted by Fiji’s Finance Ministry and the Central Bank in the wake of the 2006 coup has worsened the recession in the country.

Professor Ron Duncan, executive director, Pacific Institute of Advanced Studies in Development and Governance at the University of the South Pacific in Suva says that essentially, the major shock to the economy from the (December 5) coup was the adverse impact of the foreign travel advisories on the tourism industry.

“So we had an economy suffering a major external shock and consequently a recession.

“The policies adopted by the MOF and the Central Bank only served to make the recession worse than it needs to have been.”

Professor Duncan noted that stringent capital controls were put in place by the Central Bank, fearing capital flight.

But he pointed out that the 2006 coup was different from the 2000 government takeover, which threatened the business sector.

“The 2006 coup did not have the same impact on the business sector. There should not have been the same worry about capital flight.”

He notes that the Central Bank has since eased the stringent capital controls, under pressure from business.

“But I think that it still doesn't really understand the nature of the crisis.”

Professor Duncan says the bank reports that its policies are successful because imports are declining. “But here we have an economy in recession. It is only natural that imports will decline.”

He says the main reason for the bank's focus on capital controls was to prevent a further run-down in foreign reserves, which would force a devaluation.

But he pointed out that Professor Satish Chand (of the Australian National University) had estimated that the Fiji dollar was over-valued by 12 percent or more following the coup.

“The bank resisted devaluation. It is too late now to devalue as an adjustment of the economy had to be made in some form, and if the adjustment was not allowed to take place through the exchange rate then it had to take place somewhere else.

“The most likely place where the adjustment has taken place is in the loss of jobs.”

According to him, one of the Bank's arguments for resisting devaluation is that it will not lead to increased exports because Fiji's exports are "supply constrained".

He says this is true for agricultural exports.

“But Fiji's main export is tourism and devaluation of the Fiji dollar would have had a positive impact on tourism, which is not subject to the domestic supply constraints the Bank is properly concerned about.”

He says that prior to December 2006, the Fiji economy was showing symptoms of an increasing current account deficit and pressure on foreign reserves.

But, he says these were symptoms largely of the political impasse over agricultural land tenure and issues scaring foreign investors such as the law and order problem and the proposed Qoliqoli legislation.

“It was an economy supported by tourism and remittances but suffering from the shock of the loss of exports and employment in the garment industry.

“The Fiji economy was not what I would call an unstable economy. But it was one certainly in need of better management.”

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