Fiji faces ‘considerable risks amid growth’

Posted by Pacific in the Media. - May 22, 2010 

Fiji’s GDP is likely to grow 2 percent in 2010 driven by a rebound in tourism and the global recovery but it faces considerable downside risks says a new International Monetary Fund country report.

The report said increased liquidity in the banking system poses risks of inflation and loss of competitiveness while high government debt and contingent liabilities (together 70 percent of GDP) raise concerns about fiscal sustainability.

“The growth outlook remains highly uncertain due to political developments, volatility of commodity prices, the risk of natural disasters, and the complex structural reform agenda,” the report said.

It said the IMF recommended tighter fiscal policy to safeguard macroeconomic stability and ensure sustainability.

A visiting IMF delegation advised a reduction in the budget deficit to about 2 percent of GDP in 2010 – excluding the cost of civil service reform – with further consolidation over the medium-term.

The authorities agreed on the need for medium-term consolidation but at a gradual pace, the report said.

The 2010 budget targets a small increase in the deficit to 3½ percent of GDP with consolidation planned for 2011 and beyond.

The report said the IMF and local authorities agreed that monetary policy should be tightened to ensure inflation returns to low levels and protect foreign exchange reserves.

“The Reserve Bank of Fiji (RBF) recently increased banks’ required reserves and removed ceilings on banks’ lending rates and spreads. The RBF is considering further steps to tighten liquidity, but did not see the need for a substantial increase in interest rates given the fragile economic outlook.”

The report also said that preliminary data on financing shows that as bank lending to government “reached sovereign exposure limits”, the Fiji National Provident Fund provided most of the funding of the fiscal deficit which increased to about 3 percent of GDP in 2009 from near balance in 2008.

Central government debt was expected to rise to 53 percent of GDP by end 2009.

Contingent liabilities arising from “poor performance” of public enterprises were also noted as sizable.

“Net losses of the Fiji Sugar Corporation, Fiji Electricity Authority and Air Pacific amounted to 1 percent of GDP in 2008/09 and entail fiscal risks while central government guarantees of public enterprise debt amount to 15 percent of GDP at end 2008.”