Fiji Inflation Risk

by Shalveen Chand

Fiji Times - Monday, May 24, 2010

INCREASED liquidity in Fiji's banking system poses risks of inflation and loss of competitiveness, while high State debt and contingent liabilities, together with 70 per cent of GDP raise concerns about fiscal sustainability, says the International Monetary Fund.

The IMF, in its situation report released last week, said economic growth in Fiji of 2 per cent was likely in 2010, driven by a rebound in tourism, the global recovery, and rebuilding after the floods.

Fiji, however, faces considerable downside risks.

The growth outlook remains highly uncertain. The IMF cited volatility of commodity prices, the risk of natural disasters and the complex structural reform agenda.

The IMF has recommended tighter fiscal policy to safeguard macroeconomic stability and ensure sustainability. A reduction in the budget deficit to about 2 per cent of GDP in 2010 has been suggested. This excludes the cost of civil service reform with further consolidation over the medium-term.

Fiji agreed on the need for medium-term consolidation, but at a gradual pace.

The 2010 budget targets a small increase in the deficit to 3.5 per cent of GDP, with consolidation planned for 2011 and beyond.

The IMF also noted that the public enterprises were a source of significant fiscal risk and to eliminate losses and encourage private investment in these areas, tariffs for all goods and services provided by public enterprises should be raised to full cost recovery levels.

The report said the Fiji Electricity Authority's tariffs, among the lowest in the region, should be raised to reflect the cost of imported fuel and adjusted over time in line with changes in import costs.

Tariff adjustments should be accompanied by well-targeted transfers to protect the poor.

IMF said that a more flexible exchange rate would help absorb external shocks and protect Fiji's reserve position.

The authorities are considering raising tariffs, strengthening oversight of public enterprises, and moving regulatory functions to an independent entity to improve governance.

In a meeting held between IMF and Fiji, it has been 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 authorities are evaluating the possibility of a more flexible exchange rate arrangement. IMF said that a more flexible exchange rate would help absorb external shocks and protect Fiji's reserve position.