Update on Global Financial, Economic and Health Crisis
Impact and Response

Ladies and Gentlemen, Good afternoon

1.0 Impact on Fiji (Indirect Effects)
 
 Demand for Fiji Exports Abroad
1.1 As foreign economies experience decreases in domestic demand  for both domestically produced and imported goods, Fiji is faced with a decline in its export volumes.

1.2 As a result, this has affected our economic growth as major export sectors are affected through reductions in export earnings resulting from the reduced demand, particularly in the forestry and unusual water sectors.   Although, there has been a decline in exports, Fiji is also experiencing a decline in imports as well due to the slowing demand.

1.3 For our mineral water exports, demand has already declined in US as a result of the economic slow down and other contributing factors such as an environmental backlash against plastic bottles, and competition.

1.4 Mineral fuels make up the bulk of our re-exports, heading predominantly to other Pacific Island nations.  Since the peak in price of crude oil in July, the world market price of Brent crude has fallen to less than US$40 and gradually increased to US$60. 

Reduced Foreign Investment Flows
1.5 Our top source countries for investment tended to remain the same over the years and are dominated by the following nations: New Zealand, Australia, USA, Britain and Korea.  These countries have been affected by the fallout from the financial crisis, some more than others.  But what is clear is that in times of uncertainty and economic hardship, investment is sure to decline in domestic markets and this has grave consequences for investment outflows or foreign direct investment abroad. 

1.6 Investment is obviously a critical component to ensure sustainable economic growth.

1.7 Furthermore, recent building and construction data from the Bureau of Statistics show that activity is this sector is on a downward trend, in particular for new buildings (there has been a marginal pickup in activity on additions).  Further the building materials index shows costs have increased substantially.  The fact that most goods captured in this index are imported, increasing world prices has had a negative impact on this sector domestically.  However, with a forecast slowdown in economic growth, the demand for these materials and the materials used to manufacture them should fall and this may result in a decline in price.

Decline in Overseas Remittances
1.8 With economic growth set to decline in many of the countries where Fiji citizens choose to emigrate to (as well as the associated macroeconomic changes such as rising unemployment and reductions in production), this is likely to have a negative impact on overseas remittance inflows.  People who would normally send money back to Fiji may find that they have less disposable income available to them and thus less money to send to family, friends or relatives still in Fiji. The tlevel of remittance has declined by a third compared to the last couple of years.

Effect on Visitor Arrivals
1.9 Much of our growth forecasted lies with continued positive performance from our tourism industry, and unfortunately has been affected by economic declines in source markets.

Impact Via Exchange Rate
1.10 Over the years, Fiji’s currency has appreciated.

1.11 The appreciated Fiji dollar exerted pressures that impact the Balance of Payments (as imports became cheaper).  Fiji, as a result had to depreciate its currency.

 Impact on Government Budget
1.12 The two crucial components of the budget that are directly affected are: i) worsening of government’s debt position and ii) the reductions in level of revenue collection.

1.13 Fiji’s external debt servicing requirements have increased as a result of the currency devaluation.

1.14 Government’s ability to collect its revenue (tax and non-tax) is directly related to the level of economic activities generated in a given period. Decline in economic growth has adversely affected government’s revenue.

2.0 Current Policy  Measures

Devaluation of the currency
2.1 The recent monetary measure undertaken by the Government to devalue the Fijian dollar by 20 percent is expected to have positive impact on the economy in terms of production and exports. It is anticipated that through devaluation Fiji’s trade balance will improve by discouraging imports and increasing exports as Fiji’s exports become relatively less expensive in the international market.

2.2 It is also expected that devaluation will lead to an increase in visitor arrival as Fiji becomes more competitively priced against other destinations  this will have a impact on the Retail Sales and Hotels and Restaurants sectors, as well as on the  Transport and Communication Sector.  An increase in tourism activities will have added benefits on the economy with increase in employment opportunities.
 
2.3 Foreign reserves position has improved further as imports are discouraged as a result of increase in import value and exports being more favorable to the foreign market. 

2.4 Devaluation is expected to have improvements in government revenue collection in terms of hotel turnover tax and departures through expected increase in visitor arrivals and duty through increase exports. While it is expected to have a negative impact on the external debt as more Fiji dollar will be required to repay loans in foreign currency.

Interest Rate
2.5 Banks and other financial institutions have declined and thus a more conducive interest rate environment. 

Foreign Exchange and Reserves
2.6 The Reserve Bank of Fiji (RBF) had implemented policies for commercial banks and lending institutions to review lending to sectors that imports high end luxury items which tie up valuable foreign exchange to preserve the country’s foreign exchange.

2.7 Furthermore, to protect the country’s foreign reserve situation the RBF has undertaken the tightening of exchange controls and suspended offshore investment facilities for local non-banking financial institutions, companies and individuals as part of its measures to protect the country’s foreign reserves situation.

Reduction in Tax
2.8 The Government had under the 2009 Budget taken initiative to reduce the company tax rate from 31 percent to 29 percent for 2009 and 28 percent for 2010.

2.9  It has also introduced 10 year tax holiday to new companies undertaking agricultural farming and agro-processing and tax exemption for a term of ten years for companies that are involved in processing agricultural commodities into bio- fuels.

2.10 To encourage investments and create employment opportunities, the Government has established economically depressed region as Tax Free from 1st January 2009 to encourage investments and create employment opportunities and provided tourism incentive package such as import duty concession for capital goods not available locally to boost investments in the sector.
 
 Government Support 
2.11 The Government has allocated significant resources for domestic production of food and $2.0million for Export Promotion Programme in 2009 for agricultural projects.

2.12 In conjunction with the rising food prices, Government has taken initiative to implement policies to assist the poor through exempting VAT on essential food items.

Expenditure Control
2.13 Efforts are being made by government to reduce operating costs such that capital expenditure projects could be financed.  This has become necessary as a result of the current debt position and declining revenues.

3.0 Policy Options

 Fiscal Policy  
3.1 While Governments of the countries that have been directly affected by the financial crisis have intervened significantly in the market and are promising to increase government expenditure to stave off the impending global recession – this may not be the correct course of action for the region, and more specifically for Fiji at this point in time.

3.2 Government should continue to exercise fiscal discipline and its aim to restrict the budget deficit to 2%.  However some fiscal space should be allowed in order to respond to any downturn in economic growth or further external shocks

3.3 Efforts should be focused on ‘trimming’ low priority expenditure and improving revenue collections, much of which is being carried out at the moment.  In this way the Government’s fiscal policy will be protected, but allow resources to be re-allocated should the need arise.

Monetary Policy
3.4 With the decline in world economic growth having been forecast, and to some extent beginning to be felt already, inflationary pressures are likely to reduce as well.  As a result there would be some justification for the gradual easing of tight monetary policy. 

3.5 However, with the protection of the foreign reserves position of the economy being one of the two objectives of monetary policy, prudence should still be shown. 

Banking Surveillance
3.6 As mentioned earlier, the banking system should remain relatively well isolated from the direct effects of the financial crisis.  However, banks may be affected indirectly through possible reductions in liquidity and a deterioration in loan quality as economic growth slows.

3.7 Local regulators and financial supervisors backed up by offshore supervision of the overseas banks that have set up operation in Fiji, should maintain close contact with the region’s financial institutions as the situation develops.

Structural Reform
3.8 While fiscal discipline is necessary, efforts should be focused on continuing on a programme of structural reform.  This is one means of lessening the downside risks that the global slowdown may cause.  Within this rather vague heading of structural reform, the priority should be to address constraints to private sector-led economic growth.  While the Government has shown commitment to this issue, the current global situation provides an added impetus to this objective.

3.9 Food and crude oil prices have reduced and were continuing to do so since the peaks in world prices that were experienced in the first half of 2008.  However, prices are projected to increase in Fiji  as devaluation will result in Fiji paying more for its imports  Therefore, it is necessary that efforts are put in place to reduce importation of luxury goods and domestic production to be encouraged to provide any substitute for imported food in particular in the Agriculture Sector.     

3.10 As a result, increasing rural productivity given our agricultural based economy will improve local livelihoods in the face of the rising cost of living, but will also aid in providing much needed stimulus to our agricultural export sector.  This means focusing on improving transport and communication links and crucially, extension services.  A commercial mindset needs to be promoted too as this would automatically provide the incentive to become more productive.

3.11 In terms of tourism, further efforts should be placed on reducing the cost of transport and communication, as well as focusing on human resource development, particularly in areas that are in short supply within the industry.  All in all, this would provide a higher enabling environment for greater private investment.

3.12 In order to achieve the above, public sector reforms need to be fast-tracked so that the focus can be placed on Government’s core activities and ultimately result in the freeing up of budget resources.

4.0 Conclusion

4.1 The implications of the US sub-prime crisis has led to the near-collapse of financial systems in a number of developed economies, investors have lost confidence in markets, inter-bank lending is at an all time low and neither parties seem to be reacting to the unprecedented Government intervention in the market.  Economies are being pushed into recession and the forecast for world economic growth has been revised downwards continuously.

4.2 The inter-dependency between financial systems has led to a global financial crisis; Thus Fiji is no exception with its currency pegged to its major trading partners. The devaluation of the Fiji currency is expected to reduce the decline in exports as the Fiji currency had appreciated in the past months making it unfavorable to import from Fiji.  

4.3 In terms of appropriate policy response, focus should be placed on consolidating the fiscal position in terms of limiting unnecessary expenditure and maximizing revenue collections.  Structural reform efforts should be continued and even fast-tracked; domestic productivity needs to be increased in order to secure the livelihoods of Fiji citizens should Fiji be affected by an economic downturn.

 

National Planning Office
23 July 2009