Savenaca Narube: The Fiji economy - facing the global crisis
Summary of an address by Mr Savenaca Narube, Governor of the Reserve Bank of Fiji, to
the Fiji Australia Business Council, Suva, 2 December 2008.
* * *
Global crisis
•
Looking at a snapshot of domestic economic conditions, the economy declined
heavily in 2007 but is recovering this year, albeit at a low growth rate. The trade
deficit is widening and exerting pressure on foreign reserves. Moreover, inflation
rose to a 20-year high but is expected to moderate in 2009. Investment has fallen.
Unemployment is rising and poverty is worsening. Now Fiji faces the global financial
crisis.
•
The IMF has revised world growth successively, down to 3.7 percent this year and is
expecting a global recession, with growth forecast at 2.2 percent in 2009. Of our
trading partners, New Zealand, Japan and the Euro-zone are in recession, while
growth in the US and Australia has slowed considerably.
•
The crisis has resulted in sharp swings in the Fiji dollar vis-à-vis the currencies of
our trading partners. However, the Nominal Effective Exchange Rate remains
stable.
• The financial crisis will affect us through the recession in our major markets and also
in the changes to the exchange rate.
Exposure to trade in goods and services
•
Fiji's commodity exports will be affected insofar as external demand falls. Hence,
demand-driven exports, such as tourism, water and garments are likely to slow
down. Supply-driven exports, while unaffected from the global crisis, are bound by
on-going structural constraints. Overall, there is likely to be a slowdown in the
growth of total exports.
•
Tourism is anticipated to be under threat from the fallout of the global financial crisis.
Visitor arrivals from the US, Europe and Japan are already falling, while New
Zealand tourist arrivals are flat. The Australian market remains resilient and is a key
source of growth. Exchange rate movements, particularly with the Australian and
New Zealand currencies, will further dampen demand.
•
Personal remittances are likely to decline further.
• Overall, imports are expected to rise. The weakening of the Fiji dollar, coupled with
higher duty, is likely to raise the price of cement and cars out of Japan, dampening
demand. On the other hand, the strengthening of the Fiji dollar against the Aussie
and Kiwi dollars will lower food prices received from Australia and New Zealand.
However, demand may be inelastic.
• The trade balance may worsen.
Growth outlook
• After contracting in 2007 (-6.6%), our economy is showing some recovery in 2008
(1.2%). Forecasts for 2009 and 2010 are 2.4 percent and 1.9 percent, respectively.
•
The major drivers of growth are tourism, agriculture, manufacturing, mining and
water, while the major drag, particularly for 2010 and 2011, is the reduction in
Government expenditure, following the fiscal stimulus expected for 2009.
•
These growth rates are too low, compared to our Pacific neighbours and similar
small island developing countries.
Key challenges and policy mix
•
Our key challenges are:
o Safeguarding Fiji's external position
o Raising exports
Raising investment
o
o Raising and sustaining growth
•
Budgetary measures
o Pro-growth (fiscal deficit is 3% of GDP for 2009, support for priority sectors
- tourism, agriculture, ICT)
Balance of Payments (BOP) support - bio-fuel, import substitution
o
(increase in tariffs), enticing Fiji diaspora
o Investment - infrastructure development, tax incentives
•
Monetary measures
o BOP - credit ceiling, exchange controls
Investment - low interest rates, special approvals for priority sector lending
o
•
Government has indicated an expansionary stance for 2009. While a good increase
is noted for capital expenditure, operating expenditure is too high, as a percentage
of GDP. Nevertheless, the deficit is sustainable.
•
On money and credit conditions, commercial banks' lending rate continues to
decline and was around 8 percent in October. Our lending rate is the lowest in the
region. Lending for investment purposes is rising.
•
Monetary policy objectives - year-end inflation are still expected at 7.5 percent but
will moderate next year. Foreign reserves remain under pressure.
Summary
•
Current weak domestic economic fundamentals will be exacerbated by the global
financial crisis. The key challenges must be met with coordinated monetary and
fiscal policies.
•
The current policy mix is appropriate. There is a need to raise growth in the medium
term and the only way to do this sustainably is to raise exports of goods and
services.