Savenaca Narube: Overview of Fiji’s economy Summary of a presentation by Mr Savenaca Narube, Governor of the Reserve Bank of Fiji, to the 19th Australia Fiji Business Forum on The Fiji Economy, Sunshine Coast, Australia, 9 October 2006. * * * 1. Economic performance • Economic growth has averaged around 2.4 percent over the past 5 years and is expected to average around 2.7 percent in the next 3 years. • Investment performance has increased since 2001, with the momentum coming from the private sector. 2. What are our key challenges? • Challenge 1: Underperforming resource based sectors • o Gold production has performed poorly in spite of favourable international prices recorded in recent years o Forestry showing signs of recovery in the medium term o Fisheries sector has shown some growth but is still below potential o Mitigating factors: A company restructure is underway at the Vatukoula gold mine Incentives are being offered by Government for investment in agricultural production Greater public-private partnership is being encouraged Government is looking at ways to improve market access for these sectors Value adding initiatives are also being promoted Challenge 2: Sugar o Sugar production is far below its potential with sugar exports performing poorly when compared to previous years o Preferential pricing is gradually being withdrawn: o o 60 percent of Fiji’s sugar is exported to the EU market EU preferential price will undergo a 36 percent reduction over a period of 4 years, beginning in 2006 Expiring land leases also pose a challenge for the sector: Around 2,800 farm leases will expire by 2008 About 10,300 farm leases will be expiring over the next 25 years Mitigating factors: Sugar reforms are underway with support from the Indian Government ADB support through the Alternative Livelihoods Programme is ensuring that those displaced by the reforms have assistance EU support has also been promised • • The multi-party system will facilitate the passage of land tenure legislation through Parliament Diversification within the industry to produce ethanol is also being considered Challenge 3: Debt o Increasing Government debt is becoming an issue of sustainability o While, the higher fiscal deficits in the past worked well to raise economic growth, we now need to relook at our strategy to secure sustainability o Mitigating factors: Strategic Development Plan 2007-2011 has a strong commitment to lower deficits to around 2 percent in any year of the SDP plan period This is expected to help bring the level of Government debt down to 49 percent of GDP by 2009 Challenge 4: Balance of payments o Strong demand is leading to an increase in imports o Unfortunately, this is happening at a time when our exports are performing poorly o This is unsustainable given that it is leading to a widening trade gap o While a surplus from the services and transfers accounts are growing, the surplus generated is still insufficient to offset the trade gap o As a result, our current account imbalance is worsening, thus placing pressure on Fiji’s balance of payments o Mitigating factors: RBF has raised interest rates to quell the surge in consumption driven demand Fiscal consolidation plans is a part of the SDP commitment This means that there will be greater policy coordination between monetary and fiscal policy Government has successfully conducted an international bond issue National Exports Strategy has been developed in order to raise Fiji’s exports Alternative sources of energy are being pursued to reduce our dependence on fuel imports Import substitution is being considered for relevant and viable areas 3. What are our key strengths? • Strength 1: Low external debt o Government external debt has been on a declining trend since 1999 and was around 3.6 percent of GDP or 6.8 percent of total Government debt by 2005 o This declining trend in external debt has also led to lower debt servicing commitments over the years with debt servicing ratio at 0.5 percent o International bond issue by Government: • • • This was to finance government capital projects and avoid crowding out the private sector at a time when liquidity conditions are tight With very low external debt, there is much room for government to diversify its sources of borrowing externally Requirement of US$150 million Fiji received a Ba2 rating by Moodys and a BB rating by Standard & Poors – reflecting a stable outlook for the Fiji economy Results: 5 year tenure; initial price guidance of 7.25 percent was announced; 10 times oversubscribed (US$1.4 billion); finally priced with a coupon rate of 6.875 percent to yield 7.000 percent This very successful debut bond issue reflects confidence in the Fiji economy Strength 2: Low inflation o Inflation in Fiji has been low, averaging around 3 percent over the last 10 years o Reasons for low inflation: Fiji has a fixed exchange rate that serves as an anchor on prices Wage demands are relatively modest Good inflation management is practised by our major trading partners all of whom either explicitly or implicitly target inflation Good supply conditions for local market produce Strength 3: Robust tourism sector o The tourism industry is currently being touted as Fiji’s flagship industry, with future prospects looking very bright o Fiji has been able to attract significant investment through this industry from major international hotel name brands o Other supporting factors for this growing sector are: o • Increases in airline seat capacity with Air Pacific Introduction of low cost carriers Development of new markets This industry has also spurred growth in other sectors like the wholesale and retail trade and building and construction Strength 4: Strong and stable financial system o Independent central bank o Sound financial system o Favourable report from the Financial Sector Assessment Programme conducted by the World Bank/IMF o Financial Intelligence Unit has been set up o Development of a Real Time Gross Settlement System Strength 5: Sustainable political stability o 2 elections since 2000 and both were declared free and fair by international observers o Formation of a multi party cabinet o Strong investor and consumer confidence o Affirmative action policies are addressing the needs and concerns of the marginalised and disadvantaged o Clarification of the role of the military