savenaca narube : fiji ’ s economic performance and challenges ahead summary of a presentation by mr savenaca narube, governor of the reserve bank of fiji, to the 2006 national economic summit, suva, 28 september 2006. * * * 1. how have we performed • economic growth has been volatile over the past decades. however, there have been pockets of years where sustained high economic growth has been achieved. • when benchmarked against pacific economies and selected asian economies, fiji can do much better • factors that contribute to this lacklustre performance are : o smallness / isolation o natural disasters o loss of preferential access o slow reforms o low productivity and efficiency o slow policy implementation o political instability • nevertheless, investment is growing • however, economic growth in recent years is being driven by consumption causing some imbalances : o strong consumption demand is feeding through to our imports o unfortunately, at the same time our exports have not been performing well, thus widening our trade gap o services account is growing and is providing some relief to these imbalances o however, it is still not enough to counter the increasing current account deficit and overall pressure on the balance of payments account • expansionary fiscal policy has supported economic growth in past years • inflow remains low 2. risks to sustainable growth • fiji faces several risks to sustainable economic growth • risk 1 : political instability • risk 2 : unsustainable debt levels o • this could be a short - term risk if the government reduces its deficit and we undertake reforms risk 3 : stagnating exports and escalating imports is unsustainable o this could also be a short - term risk if we act now to remove the barriers to exports, look for import substitution where relevant and put in place policy measures now to dampen demand 3. what policies are available to reduce these short term risks? • the two major pillars of policy are : • • o fiscal – government o monetary – reserve bank of fiji what has the rbf done? o raised interest rates o tightened liquidity o issued credit guidelines o tightened borrowing limits by non - residents however, monetary policy is not enough because : o heavy reliance on monetary policy will result in further interest rate increases o the full effect of interest rates on demand takes a long time o further interest rate hikes could slow and dampen investment • hence, monetary and fiscal policies must work together and share the burden of sustainability • fiscal policy has a greater influence on the economy :

, especially in periods of heightened uncertainty and perceived structural change. this difficulty is potentially greater the larger the size of the decision - making body is, and particularly if the committee endeavours to forge a consensus on the economic outlook, the balance of risks to the policy objectives and the appropriate course of monetary policy in the future. • a third issue relates to the risk that the markets and the public will not fully understand the conditionality of the announced future policy path on forecasts or assumptions about the future evolution of exogenous variables that will influence the choice of the policy path. the potential problem is likely to be greater given the implicit or explicit assumption about the time invariance of the underlying structural relations. communication of the likely future path of policy rates may be see woodford ( 2005 ). see, for example, mishkin ( 2004 ) ; morris and shin ( 2002 ), and kahn ( 2007 ). there may be periods of greater certainty and perceived stability of the underlying structural model when it is relatively easy to formulate a future policy path. there may also be exceptional situations, such as when the economy faces deflation risks and the policy rate approaches the lower zero bound, when it may be appropriate to provide a clear signal of future policy intentions. but such situations, by their very nature, do not justify the adoption, as a general rule, of a pre - announcement of the future monetary policy stance. for instance, the recent financial market turmoil may result in a reassessment of banks ’ business models – at least by some banks – and may affect their lending practices and the stability of the relationships between policy rates, bank lending rates and credit availability. misinterpreted as a quasi - promise or commitment and could lead to a disorderly adjustment of interest - rate expectations. • fourth, another problem is the potential effect on the central bank ’ s credibility if its communication of future policy rates often deviates from the subsequent actual path of interest rates. in this respect, policy - makers may also be concerned that frequent revisions of a previously announced policy path may weaken the public ’ s confidence in their forecasting ability or in their commitment to follow through. in particular, policy - makers may hesitate to reverse the direction of such a path, e. g. from an accommodative to a restrictive stance and this could lead to the implementation of a policy path that does not take fully into account new, incoming information and is therefore sub - optimal. there are