for creating synergy effects. but let me also emphasise how much we appreciate the support of our external research professors. they are professor jorg breitung of bonn and professor harald uhlig of berlin. we have already benefited a lot from their advise and hope for further fruitful collaboration. and we also benefit from our research council which follows our work with a critical eye and makes valuable recommendations. among the members of the research council are jurgen von hagen, martin hellwig and manfred j m neumann. both peter kugler and axel weber have now left the council. peter kugler ’ s successor is professor jurgen wolters of berlin. and our president has been succeeded on the research council by charles goodhart. given this council membership i am sure you will agree with me when i end by saying that research really matters at the bundesbank. against this background, i am very pleased to welcome you to this workshop on dynamic stochastic general equilibrium models and the financial sector. the workshop is being hosted by our economic research centre together with economists from the technical university of darmstadt.

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 o raising investment 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 ) o balance of payments ( bop ) support – bio - fuel, import substitution ( increase in tariffs ), enticing fiji diaspora o investment – infrastructure development, tax incentives monetary measures o bop – credit ceiling, exchange controls o investment – low interest rates, special approvals for priority sector lending • 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.