times of crisis. this has been the case with the current financial crisis where exceptional demand for the us dollar has strengthened the currency while weakening other currencies. in this regard, the fiji dollar is expected to weaken against the us dollar. the appreciation of the usd will augur well for exports to the us or goods priced in usd. however, this will be offset by the losses from the australian and new zealand dollars, both of which have weakened against the fiji dollar. while it is not clear where the trading partner currencies are headed, there is a general agreement that the us dollar will continue to strengthen against the major currencies. in addition, our external competitiveness could be affected by competition from asian economies, as they normally keep an undervalued exchange rate to boost their exports and services ( e. g. tourism ) sectors. • exchange rates : compared to the beginning of the year, the fiji dollar strengthened against the australian and nz dollars by around 12 and 13 percent, respectively. however, the fiji dollar fell against the us dollar and euro by 13 and 2 percent, respectively. • impact on economic growth : the risk to the fiji economy from the financial crisis is on the downside. this can be largely attributed to the expected negative effects emanating from the trade and financial channel. that is, if exports of mineral water, fish, garments, textiles & footwear and other domestic exports ( like agro - based produce ) potentially decline then this will naturally feed into lower production in these sectors. in addition, any slowdown in tourism would impact the wholesale & retail trade, hotels and restaurants sectors, as well as, the air transport and services allied to transport sectors adversely. furthermore, a reduction in remittances flows could suppress consumption expenditure. similarly, lower financial flows ( especially, fdi ) could lead to a decline in investment, especially in the building & construction sector. thus, domestic demand may be affected as a result of the global financial crisis. it is likely that the financial crisis will erode fiji ’ s growth prospects somewhat. • impact on fiji ’ s monetary policy objectives : in terms of the monetary policy objectives, the global slowdown will ease inflationary pressures. although there is some appreciation in the us dollar, oil prices have dropped more sharply. on a net basis, this is expected to ease inflationary pressures from oil. in contrast, it is likely that pressures on foreign reserves ( the underlying position of the balance of

8 3. 0 4. 3 2009 ( f ) 2. 1 1. 3 - 0. 7 - 0. 5 - 0. 2 8. 5 6. 3 2. 4 3. 8 source : * imf world economic outlook – nov - 08 ; consensus forecast & asia pacific consensus forecast – oct08 impact of the financial crisis on fiji ’ s economy • fiji ’ s financial sector : overall, fiji ’ s financial sector is quite insulated from the financial markets abroad and the banking, insurance and other financial institutions remains sound. the crisis is affecting the financial institutions in foreign countries on two fronts – ( 1 ) financial institution ’ s ability to lend due to the liquidity shortage ; and ( 2 ) confidence in the financial sector. in case of fiji, both of these prominent features are absent since – ( 1 ) our banking system is flush with liquidity ; and ( 2 ) our banking institutions are sound and prudent in their management of funds, thus it provides the confidence for the depositors. regular updates and assurances by the reserve bank of fiji to this effect play a key role in maintaining confidence in fiji ’ s financial system. moreover, unlike the foreign banking system, the domestic financial system is financed from local depositors and credit is extended to domestic entities – in this respect, fiji is immune from the global financial crisis. the insurance industry is relatively sheltered from the effects of the financial crisis. • macroeconomic impact : fiji, being a small open economy in the world, is heavily dependent on its major trading partners for trade and financial flows. currently, the us, uk japan and eurozone are directly exposed to the financial crisis, which will have significant implication for other major economies around the world. in addition, the possibility of a recession in the us, uk, japan and eurozone, will definitely have repercussions for our other major trading partner countries ( australia and new zealand ) given the strong trade and financial links with these mature economies. the effects of the financial crisis could indirectly trickle down to the fijian economy transmitted via the possibility of economic downturn in trading partner economies which could lower demand for exports and reduced financial flows from the major trading partner economies. overall, the potential risks to fiji ’ s macro - economy from the financial crisis are on the downside. • impact on exports : exports may be affected selectively. demand for fish, mineral water and garments, textiles & footwear may ease somewhat as a result of the slowdown