control inflation extremely well. lower prices of domestically produced goods and services are also suppressing consumer prices. however, in the next year, inflation could rise as the effects of oil prices work its way through the entire economy. we are projecting inflation to rise to 4 percent next year. this again depends on where the oil price goes from here. thirdly, in the medium term the higher fuel costs will ultimately dampen spending and lead to lower economic growth. oil price the rise in crude oil prices has come at bad time for fiji when our exports are falling ; imports are rising ; and economic growth declining. our immediate concern is its impact on our external position. clearly, we cannot do anything about the level of oil prices in the world. what we can influence is our response to it. we must avoid the cyclical impact of this inflation back to wages. we must continue the search for alternative sources of energy, we must conserve the use of fuel and also exports more to pay for the rise in oil imports. asset price inflation i would like to move on to another topical subject of asset prices. in the last four years, we have seen significant movement in property values. anecdotal evidence suggests that prices of residential properties in some centres have almost doubled since 2000. our assessment, at this stage, is that demand in the property market is expected to remain buoyant. we can understand some of the underlining factors behind this trend like the growth in incomes, improvement in labour market situation as well as lower interest rates and competitive loan conditions. but we are concerned about the quantum of the price increases that appear to be well in excess to the real rate of growth in incomes or even expected future incomes. it implies that speculative elements may be at work. if asset price bubble continues to be artificially inflated, they not only take the affordability of owning a house out of the reach of many of our citizens, they potentially can lead to unsustainable debt levels particularly if incomes drop with flow on effects to the quality of loans of financial institutions. the reserve bank is monitoring the situation closely. productivity let me briefly raise the topic of productivity. a major challenge for fiji, in assessing labour productivity, has been the lack of consistent and timely data. additionally, no national benchmark for productivity at corporate level exists. however, we estimate that productivity growth in the country at the aggregate level has averaged around 1 percent over the last 10 years, on the assumption that the capital to labour ratio

worked very well and the economy has been driven largely by domestic demand in the last four years. simply put, people, government and corporations are spending more. this spending comes largely in two parts consumption and investment. both these are buoyant and are helping to move the economy along. consumption spending let me talk first about consumption spending. the buoyancy in consumer spending is clearly reflected in the growth in the wholesale and retail sector, buoyant vat receipts and strong pick up in credit. while consumption helps growth in the year that it is spent, its impact does not last beyond that. in fact, for an economy like fiji, consuming more also means more imports and over time this can lead to balance of payments problems if we cannot sell enough exports. after four years of high consumer spending, this is exactly what we are facing now. our imports are rising while sadly our exports are not keeping up. as i explained, sugar, gold, agriculture and garments are struggling. exports in the last three years have declined in absolute terms. we forecast exports to increase only by 3 percent in the next three years. meanwhile imports are rising by an average of 6 percent annually. the trade deficit is therefore widening. something will have to close the gap very soon. the solution is therefore obvious. we must sell more exports. a modest target of 10 percent growth in our domestic exports per year for the next five years should help. and we can easily meet this target if we accelerate the sugar reform, lift the productivity of our agricultural exports and grow the new industries. financing of consumption one may ask where is the funding of this strong consumer spending coming from. well, from four major sources. firstly, wages and salaries, secondly, credit or borrowing, thirdly, fiji national provident fund withdrawals and lastly from remittances. withdrawals from fnpf are running at around $ 16 million a month. remittances let me elaborate on the remittances. personal remittances have become a prominent source of foreign exchange for fiji. personal remittances have surged to $ 300 million in 2004, compared to a mere $ 50 million five years ago. remittances are now equivalent to 7 percent of gdp and that is more than many of our traditional economic sectors. they have also displaced garments and sugar on their rise to become the second largest source of foreign exchange earnings for fiji. furthermore, 4 / 8 we are only capturing remittances that