Summary:KEY ISSUES Context: Growth in recent decades has been sluggish owing to persistent political turmoil, external shocks, and slow progress on structural reforms. Unemployment at nearly 9 percent continues to be stubbornly high, with youth and underemployment at significantly higher rates. The political environment remains complex as Fiji prepares for transition to democratic government in 2014, although the strained relations with traditional development partners have started to ease somewhat, after the enactment of the new constitution in September 2013. Key issues and policy recommendations: Structural reform. The key policy challenges are to raise potential growth, reduce vulnerability to shocks, and further reduce poverty. Although the authorities have recently implemented some structural measures—improving infrastructure, enhancing land-leasing efficiency, restructuring the sugarcane industry, among others—the need for deeper and faster reform to support higher growth and reduce unemployment and poverty is urgent. The investment climate needs improvement through making government regulations more predictable and less intrusive, including relaxing the extensive price controls. Macroeconomic policies. The current configuration of mildly expansionary fiscal policy and accommodative monetary policy is broadly appropriate as the unemployment rate remains high and inflationary pressures dissipate against the background of some slack in the economy and stable commodities prices. The projected increase in the fiscal deficit is largely due to an increase in capital spending to clear infrastructure backlogs. Recent income tax cuts are growth-friendly but basebroadening measures are needed. The slow appreciation of the real exchange rate has continued and the Fund’s exchange rate assessment approaches now suggest moderate overvaluation. The level of the peg should be subject to periodic reviews and adjusted as necessary, and the authorities could also consider more flexible arrangements.
