On November 4, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Fiji.¹

Growth in the Fijian economy increased to 2¼ percent in 2012, supported by income tax cuts, low interest rates and the one-time payouts under the Fiji National Provident Fund (FNPF) reform, which offset the negative impact of the severe floods and Cyclone Evan on the agriculture and tourist sectors. Inflation declined as imported commodity and food prices moderated. With a lower-than-budgeted deficit of 1 percent of GDP, Fiji’s debt-to-GDP ratio continued to decline in 2012. The financial sector is stable and international reserves have stabilized to a comfortable level. However, unemployment remains stubbornly high at nearly 9 percent, with youth unemployment and underemployment at significantly higher rates. Emigration pressures continue especially among the higher skilled. Economic growth is set to increase to around 3 percent in 2013. The latest available indicators suggest accelerating growth momentum in the first half of 2013 boosted by increases in disposable income, bank borrowing, and rising investment. These effects are likely to taper off somewhat in the latter part of 2013. In 2014, growth is projected to moderate to 2¼ percent.

The current macroeconomic policies are broadly appropriate. Fiji’s fiscal policy continues to balance the need to strengthen the fiscal position against the need to increase public investment to support growth. The 2013 deficit target of 2.8 percent of GDP is on track to be met, with strong VAT revenue collections and somewhat slower-than-planned expenditures in the first half of 2013. In view of muted inflationary pressures, the accommodative stance of monetary policy is appropriate.

The authorities have recently accelerated structural reforms—including in the areas of land policy, the sugarcane sector, the civil service, public enterprises, and pensions—but key policy challenges remain to sustainably raise economic growth, reduce poverty, and increase resilience to shocks. To achieve higher growth and reduce unemployment, faster and deeper structural reform is now urgently needed. It is particularly important to expand Fiji’s capacity to utilize effectively an expected increase in foreign and domestic investment following a successful transition to democratic parliamentary government in 2014.

Executive Board Assessment²

Executive Directors welcomed Fiji’s improved macroeconomic situation and viewed the current configuration of policies as broadly appropriate. Directors encouraged the authorities to use the present stable environment to accelerate the pace of structural reforms in order to support sustainable, higher and broad-based growth and to reduce vulnerability to shocks.

Directors observed that fiscal policy is rightly balancing the need to strengthen the fiscal position against the need to increase growth-enhancing public investment. They welcomed the authorities’ plan to reduce fiscal deficits, while increasing capital spending to clear infrastructure backlogs. While recent income tax cuts are growth friendly, Directors stressed the need to broaden the tax base and to manage current expenditures to create space for capital investment, lower public debt, and build buffers against external shocks. They welcomed the reform of the Fiji National Provident Fund, while noting that potential risks arising from the option of lump sum payment would need to be managed carefully.

Directors saw the accommodative monetary policy as appropriate in view of low inflation and high unemployment. They welcomed the overall soundness of the financial sector and the rebound of credit growth from low levels but called for enhanced monitoring of sectors with rapid credit growth. In the event inflationary pressures emerge, Directors advised using open market operations to reduce excess liquidity and, if needed, tighten policy rates. Directors welcomed the initiatives for financial inclusion.

Directors noted the continued gradual appreciation of the real exchange rate and called for periodic reviews and adjustment if necessary, of the level of the peg to avoid abrupt step devaluations. Most Directors also saw merit in more flexible exchange arrangements. Directors encouraged the authorities to eliminate remaining exchange restrictions and to continue to strengthen the Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) regime.

Directors welcomed the recent progress in structural reforms. However, to raise Fiji’s potential growth, reduce its vulnerability to shocks, and alleviate poverty they saw a need for deeper and faster reforms. Priority should be given to improving the investment climate by streamlining government regulations, relaxing price controls while protecting the most vulnerable, increasing the efficiency of land use, and upgrading the infrastructure. Efforts are also needed to increase the energy supply and ensure the viability of the sugarcane industry. Directors called for improvement in data quality.