- After the sharp contraction due to the Covid-19 pandemic, the economy is experiencing a strong recovery driven by the return of tourism.
- Macroeconomic policies should aim to maintain strong growth while addressing the high public debt and gradually unwinding the accommodative monetary policy. At around 85 percent of GDP, public debt makes Fiji vulnerable to macroeconomic, climate, and other shocks.
- The government's efforts to reduce debt levels should focus on front-loaded revenue measures including VAT reform, supported by income support to the most vulnerable and growth-enhancing structural reforms.
Suva, Fiji: An International Monetary Fund (IMF) team led by Mr. Marshall Mills held discussions with the Fijian authorities and other stakeholders in Suva during March 8 to 22, 2023. At the conclusion of the visit, Mr. Mills issued the following statement:
"Fiji is experiencing a strong economic recovery from the pandemic. Real GDP growth rebounded by an estimated 16.0 percent in 2022 driven by the strong revival in tourist inflows. Supported by the strong economic recovery, fiscal deficits are falling from 12.2 percent of GDP in FY2022 to a projected 7.7 for FY2023. However, central government debt remains stubbornly high at around 85 percent of GDP. With the stabilization in global commodity prices, year-on-year inflation has eased recently, declining to 1.5 percent in February 2023. With high global commodity prices and the still partial recovery in tourism, the current account deficit remained elevated at an estimated 14.0 percent of GDP in 2022. However, FX reserves remained relatively comfortable at 6.2 months of prospective imports, cushioned by concessional financing from donors and remittances.
"However, the risks to the outlook are tilted to the downside. Above all, Fiji's high debt deprives it of the fiscal space to respond to shocks. The country remains vulnerable to weaker growth in advanced economies that would reduce tourist inflows and remittances. Renewed acceleration in global commodity prices and growing skilled labor shortages could revive supply-side inflationary pressures. Fiji is also highly vulnerable to frequent natural disasters, particularly tropical cyclones. On the upside, reduced policy uncertainty could help jumpstart private investment, and continuing momentum in tourist inflows could sustain above-trend economic growth in the near-term.
"With a strong economic recovery underway, policies should focus on maintaining medium-term growth, rebuilding buffers, and enhancing resilience. The key priority is to reinforce the balance sheet of the government to provide fiscal space to manage future shocks; the government should launch a medium-term fiscal consolidation, relying primarily on revenue mobilization while promoting growth, private investment, and social inclusion.
"In this context, the team strongly welcomes the authorities' commitment to ensure fiscal sustainability, reflected in the medium-term fiscal strategy and the recent appointment of the 2023 Fiscal Review Committee. The team recommends to front-load the fiscal consolidation with a comprehensive tax reform strategy in the forthcoming budget which raises revenue, simplifies the tax system, and enhances efficiency. Suggested measures include unifying the VAT rate at a slightly higher level; simplifying personal and corporate income taxes, especially by reducing tax exemptions; and raising certain excise and tourism-specific taxes. While tax reforms are necessary to raise revenue, they should be accompanied by targeted transfers to low-income households and growth-enhancing measures, such as cutting red tape. Spending should be disciplined and gradually re-oriented to boost growth, enhance resilience, and promote inclusion.
"Monetary policy should start now to gradually unwind the accommodative stance, which was an appropriate response to the pandemic. Moving to a more neutral stance by addressing the historically high levels of liquidity and low interest rates would put the Reserve Bank of Fiji (RBF) in a position to manage pressures on inflation or reserves as they emerge. The banking sector appears to be well capitalized and liquid, but close attention is required to monitor non-performing loans that remain significantly above pre-pandemic levels. Developing an appropriate crisis prevention and management framework is also important. As external sector conditions improve, especially regarding tourism receipts and commodity prices, there is room for the reversal of the additional exchange restrictions on current transactions and capital flows measures that were implemented in April 2020. The team urged continued progress on anti-money laundering and international tax issues and suggested examining how to phase out other long-standing exchange restrictions that add to business costs and deter investment.
"Fiji's growth outlook beyond the current rebound will rest critically on the ability to implement a well-designed long-term reform and growth strategy. Strong medium-term growth is vital to boosting living standards, reducing the public debt burden, and rebuilding resilience. Key elements will include promoting productivity growth, cutting the cost of doing business, enhancing social inclusion, and meeting the economy's investment needs against the backdrop of fiscal consolidation. Further reducing red tape and improving infrastructure will help attract private and foreign investment. Continued efforts towards diversification – both within and away from the tourism sector – will help improve employment and competitiveness. Increasing investment in climate adaptation and renewable energy can help reinforce Fiji's ability to absorb related shocks. Boosting potential and inclusive growth will also require improvements to human capital, tackling labor shortages through technical training and closing the large gender gap in labor force participation.
"The team had fruitful discussions with the Deputy Prime Minister and Minister for Finance, Strategic Planning, National Development, and Statistics, Biman Chand Prasad, the Governor of the Reserve Bank of Fiji, Faizul Ariff Ali, other senior government officials, development partners, and private sector representatives. The team would like to thank the Fijian authorities for their excellent cooperation and hospitality."
