IMF Staff Concludes 2024 Article IV Mission in Fiji

• Fiji's post-pandemic economic rebound has been strong, and growth is now returning to historical trends. This year growth is projected at 3%, although it faces downside risks.
• Budget policies are broadly appropriate this year, although additional gradual fiscal consolidation is needed going forward to rebuild fiscal buffers.
• Macroeconomic policy should continue to focus on rebuilding room for policy responses to shocks, through a steady reduction in debt ratios, a gradual normalization of monetary policy, and an ambitious reform program to promote stronger growth.
• Structural reforms need to tackle the key constraints to higher GDP growth, build resilience and address future challenges, including climate change and emigration.

Washington D.C: An International Monetary Fund (IMF) team led by Mr. Marshall Mills held discussions with the Fijian authorities and other stakeholders in Suva and Nadi during February 28 to March 12, 2024. At the conclusion of the visit, Mr. Mills issued the following statement:

"After a strong rebound from the pandemic, Fiji's economic growth is returning to historical trends. The economy is projected to grow by 3 percent in 2024, after expanding by 20 percent in 2022 and 8 percent in 2023, GDP has now surpassed 2019 levels, driven by a strong revival in tourist inflows, particularly from Australia and New Zealand. The fiscal position and debt-to-GDP ratio have continued to improve significantly, thanks to the recovery and revenue measures in FY2023-24 budget. The fiscal deficit is expected to decline to 4.4 percent of GDP in 2024 (down from 5.9 percent in 2023), while public debt has fallen from a peak of 91.5 percent of GDP at end-2021 to 80.4 percent at end-2023. Inflation is also moderating after ticking up past 5 percent in 2023, owing in part to the temporary effect of the mid-year Value-Added Tax (VAT) increase. Inflation is expected to fall to around 3 percent (yoy) by end-2024. The current account deficit narrowed sharply in 2023 to an estimated 4.7 percent of GDP, driven by strong tourism receipts, and is expected to widen slightly to 6.3 percent of GDP in 2024. Reserves remained comfortable at end-2023, covering 5.4 months of prospective imports, supported by remittances and concessional donor financing.

"Despite the strong economic rebound and positive current trends, the economy faces a number of risks and challenges. Major downside risks to the economic outlook stem from unexpected global developments that would reduce tourist inflows and from tighter-than-expected domestic supply-side constraints, in particular, labor shortages, delays in investment plans, and hotel capacity. An increase in global commodity prices, higher shipping costs, wage pressures, and potential second-round effects of the recent uptick in prices could pose upside risks to inflation. The fiscal path under current policies reduces debt only slowly and could limit the fiscal space needed to respond to future shocks. On the upside, a stronger reform momentum to improve the business climate could stimulate private investment, including Foreign Direct Investment (FDI), and boost growth potential.

"In this context, the Fijian authorities are appropriately aiming to deliver stronger inclusive growth while rebuilding policy buffers. Achieving these goals will require additional gradual fiscal consolidation, a measured normalization of monetary policy, and an ambitious reform program, which should tackle the key constraints to growth, further boost resilience, and address long-term challenges, including climate change and emigration.

"While broadly appropriate under the current budget, fiscal policy needs to continue a gradual consolidation to rebuild fiscal space, while improving the targeting of social spending and prioritizing capital spending. The authorities rightly target a continuing reduction in the public debt-to-GDP ratio (to 75.7 percent in 2027). The revenue measures last year have put debt on a downward trajectory, although IMF staff project that – without further measures – it will decline only slowly to 78.6 percent of GDP by 2029. While the risk of debt distress is still assessed as moderate, the fiscal space to absorb potential shocks would remain limited. Accordingly, IMF staff urges continuing efforts to gradually enhance revenue and spending efficiency through better targeting and investment management. These measures would achieve the authorities' goal of a small primary surplus. The public sector balance sheet would also be strengthened through more careful controls over the state-owned enterprises, including financial monitoring. IMF staff further recommends achieving a primary surplus of around 2 percent of GDP by 2029, which – if sustained – would steadily reduce the debt to GDP ratio to 50 percent by 2034 (similar to the pre-pandemic level).

"Monetary policy has broadly achieved its goals of price stability and adequate reserves. As the economy approaches potential output in the post-pandemic recovery, IMF staff believe that the monetary policy stance should now begin to move gradually toward a neutral stance, which would create policy room to manage downside risks to price stability or external stability. Although the high levels of excess liquidity have been falling, their persistence has weakened the effectiveness of monetary policy and the development of the monetary policy transmission mechanism. The normalization of the monetary policy should be supported by a proactive communication strategy to effectively manage market expectations.

"The financial sector is overall sound, although the level of non-performing loans (NPLs) needs to be reduced at all banks. The authorities should continue to strengthen financial sector oversight, particularly for banks with high NPLs. The authorities need to address remaining recommendations from the 2018 Financial Sector Stability Review (FSSR), particularly the review of the Reserve Bank of Fiji (RBF) and the Fiji Banking Acts. Recent improvements to the financial infrastructure such as the Automated Clearing House should further enhance financial inclusion and efficiency. Fiji should continue strengthening its framework for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) by addressing remaining weaknesses in the areas of entity transparency, beneficial ownership, and risk-based supervision of the financial sector.

"The Fijian authorities' structural reform strategy needs to be comprehensive and prioritized to successfully accelerate inclusive growth. The National Development Plan under preparation will play a central role, supported by efforts like the multi-stakeholder Growth Reset Committee. The consultative approach will help build support. The resulting strategy should focus on tackling key bottlenecks and "quick wins." In particular, addressing labor shortages in key sectors (like professional services and construction) and cutting red tape (like immigration and permitting processes) are critical to faster growth, freeing up an existing pipeline of private investment projects. Quicker access to power and facilitating renewable energy installation will also promote private investment. Effectively implementing reform plans will also be a vital challenge.

"The government's growth strategy also needs to intensify efforts to address long-term challenges. Educational, technical training, and labor market reforms can enhance the labor force over time (including facilitating female participation). Efficient infrastructure repair, maintenance and investment will be a key factor in growth potential.

"Reinforcing resilience to climate change is also critical to faster inclusive growth. The authorities should intensify their significant efforts, including addressing the financing and investment management challenges. IMF staff welcome the government's recent climate finance initiatives, including sovereign parametric insurance and a domestic "blue bond." Investment in renewable energy production needs to accelerate to achieve Fiji's target of 100 percent renewable production by 2036.

"The team had fruitful discussions with the Deputy Prime Minister and Minister for Finance, Strategic Planning, National Development, and Statistics, Biman Prasad, the Governor of the Reserve Bank of Fiji, 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."