IMF Wraps Up Article IV Consultation with Fiji

Washington, DC: On June 1, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Fiji and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.[2]

Fiji's economy rebounded strongly in 2022, as tourism recovered rapidly. The tourist arrivals in 2022 reached 71 percent of 2019 levels, yielding GDP growth of an estimated 16.0 percent in 2022. Inflation has been contained, averaging 4.3 percent in 2022 and falling to 2 percent year-on-year in March 2023, due in part to the dampening effects of administered price controls and fiscal measures. The current account deficit remained high at 17.5 percent of GDP in 2022, as improving tourism receipts and strong remittances were offset by the impact of higher commodity prices and rising import demand. The overall fiscal deficit declined slighted to 12.2 percent of GDP in FY2022 from 13.6 percent in FY2021, and public debt-to-GDP remained elevated at 87 percent end-2022. The ratio of bank non-performing loans to total loans has stabilized recently but remains well above pre-pandemic levels.

In the near-term, the economy is projected to grow above trend (which is estimated at around 3¼ percent). Tourist inflows are expected to approach pre-pandemic levels in 2023 and revert to the long-term growth trend thereafter. This tourism rebound will support momentum in the economy, with real GDP projected to grow by 7.5 percent in 2023 and 3.9 percent in 2024. Downside risks to the outlook include weaker growth in tourism-source countries, renewed acceleration in global commodity prices, and skilled labor shortages. On the upside, reduced policy uncertainty and reform momentum post-elections could improve the business climate and encourage private investment.

Executive Board Assessment

In concluding the Article IV consultation with Fiji, Executive Directors endorsed the staff's appraisal as follows:

With the rapid rebound in tourism, the economy is experiencing a strong recovery. Nevertheless, significant risks to growth remain both on the demand side – due to the global outlook – and on the supply side – due to capacity constraints and price competitiveness. Inflation has eased since end-2022, but risks are tilted to the upside, given strengthening domestic demand, growing wage pressures, and volatile global commodity prices. Increasing policy certainty through a coherent strategy for economic reform and fiscal consolidation should help reinforce sustainability and promote growth.

The recovery and ongoing broad consultations make the upcoming budget a critical opportunity to begin rebuilding Fiji's fiscal space and reducing vulnerability. While the risk of debt distress is currently moderate, high debt levels leave Fiji vulnerable to future shocks, with little space to respond. The authorities' commitment to fiscal consolidation is therefore highly welcome, and it is vital to follow through with the necessary measures. Staff recommends setting a fiscal rule—for example, an anchor based on debt-to-GDP—and pursuing a front-loaded consolidation relying mostly on a comprehensive tax reform strategy which raises revenue, simplifies the tax system, and enhances efficiency. Revenue mobilization should be accompanied by increased spending on inclusion (including targeted transfers to offset any impact of tax hikes on low-income households) and growth-enhancing reforms, such as cutting red tape. Overall, spending should be disciplined and gradually re-oriented to boost growth, enhance resilience, and promote inclusion. To safeguard progress, the authorities should closely monitor and address fiscal risks, including from contingent liabilities related to financially weak public companies.

Monetary policy needs to begin shifting now to a more neutral stance, amidst growing uncertainty to the outlook for inflation and foreign reserves. While the outlook for near-term inflation and foreign reserves remains stable, pressures may resurge as the output gap narrows with the economic recovery. The Reserve Bank of Fiji (RBF) should be closer to neutral stance to be in a position to manage pressures. Similarly, with external sector pressures easing, the tightening of exchange restrictions and capital flow management measures at the onset of the pandemic should be reversed. In addition, gradually phasing out the long-standing restrictions on current transactions, which constitute an exchange restriction subject to approval underArticle VIII, Section 2(b) of the Fund's Articles of Agreement, would help reduce impediments to cross-border transactions and encourage foreign investment.

Financial sector soundness remains strong exiting from the pandemic, although staff advises reinforcing financial sector supervision as the economy recovers. The RBF should closely monitor NPLs and further enhance ongoing efforts to address them. Efforts to strengthen the financial supervision framework should continue. Staff urges continuing follow-up on key recommendations of the 2018 Financial Sector Stability Review —particularly those related to corrective action, and bank recovery, coordination with home authorities, and bank resolution.

Following the strong economic rebound, the medium-term outlook hinges on the implementation of a well-designed and comprehensive growth strategy. With the public support that broad consultations can bring, pro-growth reforms and medium-term fiscal consolidation can be mutually reinforcing. Boosting business confidence can also help jumpstart numerous private investment projects that are already planned and financed. Reforms should aim to enable diversification, both within and beyond the tourism sector; increasing the domestic value-added in tourism could promote agriculture and rural development, with benefits for job creation and inclusion. With potential headwinds from a "brain drain," it is a priority to enhance training, education, and health care programs to bolster the supply of skilled labor. Promotion of sector-specific immigration to target any skill shortages could complement these efforts. Further efforts to reduce the overall cost of doing business are also a priority to attract private and foreign investment, including in the tourism sector.

Addressing the implementation challenges of Fiji's climate plans will require increased efforts and financing. Advancing climate adaptation plans will help Fiji transition to a more sustainable and resilient growth model. Accelerating investments on renewable energy will help Fiji diversify its energy sources and reduce external imbalances. However, Fiji's climate adaptation and mitigation plans faces significant challenges, including shortfalls in climate financing, implementation capacity, and investment management. The authorities should intensify their efforts, working with development partners and private sector, to address the challenges.