IMF Executive Board Concludes 2014 Article IV Consultation with the Republic of Fiji | WPN World People News

On October 31, 2014, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with Fiji.

With elections in September 2014, Fiji took a decisive stride toward returning to democratic government for the first time since 2006. The elections are expected to solidify the recent improvements in relationships with traditional development partners, improve access to concessional development finance, and boost confidence in the economy.

Growth in 2013 accelerated to 4.6 percent. The latest available consumption and investment indicators suggest continued strength in 2014, with economic growth projected at 3.8 percent. Headline inflation is currently low as imported commodity and food prices have remained stable. The Reserve Bank of Fiji (RBF) lowered its policy rate to 0.5 percent in 2011 and monetary policy has been on hold since then. The lower policy rate and persistent excess liquidity in the banking system have slowly been transmitted to lower lending rates. In response to lower rates and improved confidence, net domestic credit accelerated in the first half of 2014. The fiscal deficit was smaller than expected in 2013, but the 2014 budget was expansionary. The authorities have provided for a large increase in expenditures in the 2014 budget, with the bulk of the increase financed from privatization receipts. Since large parts of the planned privatization financing are not expected to materialize in 2014, the authorities have implemented expenditure and revenue contingency plans aimed at containing the deficit. Based on developments in the first half of 2014, the deficit financing target is on track to be met.

The authorities have accelerated economic reforms in recent years, such as in the sugar sector and pension schemes, but key policy challenges remain to raise potential growth, reduce unemployment, improve financial inclusion, and increase resilience to shocks. Following the elections, continued structural reform momentum is needed to improve the business environment, address the infrastructure backlog, and raise the capacity to take full advantage of a potential increase in investments.

Executive Directors welcomed Fiji’s successful national elections, which are expected to boost confidence in the economy, solidify relationships with traditional development partners and improve access to concessional development finance. Directors encouraged the authorities to take advantage of the post-election environment to accelerate the pace of structural reforms in order to support sustainable, higher and broad-based growth, and reduce vulnerability to shocks.

Directors agreed that near-term macroeconomic management needs to be carefully calibrated, with the economy now growing above potential. They noted that fiscal policy has been prudent and well focused in recent years, but that the 2014 budget is a departure from trend. While welcoming the contingency plans developed by the authorities, Directors cautioned against financing an expansion of recurrent expenditure with one-off asset sales. To enhance buffers and create space for needed public investment, they stressed that base-broadening revenue measures are needed, alongside current spending restraint. These measures should include a significant reduction in income-tax holidays and tax incentives, within a general improvement in the investment climate.

Directors called for the adoption of a tightening bias in the monetary stance to curb demand pressures, given strong credit growth and the positive output gap. They advised a policy mix of targeted prudential measures, open market operations, increased reserve requirements, and if needed, a gradual adjustment of the policy rate. Directors viewed the post-election environment as a window of opportunity to lay the foundation for moving toward a more flexible exchange rate designed to enhance external competitiveness and resilience to shocks. They encouraged the authorities to bring exchange restrictions in compliance with Article VIII requirements.

Directors acknowledged the soundness of the banking system, but called for enhanced financial oversight to mitigate risks stemming from rapid credit expansion. They recommended strengthening the financial sector’s supervisory and macroprudential frameworks, monitoring banking sector risks through regular stress testing, and further improving the AML/CFT regime. Directors commended the success in increasing financial inclusion and encouraged further efforts in this regard.

While welcoming recent progress, Directors supported deeper and faster structural reforms to lift Fiji’s potential growth, reduce external vulnerabilities, and alleviate poverty. Priority should be given to improving the investment climate by streamlining government regulations, relaxing price controls while protecting the most vulnerable, further enhancing the efficiency of land use, and upgrading infrastructure. Efforts are also needed to boost the energy supply and ensure the viability of the sugarcane industry. Directors also looked forward to continued improvements in data quality.

Source: International Monetary Fund