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Macroeconomic Challenges Before Fiji

Macroeconomic Challenges Before Fiji
An artist impression of the newest hotel yet to be built by Avoser under the Holiday Inn banner.
May 02
08:21 2015

Last week, we discussed Fiji’s 2015 growth rate forecasts of two international funding agencies and the Reserve Bank of Fiji (RBF).

Regardless of the differences in 2015 growth rate forecasts in per cent (RBF: 4.5; ADB: 4.0; and World Bank: 2.5), it was clear that Fiji has had six years of continuous positive growth.

That leads to the common concern: Can Fiji sustain these growth rates over the medium term?

Growing investment

It is expected total investment as a per cent of GDP would exceed the targeted rate of 25 per cent of GDP in 2015. Private sector investment will be 13.5 per cent of GDP in 2015.

The rise in private investment over the last three years is reflected in the growth rates of investment lending: 28.1 per cent in 2012 and 108.8 per cent in 2013.

Though the rise in investment was only 11.3 percent in 2014, there has been another spurt in lending in 2015: 48.9 per cent for the first two months.

Private sector employment has gone up. Jobs advertised rose by 24.6 per cent in 2012; 9.3 per cent in 2013; 12.8 per cent in 2014; and in 2015 up to February: 8.3 per cent.

Private consumption is increasing. Lending for consumption was up by 25.4 per cent in 2012; and 89.6 per cent in 2013. T

here was a slight decrease in 2014: the growth was 72.8 per cent in 2014. It has picked up in 2015: already up by 56.4 per cent up to February.

Increasing trend in capital expenditure by government is also seen: 2012: $533.8 million; 2013: $586 million; 2014:$841.6 million; and continuing in 2015: $1.321 billion.

The impact of growth gets manifested in several directions.

First, the annual fiscal deficit as per cent of GDP is on the rise: 0.5 per cent in 2013 to 2.0 per cent in 2014.

In 2015, it is expected to reach 2.5 per cent. If the planned asset sales (with estimated receipts of $507 million) do not materialise to the fullest extent, fiscal deficit would be higher than anticipated.

Twin deficits

As it happens, fiscal deficit (government expenditure exceeding government revenues) and excess private sector spending (facilitated by lending) give rise to trade deficit.

Trade deficits arise if imports exceed exports. Imports of investment goods (dominated by machinery and construction equipment as well as transport) rose in 2012 by 1.5 per cent, in 2013 by 25.1 per cent, in 2014 by 45.6 per cent.

This is while imports of consumption goods (rice and wheat flour and beverages and a host of manufactured goods) rose by 7.4 per cent in 2012, 5.4 per cent in 2013 and 30.5 per cent in 2014.

The trade deficits are offset by earnings from tourism and inward remittance inflows. Tourism earnings (in billion) were: $1.3 in 2013; $1.4 in 2014.

Remittances were $339.1 million in 2013; and $383.2 million in 2014.

They helped to reduce the size of current account deficit, defined as the net balance between total payments for imports of goods and services and total external receipts from exports of goods and services.

Rising current account deficits

Current account deficits as percentages of GDP send out a signal in regard to external stability of the currency.

They are rising. In 2012, it was 1.8 percent of GDP: in 2013 it was 14.9 per cent. It came down to 8.9 per cent in 2014; but is expected to go up to a close 10 per cent.

Not all current account deficits are worrisome. If there is steady growth in capital inflows, preferably, durable and non-volatile foreign direct investment (FDI) inflows in productive areas, unlike hot money, which are speculative in nature and pulled out any time, there is no worry.

However, if FDI inflows are insufficient, it is the foreign reserve position which becomes critical.

Fiji’s reserves, which were high at US$915 million (FJ$1.853 billion) in 2012, have been declining to US$755 million (FJ$1.529 billion) in 2013 and US$750 million (FJ$1.518 billion) in 2014.

Policy makers are aware that Fiji has to repay US$250 million, which was raised through issue of international bond in 2011.

With the strengthening of the American currency, the debt obligations would mount in Fiji dollars.

In its March monetary policy statement, the RBF cautions that positive outcomes of past expansionist policies have “filtered into some pressure on Fiji’s balance of payments position”.

Inflation

Although inflation has remained low due to “soft global commodity prices (oil and food) and low trading partner inflation”, one cannot be sure of the continuity in such a favourable climate in these days of uncertainties.

So, the macroeconomic challenges have to be met soon. The authorities have to change gears, to fiscal and monetary tightening.

As the saying attributed to Oliver Cromwell goes, “Have faith but keep the powder dry.”

– Dr Jayaraman is a Professor at the Fiji National University’s School of Economics, Banking and Finance, Nasinu Campus. His website is: www.tkjayaraman.com

 

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