Budget 2019

Fiji Budget 2019: Preparing For A Global Downturn

"In my view, 2019/20 budget should not introduce any new revenue measures to increase any taxes or duties on businesses because it will have a negative impact on economy growth. " - Rohit Kishore, Economist
04 Jun 2019 12:52
Fiji Budget 2019: Preparing For A Global Downturn

Leading economist Rohit Kishore does not foresee the Fijian dollar being devalued in the near future.

Mr Kishore, who also teaches the Executive MBA course at the Fiji National University, says that the 2014 election provided the much-needed political and economic stability which boosted economic confidence but Fiji, like most other developing nations, needs to keep a close watch on global financial activities.

What would affect our economy the most?

Economic growth is cyclical in nature with a boom and bust characteristic, with each cycle spanning approximately 10 years.

With moderate to low growth forecast for the world economy, it seems we are approaching the slowing down phase, which if not managed properly, could see us ending in an economic recession.

Therefore, what matters most is to boost confidence in our economy, and 2019/20 budget must make every effort to do so.

However, because it has been carrying deficit budgets for previous years, it must balance the budget to be able to provide economic confidence.

This must be done by fiscal consolidation on the expenditure side, and not from revenue measures by imposing new taxes and duties or increasing the existing ones.

We want businesses to operate freely and be profitable.

If they are more profitable they will create more jobs and it is the profitable businesses that create economic growth.

With improved compliance measures, revenue collection has been good, and perhaps the highest ever.

In my view, 2019/20 budget should not introduce any new revenue measures to increase any taxes or duties on businesses because it will have a negative impact on economy growth.

How is Fiji’s liquidity status?

The 2014 election provided the much-needed political and economic stability which boosted economic confidence.

This set the mood for expansion, which saw investors and businesses increase their investments and demand for bank loans kept on increasing over the eight years until 2018/19.

The drawing of high level of loanable funds from the banks on the one hand, and low savings deposit on the other, ought to have placed bank liquidity under pressure.

However, the reserve bank seems to have used its monetary policy and allowed banks to increase retail and commercial lending rates.

The high lending rate will no doubt slow commercial and retail borrowing which should allow banks to rebuild liquidity.

The banks are also offering the highest deposit savings rate ever, which should see saving deposits increasing and this should further replenish liquidity.

On the flip side, however, this means less economic activates and lower economic development.

The banks should attempt to compensate borrowers for increased lending rates by lowering their fees and charges which have no doubt increased over the years.

The banks in Fiji should also become more innovative, restructure and concentrate in lowering their expense ratios in line with the oversees banks.

Any further interest rate hike, in this tough economic times, could prove economic disaster.

Do you see Fijian dollar being devalued in the near future?

One reason a country may devalue its currency is to reduce its trade imbalance.

Devaluation reduces the cost of a country’s exports, making them more competitive in the global market, and increases the cost of imports so local investors may reduce import.

However, in opinion, I do see a devaluation increasing exports and decreasing imports to the level that it will favour improving the balance of payments by shrinking trade deficits.

Fiji has been a net importer with our imports exceeding our exports.  A devaluation would make our import more expensive and draw on the foreign reserves which is currently less than 12 months cover.  On the export although it may increase export, but cheaper export would mean less revenue.

In essence currency devaluation would mean something is terribly wrong and it would send a negative signal to the investor and business which would further exacerbate the low confidence.

Therefore, I do not see the Fijian dollar being devalued in the near future, and it should not be devalued.

How much is our economy influenced by what is happening on international stage?

So far, the US has clouted 25 per cent tariff on US$250 billion worth of Chinese imports coming into the USA markets, and outlined its intention of imposing further tariffs on US$325 billion more.

In retaliation, China has set tariffs on US$110 billion worth of US goods coming into China, and is menacing on other policy measures that would affect the US companies operating in China.

The Presidents of both countries seems to be stubborn in their moods on reconciliation, which in my opinion, could vent into full blown trade war between the two largest economies and proof to be the largest trade war in economic history to date.

The US and China’s escalation of trade tariffs is expected to hit global economic growth, which includes Fiji’s major trading partners, e.g. USA, UK, Australia, New Zealand, Japan, China and other Pacific island countries.

Continuation of such trade barriers between the two largest economies would hit businesses, which will start laying of people that may lead to high unemployment, lower productivity and a general economic downturn in the wider economy.

This could have a contagion effect on Fiji’s economy from macroeconomics perspective and affect the economic growth severely in 2019/20 and beyond.

Then we have continuous delay in the resolving of the Brexit deal between the UK and the European union countries.  On April 10, the UK and the EU agreed a second delay to Brexit until October 31, 2019.  A 2018 analysis by Stanford University and Nottingham University economists estimated that uncertainty around Brexit reduced investment by businesses by approximately 6 percentage points and caused an employment reduction by 1.5 percentage points.

The above suggests lower to moderate global expected economic growth in 2019/20.

This no doubt puts downward macroeconomic pressure on Fiji’s economy, with Fiji already facing number of microeconomic challenges.

IMF has lowered expected global economic growth to reach 3.7 per cent in 2019/20, down from its previous prediction of 3.9 per cent in July.

The IMF has further warned that the world faced a permanent hit to growth if the US followed through on a threat to impose a 25 per cent tariff on all imported cars, and global tariffs hit business confidence, investment and borrowing costs.

In this worst case scenario, the US economy would take a significant hit, while economic growth in China would drop below 5 per cent in 2019, compared with a current prediction of 6.2 per cent.

Feedbackjyotip@fijisun.com.fj

Fiji Sun Instagram
Subscribe-to-Newspaper
error: