Press Release No. 16/70

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with the Republic of Fiji

February 23, 2016

On February 5, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Fiji.¹

Fiji is enjoying strong growth momentum, due to higher investment, robust tourism and strong remittances, supported by an improvement in the terms of trade. The historic elections of September 2014 marked the return to democracy, leading to a normalization in relations with development partners, further boosting investor and consumer confidence.

The Fijian economy entered its third year of above 4 percent annual growth in 2015, with GDP projected to expand by 4.3 percent, following growth of 5.3 percent in 2014. Headline inflation has remained low, benefiting from low global energy prices and wide-ranging administered prices. In addition, delayed pass-through of low global food prices is likely to keep inflationary pressures at bay. The Reserve Bank of Fiji (RBF) has kept the overnight policy interest rate near zero, at 0.5 percent, and excess liquidity in the banking system persists. Despite some recent moderation, credit growth has remained strong, reflecting in part the accommodative monetary conditions, improved business confidence, and pent-up demand for credit. The 2015 fiscal deficit is estimated at 3.2 percent of GDP and key budget targets have been met, but slower execution of capital projects contributed to a smaller deficit. As a result of the shift in capital spending from 2015 to 2016, the fiscal deficit is projected to increase to 4.3 percent of GDP in 2016, and consolidation has been deferred to 2017. Public debt is sustainable, and is forecast to gradually decline over the medium term. Foreign exchange reserves remain adequate.

The authorities continue to make progress in several structural reform areas, with a view to lowering the cost of doing business and improving the overall business climate. However, much scope for further liberalization remains, including with regard to consumer prices and exchange controls. Efforts in these areas and continued impetus on structural reforms would also help sustain broad-based inclusive growth.

Executive Board Assessment²

Executive Directors noted that political stability had contributed to Fiji’s strong growth performance and favorable economic outlook. Macroeconomic policies have also been supportive. Nevertheless, Directors noted that risks to growth remain, and derive mostly from external developments. At the same time, prolonged accommodative policies and delays in reform implementation could generate imbalances and undermine growth prospects. Accordingly, Directors encouraged the authorities to pursue sound macroeconomic policies and implement structural reforms to generate sustainable, inclusive growth.

Directors emphasized the need for a growth-friendly fiscal consolidation to build buffers and maintain sustainability. They commended the authorities’ focus on addressing public infrastructure gaps, and recommended prioritization of capital projects and social spending while containing current expenditure. They welcomed efforts to broaden the tax base and strengthen administration. Directors also commended the successful refinancing of external sovereign debt, which reflected favorable market conditions and an improvement in Fiji’s macroeconomic fundamentals.

Directors recommended a gradual tightening of monetary conditions. They also supported the use of appropriate macro-prudential policies to help moderate credit growth, especially to the housing sector. While financial stability indicators are generally sound, Directors recommended strengthened bank and non-bank supervision.

Directors noted that the broadly favorable macroeconomic conditions provided an opportunity to increase exchange rate flexibility over the medium term to cushion against external shocks. Directors encouraged the authorities to review and adjust the level of the exchange rate basket peg more frequently to prevent protracted deviations from fundamentals.

Directors underlined the need for structural reforms to cement gains in potential growth, bolster resilience, and reduce poverty. Directors encouraged the authorities to further streamline government regulation, implement civil service and state-owned enterprise reforms, and remove impediments to land use. Directors also recommended a gradual relaxation of price controls and exchange restrictions.

Directors commended the authorities’ efforts to improve data which can help improve policy making and reform efforts.