Republic of Fiji: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Fiji

1. After keeping COVID-19 at bay for a full year, an outbreak of the COVID Delta variant emerged in Fiji in April 2021. While the outbreak was largely confined to one island, infection rates were at one point among the highest in the world. Contributions of AstraZeneca vaccine from Australia and New Zealand enabled an aggressive vaccination campaign. As of mid-October, more than 95 percent of eligible Fijians (those over 18) had received their first dose and 80 percent were fully vaccinated. Passing these milestones, the government announced an easing of local curfew and business restrictions. The government has also announced that Fiji’s borders will be reopened to fully vaccinated travelers from a select group of countries, including Australia, New Zealand, the U.S., UK, Japan, and other Pacific Islands.

Abstract

1. After keeping COVID-19 at bay for a full year, an outbreak of the COVID Delta variant emerged in Fiji in April 2021. While the outbreak was largely confined to one island, infection rates were at one point among the highest in the world. Contributions of AstraZeneca vaccine from Australia and New Zealand enabled an aggressive vaccination campaign. As of mid-October, more than 95 percent of eligible Fijians (those over 18) had received their first dose and 80 percent were fully vaccinated. Passing these milestones, the government announced an easing of local curfew and business restrictions. The government has also announced that Fiji’s borders will be reopened to fully vaccinated travelers from a select group of countries, including Australia, New Zealand, the U.S., UK, Japan, and other Pacific Islands.

Context and Recent Developments

1. After keeping COVID-19 at bay for a full year, an outbreak of the COVID Delta variant emerged in Fiji in April 2021. While the outbreak was largely confined to one island, infection rates were at one point among the highest in the world. Contributions of AstraZeneca vaccine from Australia and New Zealand enabled an aggressive vaccination campaign. As of mid-October, more than 95 percent of eligible Fijians (those over 18) had received their first dose and 80 percent were fully vaccinated. Passing these milestones, the government announced an easing of local curfew and business restrictions. The government has also announced that Fiji’s borders will be reopened to fully vaccinated travelers from a select group of countries, including Australia, New Zealand, the U.S., UK, Japan, and other Pacific Islands.

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COVID-19 Infections per Million Residents

(7 day average)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Source: Our World in Data.
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Number of People Vaccinated for COVID-19 per 100

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Sources: Our World in Data and IMF staff estimates.

2. A need for significant policy adjustment in the post-pandemic is set against upcoming national elections. A wave of financing from bilateral and multilateral partners sustained public spending as revenues dwindled, but public debt has surged. Policies to support the private sector and bolster tourism—mainly through tax, tariff, and excise cuts—have significantly reduced the overall revenue envelope. Measures to recoup revenues, rationalize recurrent spending, and put debt on a downward path will be needed as recovery takes hold. As a backdrop, national elections must be held sometime between July 2022 and January 2023. The Fiji First party (Fiji’s current government) won the first post-coup national election in 2014 and was reelected in 2018 with a reduced majority. The political process behind these elections may complicate the government’s ability to undertake reforms in the short term.

3. The impact of the pandemic on Fiji has been severe. Real GDP contracted by an estimated 15.7 percent in 2020 and is projected to contract by a further 4 percent in 2021 in the wake of the Delta variant outbreak. The fiscal deficit reached a record 13.1 percent of GDP in FY20–21 and is projected around the same level for FY21–22, with an accompanying rise in public debt to 89.8 percent of GDP by the end of the current fiscal year. Year-on-year consumer price inflation reached -2.8 percent at end-2020. Increases in international commodity prices and local food prices are expected to contribute to a rise in consumer price inflation to 1.4 percent by end-2021.

4. Monetary policy has been accommodative, and financial conditions remain relatively loose. Both lending and deposit rates have decreased, and private sector credit contracted by 3.1 percent in 2020 and is expected to shrink by a further 3.6 percent by end-2021. Non-performing loans have risen to record levels. The current account deficit widened to 13.4 percent of GDP in 2020 and is expected to expand to 15.7 percent in 2021—driven by the sharp drop in the services balance from the loss of tourism. The overall balance of payments has been cushioned by the influx of external financial flows (loans and grants) in 2020, strong growth in inward remittances, and the new SDR allocation in 2021. The Fiji dollar depreciated by 4 percent on average in real effective terms in 2020, reflecting Fiji’s lower inflation relative to its trading partners. Foreign exchange reserves are expected to be around $1.2 billion by end-2021, equivalent to about 7 months of prospective import cover.

Outlook and Risks

5. A gradual recovery is expected to emerge in 2022 but will hinge on how the reopening and resumption of tourism unfolds. Based on the authorities’ October announcement regarding border reopening and protocols for international tourist arrivals, the baseline macroeconomic framework assumes tourist arrivals reach 50 percent of 2019 levels in 2022 and 95 percent of 2019 levels in 2023. On this basis, real GDP is projected to rise to 6.2 percent in 2022 and by a further 8.3 percent in 2023. Consumer price inflation is expected to rise to 2.6 percent in 2022 and 3.2 percent in 2023. However, per capita GDP is not projected to recover to 2019 levels before 2023. Critically, this outlook is based on the authorities’ commitment to reduce the fiscal deficit to around 2 percent of GDP over the medium term. It incorporates a gradual fiscal consolidation starting next fiscal year and aimed at achieving a sustainable primary budget surplus of 1–2 percent of GDP by the end of the medium-term.

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GDP Growth Rate and Tourism Flows

(GDP growth in percent, Tourism flows in thousands of people)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Source: Fiji Authorities.

6. While the outlook is generally positive, the balance of risks remains tilted to the downside (Annex 1). The Fijian economy remains in a precarious position given pandemic-related uncertainty. Vulnerabilities have been exacerbated by scarring and diminished fiscal space. Fiji remains at high risk from natural disasters—particularly the effects of tropical cyclones. The recovery and medium-term outlook in the baseline scenario also hinge on a full recovery of tourism, but it is unclear whether pr e-pandemic tourism and spending patterns will reestablish themselves. Contingent liabilities have surged during the pandemic as the government extended loan guarantees to state enterprises—some of which could potentially end up on the government’s books, depending on the pace and depth of recovery and/or emergence of new shocks. Finally, the sustainability of the economic outlook will rest critically on the government’s ability to embark on the policy reforms necessary for macro-fiscal stabilization and to begin reducing public debt. On the upside, it is also possible that border reopening and tourism arrivals could move more quickly and lead to a stronger recovery than expected.

Authorities’ Views

7. The authorities generally agreed with staff’s outlook but cited the high degree of uncertainty surrounding projections in the near term and the possibility of upside risks. The authorities concurred that the emergence of the Delta variant outbreak in April and resulting restrictions on movement and business operations had significantly dampened economic prospects for 2021, and that a second year of economic contraction was likely. However, they pointed to the rapid acceleration of vaccination, the easing of movement and business restrictions in recent months, and evidence of significant pent-up demand. Combined with the phased reopening of borders and resumption of international travel in November-December, they suggested that the fourth quarter might be more positive and could lift 2021 real GDP growth above -4 percent. For 2022–23, the authorities’ growth projections were largely in line with those of staff.

Engineering a Sustainable Recovery

A. Fiscal Policies: A Roadmap for Consolidation

8. Fiji’s fiscal policy response to the pandemic has been instrumental in cushioning the macroeconomic impact of the crisis and protecting vulnerable segments of the population. However, while the policy response has been timely, the level of fiscal stimulus (relative to peer countries) has been large and the heavy emphasis on tax and tariff cuts was not fully appropriate from staff’s perspective (Annex IV). Critically, the wide-ranging and likely permanent reductions in taxes, tariffs, and excises embedded in the FY20-21 budget and continued in the FY21-22 budget have reduced the government’s overall revenue envelope by about 5 percent of GDP. This has exacerbated the pandemic-induced expansion of the fiscal deficit. The overall fiscal deficit reached about 13 percent of GDP in FY2020-21, up nearly 10 percentage points from pre-pandemic levels, while the debt-to-GDP ratio jumped 32 percentage points to 81 percent. More importantly, these measures created a structural reduction in Fiji’s revenue profile for the medium-term (assuming these policies remain unchanged).

9. Charting a course back toward macro-fiscal equilibrium is a clear priority. The authorities have announced the objective of reducing the overall fiscal deficit to about 2 percent of GDP by 2026 to put the debt-to-GDP ratio on a downward trajectory (although detailed measures have yet to be specified). Staff simulations indicate that under a scenario of unchanged fiscal policies, the fiscal deficit would remain above 7 percent throughout the forecast horizon, and public debt would rise above 94 percent of GDP by FY2026–27. This suggests that without revenue reforms, the macro-fiscal trajectory would be either unsustainable or would require such draconian cuts to expenditures as to damage prospects for growth. Fiji’s limited access to financing further highlights the importance of fiscal consolidation. While short-term support remains necessary in the remaining months of the pandemic, a clear roadmap for fiscal reform will be essential to ensure fiscal and debt sustainability over the medium term.

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Alternative Debt Projections

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Sources: Ministry of Economy and IMF staff projections.
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Alternative Fiscal Balance Projections

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Sources: Ministry of Economy and IMF staff projections.

10. The staff proposed a roadmap for fiscal adjustment that would target a sustainable primary budget surplus of 1–2 percent of GDP by the end of the medium-term. The proposed roadmap comprises a phased series of policy measures to raise selected tax and excise rates, scale back tax holidays, broaden the tax base, and increase the efficiency of revenue collection (Table 1). Staff estimates suggest that full implementation of these reforms would raise government revenue by about 4.3 percentage points of GDP—somewhat less than the policy-related revenue losses in FY20 and FY21. Revenue reforms would need to be accompanied by a steady reduction in overall government spending—primarily recurrent expenditure. It is also recommended to undertake an analysis of government capital spending, including a Public Investment Management Assessment (PIMA) to ensure that capital projects are planned, selected, and executed with a view to maximizing growth potential and climate resilience. In this context, developing a financing plan for climate adaptation and integrating it with the medium-term macro-fiscal framework will be essential.1 Importantly, the roadmap works almost exclusively with instruments that are already part of Fiji’s revenue framework and are guided by past experience with tax rates and revenue collection— suggesting a high degree of confidence in both their feasibility and revenue gain.

11. Recognizing that fiscal consolidation efforts should increase as the economy recovers, implementation of these reforms should remain state contingent. The proposed phasing would initially target measures with the greatest potential gains and the least direct impact on household incomes—leaving broader reforms to FY23–24 or beyond. Increases to the VAT, elimination of tax expenditures and expanding the base for the personal income tax would be expected to yield the greatest revenue gains and offer a less distortionary approach to rebuilding revenue than reversing the tax and other measures taken over the last 18 months.

12. Implementation of measures in the roadmap would also help align Fiji’s tax regime with international practice and enhance the efficiency of taxation. For example, raising the fringe benefit tax would reduce the preferential treatment of fringe benefits relative to wage remuneration, raising additional revenue while reducing potential distortions to compensation practices. Similarly, introducing a dividend withholding tax on non-residents of 10 percent and phasing out the export income incentive would help align Fiji’s tax regime with standard international practices while keeping its tax system competitive.

Text Table 1.

Roadmap for Fiscal Reform

article image
Source: IMF staff estimates.

13. Overall, these measures should help reverse much of the policy-related drop in Fiji’s structural revenue profile. On the expenditure side, the fiscal profile will be helped by a phasing out of crisis-related transfers, notably the unemployment assistance scheme (2.1 percent of GDP). Together with a steady reduction in recurrent spending and improved fiscal performance resulting from the projected recovery, the measures in this roadmap should be sufficient to create a primary surplus between 1–2 percent of GDP on a sustainable basis (Table 2). Revenue and expenditure levels in this range have been achieved in the past, and staff assess the adjustment path as feasible in the absence of large new shocks. Importantly, the relatively benign fiscal outlook under staff’s baseline hinges on implementation of a consolidation strategy at least as ambitious as that laid out in staff’s roadmap. Incomplete implementation is a key risk to the outlook.

Text Table 2.

Decomposition of Fiscal Consolidation

article image
Source: IMF staff estimates.

14. Even with full implementation of proposed reforms, risks remain high. The debt sustainability analysis (DSA) suggests high levels of risk from the recent surge in public debt, including sizeable gross financing needs in the near term that could be associated with budget financing risks. Domestic financing remains heavily concentrated on the Fiji National Provident Fund (FNPF), with limited absorption capacity in the private financial sector. That said, FNPF is assessed to have a robust financial position with comfortable cash reserves, supported by a healthy financial performance thus far in the pandemic. Moreover, given the likelihood that one or more external shocks will materialize over the medium-term horizon, the overall sustainability of the outlook rests critically on implementation of fiscal adjustment as envisaged in the baseline macroeconomic framework. Absent such measures to put the ratio of public debt to GDP firmly on a downward trajectory, the fiscal trajectory and medium-term outlook appear unsustainable.

15. The pandemic has exacerbated public financial management and macro-fiscal risks. Of particular concern is the increase in contingent liabilities since 2017, and the surge in these liabilities during the pandemic. Total contingent liabilities rose nearly 70 percent over the last four years, reaching about 19 per cent of GDP in October 2021. The government has made progress in SOE reform in recent years.2 But the recent surge in guarantees to Fiji Airways 3 and Fiji Development Bank 4 are sizeable (albeit not surprising given the pandemic’s impact on air travel and a general rise in NPLs in the banking system). Contingent liabilities in problem sectors could increase further, particularly if the tourism recovery is slower than projected under the baseline. Overall, fiscal risks from the guarantees are considerable. The staff recommends continued efforts to manage public guarantees transparently, and for the authorities to prepare contingency plans in the event that some of these contingent liabilities need to be taken on to the public balance sheet. Further progress on strengthening the management of SOEs, clarifying the relationship vis-à-vis government, and setting a high bar for transparency and governance will be essential to minimizing future risks.5

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Contingent Liabilities, 2015–2021

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Source: Fiji authorities.

Authorities’ Views

16. The authorities agreed with the need to support the recovery in the near term and reiterated their commitment to fiscal consolidation over the medium term. They intend to maintain an accommodative fiscal stance in the current fiscal year if financing conditions allow, to bolster confidence in the private sector as the economy reopens to international tourism. The authorities agreed that fiscal consolidation must be a cornerstone of macroeconomic policies post- pandemic given the high level of public debt and constraints on domestic financing. The authorities highlighted the consolidation objectives included in the medium-term framework accompanying the FY21-22 budget. They agreed that a small primary surplus target is a desirable anchor to guide fiscal policy and would help ensure a steady decline in the debt-to-GDP ratio. They concurred that measures to expand the revenue base will be needed, combined with a tight rein on current spending. They appreciated the recommendations from staff’s roadmap and the potential benefits of targeting a growth-friendly and broad-based revenue framework rather than more sector-specific taxation, to help protect the competitiveness of tourism and other key sectors. They highlighted the need to move deliberately, as growth recovers, and with due attention to the impact on vulnerable households. They noted that the expansion of public support to key enterprises such as Fiji Airways and Fiji Development Bank does raise some risks but was essential given the unprecedented impact of the pandemic.

B. Monetary and Exchange Rate Policies

17. At the current juncture of low inflation and a negative output gap, the RBF should continue to maintain an accommodative monetary stance. The RBF reduced the policy interest rate from 0.5 percent to 0.25 percent in March 2020. Financial conditions have remained loose, and private sector credit has contracted through the pandemic. Liquidity in the banking system has increased significantly, due to the large inflow of foreign exchange from bilateral and multilateral loans and grants. With inflation likely to remain subdued for at least the remainder of 2021, maintaining the current stance is appropriate. However, careful review will be needed as economic growth resumes, and in the face of shifting commodity prices (although the effects of the latter may be muted by Fiji’s relatively extensive price controls).

18. The exchange rate has remained relatively resilient during the pandemic, and reserves are at record highs. The Fiji dollar is pegged to a basket of currencies amid capital mobility. The exchange rate depreciated by about 4 percent in real effective terms in 2020 and by about 1.5 percent as of August 2021. Fiji’s external position in 2020 is assessed to be substantially weaker than the level implied by fundamentals and desirable policies based on the External Balance Assessment approach (Annex III). Given the significant build-up in international reserves related to increased pandemic related financing flows, reserve cover hit a record high (7.7 of prospective imports) and is adequate for credit-constrained economies . The IMF’s 2021 SDR allocation to Fiji of about USD 133.8 million further boosted foreign reserves. But foreign reserves are expected to decline over the medium-term towards the adequate level of reserves once Fiji’s vulnerability to natural disasters is considered. Fiscal adjustment will contribute to restoring external balance.

19. The tightening of Fiji’s exchange controls should be phased out as conditions allow. Fiji maintains various exchange controls which constitute capital flows measures (CFMs) in accordance with the Fund’s Institutional View on the Liberalization and Management of Capital Flows (IV). Some of these controls also constitute an exchange restriction subject to approval under Article VIII, Section 2(b) of the Fund’s Articles of Agreement (i.e., the limit on large payments). At the onset of the COVID outbreak the authorities made changes to the exchange controls 6 to cope with the crisis. Staff assessed these as an intensification of the exchange restriction and tightening of CFMs, but no new measures were introduced. However, as the exchange restriction is not consistent with Fiji’s obligations under the Fund’s Articles of Agreement and hinders international trade and foreign direct investment, it should be phased out. The same applies to the tightening CFM changes, but while staff has assessed the introduction as appropriate given Fiji’s crisis situation, the changes should be phased out as crisis conditions abate.

Authorities’ Views

20. The authorities broadly agreed with staff’s assessment. The RBF saw the current monetary stance as appropriate and were comfortable with the current level of liquidity as inflation is subdued. They noted that the balance of payments has been particularly affected by the COVID crisis through the loss of tourism on the one hand and the influx of foreign financing on the other. There are no plans to change the current exchange rate peg framework, but there is a regular review of the currency basket to ensure the current exchange regime works well (e.g., does not hinder competitiveness), and to update the allocation of foreign reserves. The authorities broadly agreed with staff’s assessment of the external sector (including the REER) and the need to maintain higher levels of reserves given Fiji’s vulnerability to external shocks. The recent SDR allocation will be maintained with the RBF to further boost foreign reserves. Regarding exchange rate controls, the authorities noted that the pandemic was the first crisis in recent history that did not entail pressure on the exchange rate, and that tightening of conditions in April had been precautionary. While no further measures are planned and easing of existing controls will be considered as the recovery takes shape, they emphasized the need for a cautious approach. They also noted that, from an operational perspective, there had been no significant application of these measures given large capital inflows and a resilient exchange rate.

C. Financial Sector Stability

21. The banking sector remains sound overall, but the level of risk has increased with the effects of the pandemic. The stability of the banking system is underpinned by the dominance of large foreign banks that operate as branches and have access to their parent banks for capital and liquidity.7 However, the effects of the pandemic and the sharp contraction in economic activity are visible in banks’ balance sheets. NPLs as a share of total loans have risen to a record high of 7.5 percent as of June 2021 compared to 3 percent at end-2019 (and to 30 percent for credit institutions, compared to 25.7 percent at end-2019). These levels are likely to rise further after loan repayment holidays phase out in March 2022. However, banks have thus far made significant provisions to withstand credit risk shocks, and the capital adequacy of the banking sector has strengthened to 20.8 percent—well above the prudential minimum of 12 percent.

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Commercial Banks’ Nonperforming Loans

(In millions of Fiji Dollars)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Source: RBF
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Commercial Banks’ Capacity to Withstand Losses

(In millions of Fiji Dollars)

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Source: RBF

22. Enhanced supervision will be needed as Fiji enters the post-pandemic and support measures are reduced. The latest stress tests indicate all banks are capable of withstanding moderate credit risk shocks while still complying with minimum capital requirements. Under a “severe” shock scenario where the entire COVID relief portfolio (almost 19 percent of banks’ total loans) is added to existing NPLs, four banks would need to strengthen their capital adequacy. The RBF needs to continue to bolster its off-site and on-site supervisory framework and closely monitor the asset portfolio and liquidity positions of all banks and ensure sufficient provisioning. It also needs to enhance microprudential supervision by consulting banks bilaterally to help mitigate idiosyncratic shocks. The RBF has already enhanced on-site examination of banks and credit institutions—prioritizing asset quality and provisioning standards—and has mandated prudential reporting specifically on loans under repayment holidays. In terms of macroprudential surveillance, the RBF has yet to deploy tools to address potential systemic issues arising from the pandemic. The RBF has made some progress towards adopting the recommendations made under Financial Sector Assessment Program 2018 (Annex V), but additional efforts are needed, particularly with respect to crisis management.

23. While there has been a steady decline in correspondent banking relationships (CBRs) in the Pacific region, Fiji is not facing pressure on CBRs. Most of the banks operating in Fiji are branches of large overseas banks and have good track records o n AML/CFT compliance. Further, the banking sector has strong licensing requirements and operates under prudential regulations and compliance with the AML/CFT requirements of the Financial Transaction Reporting (FTR) Act. All the remittance transactions are reported in the FTR system and compliance is monitored. In addition, Fiji has been in discussions with the European authorities regarding blacklisting Fiji as a non-cooperative jurisdiction for tax matters.

Authorities’ Views

24. The authorities concurred that close supervision and monitoring of the financial sector will be needed in the year ahead. They highlighted that supervisory standards have not been loosened, save for the regulatory space given for the accommodation of loans subject to repayment holidays. On-site examinations have been re-established (albeit virtual), with close dialogue continuing with regulated entities. At the institutional level, more detailed prudential reporting has been required from the banking sector (commercial banks and credit institutions) specifically on exposures that have been offered repayment holidays, and their monitoring and supervision has been enhanced for specific institutions that were of concern. While highlighting the high levels of capital adequacy in the system as a whole, the authorities acknowledged that the full extent of problem assets is yet to be revealed. In that context, credit growth has declined, and banks have adopted a conservative stance due to the pandemic. Moreover, the rise in the NPL ratio to 7.5 percent is not alarming, is still low compared with historical levels, and banks can sustain further deterioration without significant hit to their capital adequacy.

D. Macro-Structural Issues

25. To support the recovery and enhance prospects for diversification, continued emphasis on structural reforms will be needed. The recent passage of the new Investment Act 2021 is a welcome step in this regard.8 However, there remain a number of important opportunities to improve Fiji’s competitiveness and business environment. Development of a digital national payment system would broaden financial inclusion and enhance the efficiency of government transfers while reducing corruptions risks. Further development of the domestic debt market could support a broadening of the investor base and funnel capital to new medium and long-term investments. Addressing skills gaps and labor mismatches and simplifying labor market regulations would also help boost employment and facilitate the creation of new small and medium-size enterprises.

26. Staff also recommended a continued focus on raising female labor force participation as a way of helping create a sustained economic recovery. While women in Fiji are a growing majority in higher education, their participation in the labor force is lower than males. This gap is wider than observed in neighboring Pacific Island countries and in countries with similar levels of GDP per capita. This gap also suggests a lost opportunity in terms of productivity and challenges in recruiting skilled employees. In this context, staff recommend continued focus on early childhood care and education as a means of facilitating greater female participation in the work force.

Authorities’ Views

27. The authorities agreed that a continued focus on macro structural reforms would be essential to promoting diversification and sustained growth. They noted that the pandemic has temporarily slowed progress on macro structural reforms in some areas given the need to divert government resources to meeting crisis-related needs. However, they highlighted the passage of the new Investment Act, and progress under “Digital Fiji” for the digitalization on tax, fee and license payments and issuance of permits and government documents. Work continues on easing processes on starting new businesses and encouraging foreign investment. They agreed on the need to raise female labor force participation and the potential benefits to productivity and highlighted the establishment of a National Taskforce on Early Childhood Care and Education, charged with developing a policy and regulatory framework and identifying and implementing strategies to expand the supply of childcare services.

Transparency and Governance

28. The authorities have made efforts to provide detailed information on crisis-related expenditures to the public. The majority of COVID-19 related expenditures were transfers under the unemployment assistance scheme, for which the authorities have periodically published granular data detailing the number and composition of beneficiaries as well as the amounts disbursed. Moreover, information on procurement contracts is available via a web portal, albeit with certain access restrictions. Staff encourages the government to further enhance transparency and accountability safeguards by making available details on crisis-related expenditures to the general public, including on companies winning procurement contracts and their beneficial owners. The government is similarly advised to undertake independent audits of COVID-related expenditures.

29. Fiji has made progress toward strengthening the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework. The authorities upgraded their legal framework to address the gaps identified by the Asia/Pacific Group on Money Laundering (APG) in the 2016 Mutual Evaluation Report (MER) of Fiji.9 While significant improvements were made, Fiji should tackle remaining legal issues related to terrorism and proliferation financing and – with the assistance of the APG – enhance the regulation and monitoring of the non-profit sector. Moreover, to bolster entity transparency and make beneficial ownership information available and easily accessible, the authorities are reviewing the Companies Act and related regulations to meet the Financial Action Task Force requirements.

30. Implementing the legal framework and ensuring the effectiveness of the AML/CFT framework is essential. Effectiveness is overall assessed as weak. In this regard, Fiji’s Financial Intelligence Unit (FIU) in liaison with the RBF and consultations with external donors has been engaged with financial institutions to provide guidance, training to enhance reporting of money laundering and terrorism financing suspicious transactions and to ensure that banks are able to respond to information requirements of their correspondent banks when it comes to due diligence checks. In parallel, RBF is also enhancing its AML/CFT risk-based supervision of banks.

31. The authorities should improve the current governance and supervisory framework in non-bank financial institutions (NBFIs) and strengthen the anti-corruption framework. The authorities should take steps to make boards independent and make procedures regarding tenure, qualifications, and selection of the board members in the NBFIs. While some progress has been made by the authorities by making changes in the Public Enterprise Act and Companies Act to strengthen regulations related to the Board of Directors regulations and to align the conflict of interest and governance framework with international best practices, the authorities also need to develop regulations to promote transparency and anti-corruption in the SOEs. In this regard, the Fiji Independent Commission against Corruption (FICAC) has proposed various amendments and changes in the legislation to improve the legal framework against corruption. Most notably, a separate, specialized anti-corruption court has been created within the judicial system. Further work is needed with respect to developing an asset declaration mechanism for government officials and meeting the requirements of the United Nations Convention against Corruption.

Capacity Development

32. Fiji is an intensive user of IMF capacity development, especially through PFTAC, where it is the second largest user among PICs. Recent technical assistance has focused primarily on revenue administration, public financial management, government financial statistics, and financial sector supervision. In addition, the current work plan includes capacity development in the areas of macroeconomic programming and analysis, real sector statistics, and payment systems and infrastructure.

Staff Appraisal

33. Fiji has been one of the hardest hit by the pandemic among the Pacific Islands given its heavy reliance on tourism. The Delta variant outbreak which began in the spring and quashed hopes for a mid-year reopening suggests another economic contraction this year. Notwithstanding government efforts to provide public support, the pandemic has also come with a heavy social cost. Widespread layoffs have occurred as firms sought to cut costs and weather the downturn, resulting in a surge in estimated unemployment and a displacement of labor from tourism to other sectors and subsistence agriculture. Livelihoods have been deeply affected. The economic scars of the crisis and the impact on Fiji’s productivity and potential output will not likely be understood until well into next year.

34. Swift efforts to accelerate vaccinations, facilitated by vaccine donations from bilateral partners has fundamentally changed the outlook. Fiji is now among the leaders in the Pacific with respect to vaccination ratios and is the first of the Pacific Islands to reopen its borders to international tourism and inter-island travel. The rapid progress in vaccine rollout has been made possible through a combination of timely in-kind assistance from bilateral partners, together with the use of public and private vaccine mandates. Assuming the government’s announced reopening of the border is successful and met with a positive response by tourism source countries, a rebound in economic growth in 2022 and beyond is expected. However, the degree of uncertainty surrounding this outlook is high. Successfully reopening the economy involves a complex set of investment decisions for businesses, and a carefully balanced approach by government health authorities to COVID-19 protocols and case management. Both downside and upside risks to the outlook are present.

35. Fiscal, monetary, and financial support will need to continue in the short-term, but as economic recovery takes hold, policy adjustments to address macroeconomic imbalances and reduce vulnerability will be a clear priority. The large fiscal response to the pandemic was timely and appropriate from a cyclical point of view given the sharp contraction of growth. Nonetheless, the heavy emphasis on permanent cuts to taxes, tariffs, and excises was not entirely appropriate from staff’s perspective given the need to preserve the revenue framework for the post-pandemic and debt sustainability. Fiscal consolidation will be needed to put public debt on a sustained downward path, accompanied by eventual normalization of monetary policy and removal of support measures. Absent corrective actions —particularly on the fiscal side—staff assess the medium-term macroeconomic outlook to be unsustainable.

36. Fiscal consolidation should be based on efforts to raise government revenues in a growth friendly manner. In light of the revenue losses associated with the FY20–21 budget but bearing in mind both the desire to maintain a competitive tax environment and support the incipient economic recovery, staff see merit in a phased series of measures to boost public revenue by an estimated 4.3 percent of GDP, with a view to bringing total tax revenue up to at least 22.5 percent of GDP by the end of the medium-term. Increases in the VAT hold the greatest potential for overall revenue gain and represent a more broad-based, efficient, and growth-friendly alternative to taxes that impacted mainly the tourism sector. However, the staff see merit in prioritizing the near-term measures that will have less impact on domestic demand—such as eliminating tax expenditures, taxing dividend income, and raising the fringe benefit tax. Careful management of public expenditure—including both recurrent and capital spending—will also be critical. To put debt firmly on a downward path, it will be essential for fiscal policy to be anchored around generating and sustaining a small primary budget surplus.

37. Contingent liabilities represent a potential risk to the government’s balance sheet. The recent spike in government guarantees—particularly to Fiji Airways and Fiji Development Bank— reflects the severe stress induced by the pandemic and associated economic contraction. Importantly, the most notable increases in government guarantees have been linked to Fiji’s COVID response (maintaining Fiji Airways in anticipation of an eventual recovery and supporting Fiji Development Bank given its concentration of activities in micro and small and medium enterprises). Nonetheless, these new contingent liabilities add to Fiji’s overall fiscal vulnerability. Given uncertainty regarding the speed and depth of economic recovery and continued downside risks that shadow the outlook, staff recommends a systematic and transparent approach to reducing or eliminating the need for government guarantees—including contingency plans in the event that some of these liabilities cannot be repaid and need to be taken onto the government’s books or otherwise resolved.

38. Monetary policy is appropriately accommodative but continued close supervision of financial risks is needed in the months ahead. Given low inflation and a large output gap, monetary policy should remain accommodative to help support economic recovery. Careful review will likely be needed as economic growth resumes, and in the face of shifting commodity prices.

39. Close financial sector supervision is needed as Fiji enters the post-pandemic. The evolution of NPLs should be closely monitored and the financial supervision framework should be bolstered. Follow-up on key recommendations of the 2018 FSAP is advised—particularly those related to corrective action, and bank recovery, coordination with home authorities, and bank resolution. The expansion of RBF’s financial sector supervision to include the Fiji Development Bank is welcome.

40. Further tightening of exchange restrictions for payments on current international transactions should be avoided, and existing restrictions should be phased out as the recovery gains ground. These restrictions on large external payments and tax certification requirements for certain international transactions are inconsistent with Article VIII, hamper Fiji’s international trade, and discourage foreign investment.

41. Macro-structural reforms should continue to help underpin the recovery and strengthen prospects for economic diversification. The recent passage of the new Investment Act is a welcome step in this regard. Further development of the domestic debt market will be needed to support a broadening of the investor base and funnel capital to new medium and long-term investments. And addressing skills gaps and labor mismatches and simplifying labor market regulations would also help boost employment and facilitate the creation of new small and medium-size enterprises. In this context, staff welcome continued efforts to raise the female labor force participation rate, including through a focus on early childhood care and education.

42. It is recommended that the next Article IV Consultation take place on the standard 12-month consultation cycle.

Figure 1
Figure 1

Fiji: Recent Developments

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Figure 2
Figure 2

Fiji: Fiscal Sector Indicators

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Figure 3
Figure 3

Fiji: External Sector Indicators

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Figure 4
Figure 4

Fiji: Monetary and Financial Indicators

Citation: IMF Staff Country Reports 2021, 257; 10.5089/9781616356149.002.A001

Table 1.

Fiji: Selected Economic Indicators, 2018–26

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Sources: RBF, Ministry of Economy and IMF staff estimates and projections.
Table 2.

Fiji: Balance of Payments, 2018–26

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Sources: RBF and IMF staff estimates.

External Debt=Central Government External Debt+External Private Debt

Table 3A.

Fiji: Central Government Operations, CY2018–26

(In millions of Fiji dollars)

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Sources: Ministry of Economy and IMF staff estimates.
Table 3B.

Fiji: Central Government Operations, FY2018–27

(In millions of Fiji dollars)

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Sources: Ministry of Economy and IMF staff estimates.
Table 4.

Fiji: Monetary and Financial Statistics, 2018–21

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Source: Reserve Bank of Fiji

Ratio of GDP to M2

Ratio of M2 to Monetary Base

Weighted average lending rates on commercial banks loans