|Devastating floods hit Fiji twice in a short time.|
Economist Intelligence Unit
April 18 2012
Outlook for 2012-13
Three years after the abrogation of the democratic constitution in 2009 by the then president, Josefa Iloilo, Fiji's military commander and prime minister, Commodore Voreqe (Frank) Bainimarama, appears more determined than ever to hold on to power. He has pushed back the next election date by five years, to September 2014. International donors, led by Australia and New Zealand, will continue to exert economic and diplomatic pressure on the government until a poll is held, but the Economist Intelligence Unit believes that Commodore Bainimarama will be undeterred by foreign criticism. Severe flooding in parts of the country will mean that the rate of economic growth is likely to slow in 2012, despite higher gold production and the ongoing development of the tourism sector.
The political scene
The emergency powers in place since 2009 were lifted by Commodore Bainimarama in January 2012, ahead of the start of a consultation process on drafting a new constitution. The lifting of the Public Emergency Regulations was (PER) welcomed by the Australian and New Zealand governments as a first step towards greater political freedom. But new public order controls were decreed at the same time, which in effect enshrined elements of the PER into law.
In its recent report on Fiji following Article IV consultations, the IMF highlighted weak economic growth as its chief concern and warned that without significant structural reforms and a better investment climate, real GDP growth would remain subdued at 1.5-2% a year. In late March the government tightened the law regarding airline ownership in order to increase its operational control over the national carrier, Air Pacific.
The domestic economy
According to the Reserve Bank of Fiji (RBF, the central bank), real GDP grew by an estimated 2.1% in 2011, underpinned by higher output in the primary and tertiary sectors. Thanks to a strong fourth quarter, the Fiji Sugar Corporation produced around 166,700 tonnes of sugar in 2011, representing a rise of 26.7% year on year. Although below its initial target for 2011, this was a marked turnaround on the fall in sugar output seen in each of the past four years.
Foreign trade and payments
The RBF has reported that the merchandise trade deficit for the first half of 2011 (latest available data) narrowed slightly compared to the year-earlier period, to F$917.7m (US$510m), as a rise of 20% in the total value of exports significantly outpaced growth in the import bill of 7.4%.
The emergency powers in place since 2009 were lifted by Fiji’s military commander and prime minister, Commodore Voreqe (Frank) Bainimarama, in January 2012, ahead of the start of a consultation process on drafting a new constitution. The lifting of the Public Emergency Regulations (PER) was welcomed by the governments of Australia and New Zealand as a first step towards greater political freedom. However, new public-order controls were decreed at the same time.
This has raised doubts as to how free and inclusive the forthcoming debate on the new constitution and electoral reforms will be, and has fostered wider concerns about the government’s commitment to holding democratic elections, which Commodore Bainimarama has postponed until September 2014. The PER were imposed in April 2009 after the prime minister abrogated the constitution and dismissed the judiciary. Under the regulations, Fijians’ freedom of speech and right to gather in public were curtailed, the media was muzzled, and the security forces were granted greater powers of arrest and detention.
Commodore Bainimarama presented the new controls, which update the Public Order Act 1969, as a “modernisation” of public-order rules that was necessary to combat terrorism, racial tensions and hate speech. But opponents of the government argue that the latest decree simply enshrines in law many of the provisions that existed under the PER. Although some of the rules relating to detention have been relaxed under the new rules, public meetings must still be approved in advance by the authorities. Furthermore, journalists and publishers continue to risk tough penalties, such as fines and jail sentences, if they breach content regulations, despite the removal of government censors from newsrooms.
Commodore Bainimarama has also given further details about the process under which a new constitution would be debated and ultimately approved. The process, which is expected to be completed by September 2013, will be overseen by a five-member Constitutional Commission chaired by a respected Kenyan-born expert on constitutional law, Yash Ghai. Three of the commission's other members are Fijian, while the fourth is a South African-born expert on human rights and constitutional affairs, Christina Murray. A civic-education programme will run from May to July 2012, followed by public consultations with the Constitutional Commission to be held between July and September.
According to the current timetable, the commission will produce a draft constitution by the end of 2012. Commodore Bainimarama has stipulated that the new constitution must be based on the principle of "one person, one vote" (thereby eliminating the communal constituencies in which indigenous Fijians and ethnic Indians currently vote separately), and that the legal voting age should be lowered to 18 years.
In mid-March he formally dismantled the Great Council of Chiefs, an institution set up in the 1870s under British rule, which according to the prime minister “perpetuated elitism and fed into the divisive politics which [has] plagued our country”. Under the 1997 constitution, the council (which mainly consisted of hereditary, indigenous Fijian chiefs) was responsible for appointing 14 members of the 32-seat Senate (the upper house of parliament) and had the right to name the president and vice-president. The council was suspended by Commodore Bainimarama in 2007 following the 2006 coup, and it is widely thought that the timing of the dissolution of the council reflects the prime minister's desire that it should not have a role in the new constitution.
Fiji has been hit by two episodes of severe flooding since mid-January, mainly affecting the western areas of Viti Levu, the country's largest and most populous island. The death toll in January reached double figures, and several thousand people were forced to evacuate their homes. The heavy rain caused landslides, cut power and water to some rural communities and towns, and washed away bridges and roads. It also caused extensive damage to crops (especially sugarcane), and severely affected the main tourist area of Nadi, where Fiji's international airport is located. The damage caused by the January floods was initially estimated at around F$20m (US$11m).
Heavy rain and flooding then returned in late March, killing another seven people and leading the government to declare a state of emergency for the second time in three months. Many tourists were left stranded by the forced cancellation of flights, and the cost of the clean-up, as well as of lost output, is expected to be high. According to some estimates, the damage resulting from the two flooding disasters could be nearly double that caused by the 2009 floods, the bill for which came to around F$130m. Despite the sanctions that are in place against Fiji, the governments of Australia and New Zealand pledged financial assistance to aid agencies helping with relief efforts.
Three years after the abrogation of the democratic constitution in 2009 by the president at the time, Josefa Iloilo, Fiji's military commander and prime minister, Commodore Voreqe (Frank) Bainimarama, appears more determined than ever to hold on to power. Commodore Bainimarama, who deposed the elected prime minister, Laisenia Qarase, in a coup in December 2006 before assuming the post himself, has pushed back by five years, to September 2014, the date by which an election is to be held. After the abrogation of the constitution, emergency regulations were imposed, restricting civil liberties and giving extensive powers to the security forces. These were lifted in early 2012, but were replaced by an updated version of the Public Order Act 1969, which has in effect enshrined the emergency regulations into law. The bureaucracy has been purged of anti-coup figures, and supporters of the prime minister have been appointed as replacements. Commodore Bainimarama has also been successful in taming Fiji's powerful Methodist church and, more recently, the country's trade unions.
However, despite the appearance of political stability—a result of the fact that few people are prepared to challenge the prime minister publicly—tensions persist. In mid-2011 Roko Tevita Uluilakeba Mara, a former high-ranking military officer and a son of Fiji’s longest-serving prime minister, Ratu Sir Kamisese Mara, escaped from Fiji. He had been expected to face sedition and mutiny charges, and his opposition to the government represented an open display of dissent by a former insider. Following his departure, Mr Mara embarked on a tour of the Pacific region, criticising the Fijian government for breaking its promises and withholding democracy. Meanwhile, a host of other prominent figures within the government have either resigned or been dismissed in the past two years, suggesting the existence of divisions within the regime. Since late 2010 the defence minister, Ratu Epeli Ganilau, the governor of the Reserve Bank of Fiji (RBF, the central bank), Sada Reddy, and the lands minister, Netani Sukunaivalu, have left their positions, with Mr Ganilau citing a disagreement with Commodore Bainimarama as the reason for his departure.
The Economist Intelligence Unit believes that Commodore Bainimarama will hold firm to his decision to delay the next election until 2014. There are also doubts about whether the poll, when it happens, will be free and fair. In early 2010 Commodore Bainimarama said that opposition parties, including Mr Qarase’s Soqosoqo Duavata ni Lewenivanua (United Fiji Party), the Fiji Labour Party and the National Federation Party, would not be allowed to contest the election. A new constitution, a draft of which is expected in late 2012, is expected to attempt to dismantle the country's race-based political system by abolishing the communal constituencies in which indigenous Fijians and ethnic Indians vote separately.
International donors, led by Australia and New Zealand, will continue to exert economic and diplomatic pressure on the government until an election is held. In mid-2009 Fiji became the first country to be suspended from the 16-member Pacific Islands Forum (the region's main political grouping), after Commodore Bainimarama ruled out an election before the end of that year. In the same year Fiji was also expelled from the 53-member Commonwealth. Aid has been withheld, and travel bans are in place against military personnel and those who have accepted appointments under the regime, although an exception has been made for Mr Mara since his escape from the country.
The EU has withheld funds intended to facilitate the restructuring of Fiji’s sugar industry as it adjusts to the ending of European price subsidies. In September 2011 the EU announced that it was suspending for a fifth six-month period further development assistance worth around €30m (US$40m) and subsidies to sugarcane farmers worth about €115m. The EU welcomed the lifting of Fiji's Public Emergency Regulations in January 2012, but has not sought to restore assistance programmes. So far, Commodore Bainimarama has shown no sign of bowing to international pressure.
In its recent report on Fiji following Article IV consultations, the IMF highlighted weak economic growth as its chief concern, and warned that without significant structural reforms and a better investment climate real GDP growth would remain subdued, at 1.5%-2% a year. The Fund also highlighted the many risks facing the country, including political uncertainty, structural weaknesses and its exposure to global economic volatility owing to its dependence on tourism, overseas remittances and foreign direct investment. The report also noted that high public debt and the substantial fiscal deficit (estimated by the IMF the equivalent of 54.2% of GDP and 3.5% of GDP respectively in 2011) limited the Fijian authorities’ ability to respond to a renewed global economic slowdown through fiscal stimulus. Moreover, given that the Reserve Bank of Fiji (RBF, the central bank) reduced its main interest rate, the overnight policy rate, by 100 basis points to 0.5% in October 2011, there is little scope for the monetary authorities to loosen policy further to encourage consumer spending.
The IMF applauded the Fijian authorities’ plans to reduce the fiscal deficit and the significant cuts in income tax rates that are included in the 2012 budget. But the organisation warned that further revenue-raising efforts may be required if the ambitious budget deficit target for this year of 1.9% of GDP set out in the budget is to be met. With regard to the RBF’s plans for a credit-guarantee scheme for small and medium-sized enterprises (SMEs), which have struggled to secure loans from commercial banks, the report warned against the relaxation of credit standards, which could threaten the stability of the financial system, adding that “the international experience with such facilities has been spotty”.
Nevertheless, the government has pressed ahead with an F$3m SME credit-guarantee scheme, under which it promises to repay 50% of the loan amount (excluding interest) if an SME defaults, up to a maximum of F$50,000 (US$28,000) per company. In late February the RBF also unveiled new bank ratio requirements to promote lending to the agricultural and renewable-energy sectors. Under the changes, commercial banks must use 4% of their deposits to make loans to the agriculture, fisheries and forestry sector and must reserve a further 2% of deposits for loans for the renewable-energy sector.
In late March the government tightened the law on airline ownership in order to increase its operational control over the national carrier, Air Pacific. The government currently has a 51% stake in Air Pacific, while Australia's leading airline, Qantas, has a holding of 46.3% (the remaining shares in the company are held by the governments of Tonga, Nauru, Kiribati and Samoa, and Air New Zealand). However, Qantas enjoys certain “supermajority and veto rights” on decisions such as the appointment of the airline's chairman and management, its annual operating budget, the selection of routes, scheduling changes and employee bonuses. The government claims that this gives Qantas effective control over Air Pacific at the same time as it competes directly with the Fijian carrier through its low-cost offshoot, Jetstar, which launched direct flights from Sydney to Nadi in 2010.
According to the Civil Aviation (Ownership and Control of National Airlines) Decree 2012, all air carriers registered in Fiji are now required to be under the “substantial ownership and effective control” of a Fijian citizen, while at least two-thirds of the board of directors must be Fijian. There are currently four Qantas directors on Air Pacific’s nine-member board, so that the Australian airline could lose at least one of its seats on the board under the new rules.
In a press release announcing the decree, the government framed the changes as a necessary “to ensure compliance with international law and bilateral requirements governing air service rights granted to national airlines that fly to other nations”. It adds that the government “has now corrected the activities of prior Fijian governments, which allowed foreign citizens to control Fiji’s national airlines”. However, the civil aviation minister, Aiyaz Sayed-Khaiyum, has made clear that the changes do not amount to the nationalisation of Air Pacific, which, along with its wholly owned subsidiary, Pacific Sun, remains open to investment by foreigners.
Qantas has been seeking to sell its shareholding in Air Pacific back to the Fijian government since 2010, when the Australian airline was reportedly asking for around F$70m for its stake. However, the two parties have been unable to agree a deal. Air Pacific carries around 70% of all tourists coming to Fiji. But the Fijian airline has faced growing competition in the Australian market since Jetstar launched its Sydney-Nadi service and Virgin Australia increased capacity on its various Australia-Fiji routes in 2009. The Air Pacific Group recorded an operating loss of F$4.3m in fiscal year 2010/11 (April-March), but this represented a significant improvement on its record loss in the previous year of F$78.5m.
The government has ambitious goals for economic reform, including boosting GDP, carrying out land reform and eliminating the current-account deficit. However, the high level of public debt means that the government is under pressure to reduce the size of the public sector, and only limited progress towards this objective has been made so far. Fiji remains a highly unpredictable destination for foreign investment. Legislation passed in 2010 outlawed ownership of media organisations by foreigners, and a large US-owned producer of mineral water, Fiji Water, was hit by a dramatic rise in the water resource rent tax in the 2011 budget.
The government's record on economic management is patchy. A chunky budget deficit was recorded in 2010, and we estimate that another was recorded in 2011. The budget for 2012 outlines considerable changes to the tax regime. Fijians, and particularly those on low incomes, are to see their income tax contributions slashed. The government intends to enable this measure to be afforded through increases in a number of indirect taxes, and believes that the industries affected by these increases will be sufficiently strong to cope. The 2012 budget aims to achieve a much smaller fiscal deficit, at the equivalent of 1.9% of GDP, this year, despite another rise in spending. We believe that the authorities will struggle to meet this ambitious target, particularly as flooding in early 2012 will necessitate additional, emergency spending. We forecast that the fiscal deficit will widen in 2012, to the equivalent of 3.7% of GDP, and will remain around this level in 2013.
The government is currently running a very loose monetary policy, in a bid to encourage consumer spending, and at the expense of low inflation. The government reduced its main policy interest rate, the overnight policy rate (OCR), by 100 basis points to 0.5% in October 2011. This may have proved to be a premature move, as it means that there is little more that it can do to stimulate economic growth in the aftermath of the flooding, and inflation has proved to be sticky. The RBF kept its OCR on hold at its most recent meeting, in April. We expect the start of a period of monetary policy tightening to depend on the economy's ability to bounce back from flood-related disruption. Interest rate rises are unlikely until the end of 2012.
Real GDP grew by an estimated 2% in 2011, which, if realised, would be the best performance since 2006. We would expect a similar rate of growth in 2012 were it not for the serious flooding that occurred in the early months of the year. Key tourist areas and the international airport were affected, while there has been damage to agriculture and infrastructure.
As a result, we now forecast that the economy will expand by 1.5% this year, before recovering to growth of 1.9% in 2013. The economy will be buoyed by continued development of the mining sector, although the sugar industry will remain in the doldrums in 2012-13. The prices paid for sugar by the EU under its Cotonou Agreement with African, Caribbean and Pacific countries will continue to decline rapidly, and aid that would otherwise have been provided to Fiji by the EU to smooth the transition to lower prices will be withheld because of Commodore Bainimarama's refusal to hold elections.
Beyond the flooding, the outlook for the country's tourism industry is more encouraging. Air services have become more frequent, but competition for tourists among Pacific island nations is rising, and the local industry is vulnerable to travel warnings from the Australian and New Zealand governments whenever political instability increases. Nevertheless, continued growth in tourist numbers is likely, particularly in 2013, provided that the political situation remains calm.