Republic of Fiji: Staff Report for the 2013 Article IV Consultation

KEY ISSUESContext: Growth in recent decades has been sluggish owing to persistent politicalturmoil, external shocks, and slow progress on structural reforms. Unemployment atnearly 9 percent continues to be stubbornly high, with youth and underemployment atsignificantly higher rates. The political environment remains complex as Fiji prepares fortransition to democratic government in 2014, although the strained relations withtraditional development partners have started to ease somewhat, after the enactment ofthe new constitution in September 2013.Key issues and policy recommendations: Structural reform. The key policy challenges are to raise potential growth, reducevulnerability to shocks, and further reduce poverty. Although the authorities haverecently implemented some structural measures—improving infrastructure,enhancing land-leasing efficiency, restructuring the sugarcane industry, amongothers—the need for deeper and faster reform to support higher growth and reduceunemployment and poverty is urgent. The investment climate needs improvementthrough making government regulations more predictable and less intrusive,including relaxing the extensive price controls. Macroeconomic policies. The current configuration of mildly expansionary fiscalpolicy and accommodative monetary policy is broadly appropriate as theunemployment rate remains high and inflationary pressures dissipate against thebackground of some slack in the economy and stable commodities prices. Theprojected increase in the fiscal deficit is largely due to an increase in capital spendingto clear infrastructure backlogs. Recent income tax cuts are growth-friendly but basebroadeningmeasures are needed. The slow appreciation of the real exchange ratehas continued and the Fund's exchange rate assessment approaches now suggestmoderate overvaluation. The level of the peg should be subject to periodic reviewsand adjusted as necessary, and the authorities could also consider more flexiblearrangements.