Fiji: Country outlook
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Fiji: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: The Fiji First Party (FFP), led by the prime minister and former military leader, Voreqe (Frank) Bainimarama, will remain in power during The Economist Intelligence Unit's 2021-22 forecast period. The FFP has a much smaller parliamentary majority than during its first term (2014-18) but will remain cohesive compared with the increasingly fragmented parliamentary opposition. However, the severe economic cost of the measures adopted to prevent local transmission of the coronavirus (Covid-19) could fuel social discontent and further erode support for the FFP ahead of the next general election, due by end-2022. As a result, a change of government, which would be the first since the restoration of democracy in 2014, is entirely possible.
ELECTION WATCH: The most recent general election, in November 2018, was the second since the country's return to democratic rule in 2014. The FFP won 27 of the 51 seats, down from 32 seats out of 50 in 2014 (an extra seat was added for the 2018 election). The Social Democratic Liberal Party (SODELPA) gained six seats to secure 21 in total, and the National Federation Party (NFP) retained three seats. The poll passed smoothly, although international monitors did note that the FFP government gave out a significant level of grants and other funding during the campaign. However, the outcome was accepted by the vast majority of candidates, the media and the public. Mr Bainimarama has confirmed that he intends to contest the next general election, due by end-2022, and we expect it to be a close race.
INTERNATIONAL RELATIONS: Fiji's political and economic relations with its regional neighbours will continue to improve in the forecast period. The Vuvale Partnership between Australia and Fiji (vuvale means "family" in Fijian) will underpin greater security co-operation, stronger economic ties and more frequent ministerial contact between the two countries. Australia provided assistance in the aftermath of Cyclone Harold, which struck parts of Fiji in April 2020. Australia has also pledged to assist with coronavirus immunisation; however, given global vaccine shortages and the need to vaccinate its own population, this could be many months away. Mr Bainimarama's criticism of the Australian government's reluctance to take greater action on climate change, which the Pacific Islands see as the biggest threat to their future, will remain an irritant to otherwise deepening bilateral relations.
POLICY TRENDS: Government policy in 2021-22 will focus on managing the fallout for the tourism sector and the wider economy from the global pandemic, and supporting the eventual recovery. Government revenue has plunged as a result of the economic slump and tax cuts to aid the business sector (particularly tourism operators), and will recover only gradually. The budget for fiscal year 2020/21 (August-July) halved the airport departure tax, scrapped the 6% service turnover tax and cut the environment and climate adaptation levy to 5%. Tax write-offs for business investment have been enhanced, stamp duty abolished, and customs duties on numerous products reduced to prop up demand. Pandemic relief payments through unemployment assistance and pension withdrawals have been extended into 2021, and the government is rolling out a F$60m (US$29.4m) tourism recovery package. The government will provide some additional fiscal support in the 2021/22 budget, which will be tabled in June, although options will be limited given the heavy toll on the public finances so far.
ECONOMIC GROWTH: We estimate that real GDP contracted by 14.9% in 2020, owing to the pandemic-induced collapse in tourism. This is the first contraction since 2009 and the deepest on record. Given that Fiji's borders are likely to remain closed for much of this year, we have revised down our real GDP growth forecast for 2021 to 4%, from 4.8% previously. Growth will accelerate to 7.5% in 2022, but real GDP will remain below 2019 levels until beyond our forecast period.
INFLATION: Consumer prices fell by 2.6% on average in 2020, owing to lower prices for local food relative to early 2019, the pandemic-related fall in global oil prices, the sharp contraction in domestic demand and cuts to taxes and duties on a range of products implemented in the budget. Consumer prices will rise by an average of 2.3% per year in 2021-22 as the economy begins to recover and global food and oil prices increase. Catastrophic weather events will remain an upside risk to our inflation forecast, particularly during the November-April cyclone season, as bad weather conditions can result in multi-month spikes in food prices.
EXCHANGE RATES: Having continued its depreciating trend against the US dollar in 2020, the Fijian currency will strengthen this year, to an annual average of F$2.10:US$1. US dollar weakness in early 2021 will more than offset downward pressure on the Fijian currency from ongoing uncertainty about the tourism sector's recovery prospects and concern about the wide current-account deficit. However, we expect the local currency to depreciate modestly, to F$2.16:US$1 on average in 2022, as the strengthening US economy leads to a firming in the US dollar. We expect foreign-exchange reserves to remain comfortably above the international benchmark of three months of import cover for developing economies.
EXTERNAL SECTOR: We estimate that the current-account deficit widened to 13.5% of GDP in 2020, driven by a plunge in tourism exports, which probably pushed the normally substantial services surplus into deficit. We forecast that the current-account shortfall will narrow to 9% of GDP by 2022 as a pick-up in the tourism sector and broader logistics-related activity arising from Fiji's position as a transport hub for other Pacific island nations underpins a partial recovery in the surplus on services. An increase in remittances from seasonal workers in Australia and New Zealand will also support the external balance.
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