Identifier
Created
Classification
Origin
07SUVA149
2007-03-06 20:19:00
CONFIDENTIAL
Embassy Suva
Cable title:  

FIJI'S REVISED BUDGET MIXES SPENDING CUTS WITH

Tags:  EFIN PGOV ECON MARR ASEC FJ 
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RR RUEHPB
DE RUEHSV #0149/01 0652019
ZNY CCCCC ZZH
R 062019Z MAR 07
FM AMEMBASSY SUVA
TO RUEHC/SECSTATE WASHDC 3843
INFO RUEHBY/AMEMBASSY CANBERRA 1603
RUEHPB/AMEMBASSY PORT MORESBY 1184
RUEHWL/AMEMBASSY WELLINGTON 1377
RUEHNZ/AMCONSUL AUCKLAND 0391
RUEHDN/AMCONSUL SYDNEY 0799
RHHJJAA/JICPAC HONOLULU HI
RUEATRS/DEPT OF TREASURY WASHDC 0148
RHHMUNA/HQ USPACOM HONOLULU HI
C O N F I D E N T I A L SECTION 01 OF 03 SUVA 000149 

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/05/2017
TAGS: EFIN PGOV ECON MARR ASEC FJ
SUBJECT: FIJI'S REVISED BUDGET MIXES SPENDING CUTS WITH
WISHFUL THINKING

REF: SUVA 127

Classified By: Ambassador Dinger per 1.4 (B,D)

Summary
-------
C O N F I D E N T I A L SECTION 01 OF 03 SUVA 000149

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/05/2017
TAGS: EFIN PGOV ECON MARR ASEC FJ
SUBJECT: FIJI'S REVISED BUDGET MIXES SPENDING CUTS WITH
WISHFUL THINKING

REF: SUVA 127

Classified By: Ambassador Dinger per 1.4 (B,D)

Summary
--------------

1. (C) Fiji's revised budget is a mix of modest spending
cuts, optimistic revenue projections and wishful thinking
about the future. Civil service wages are being cut 5%
effective March 8. A few ministry budgets have been
significantly reduced, most notably the Ministry of Fijian
Affairs. Defense expenditures are slated to drop, leading a
number of commentators to question the credibility of the
budget, in light of huge coup and post-coup military
expenses. To raise revenue, tariffs will rise on a number of
"luxury" items, and the visitor departure tax will increase.
Government revenues are projected to increase over 2006, even
though GDP is predicted to decline 2.5%. The budget
resurrects oft-mentioned plans to increase sugar output,
diversify tourism markets and again create a Fiji-based bank.
The interim government proposes to deal with its reserve
shortfall by borrowing off-shore, at rates it hopes will be
comparable to pre-coup levels. In our view, the budget is
unlikely to either stabilize Fiji's finances or pave the way
for renewed economic growth. Prospects for significant
economic improvement are dim unless Fiji takes credible steps
to return to democracy quickly.

Budget "A Bitter Pill"
--------------

2. (U) Interim Finance Minister Chaudhry announced Fiji's
revised budget March 2, leading off with the statement that
Fiji's finances are "at its worst state ever." Budget and
spending cuts contained in the revised budget, he said, "will
undoubtedly come as a bitter pill to many of our people. But
frankly, I am left with no other choice." Chaudhry blamed
the deposed Qarase government for Fiji's economic plight, and
said the budget would begin the process of restoring
financial stability and rebuilding Fiji's economy. He said
GDP would decline by 2.5% in 2007 (compared with the 2-4%
decline he and the Fiji Reserve Bank predicted in February,

reftel),but would show 2% growth in 2008.

Cuts in Civil Service Wages, Spending
--------------

3. (U) Chaudhry made the long-expected announcement that
civil service wages would be cut by 5%, effective March 8.
He said the interim government would review the back-pay and
COLA agreements the government reached with unions just prior
to the 2006 elections. Salaries of interim ministers, on the
other hand, will not be cut, based on the argument that
interim ministers are already making less than ministers in
the Qarase government did.


4. (U) The budgets of most ministries were cut from the
Qarase government's 2007 budget, with the Ministry of Fijian
Affairs taking the biggest hit, down more than 34%. That cut
has been clearly noted by the ethnic Fijian community,
leading pro-regime commentators and interim Fijian Affairs
Minister Ganilau to attempt to downplay its significance.
Also hard hit was the Fiji Visitors Bureau, with Chaudhry
arguing that the private sector should provide one-half of
its budget. The military budget was cut from the planned
FJ$85.9 million to FJ$80.7 million (USD 49 million).
Agriculture and infrastructure (water and road projects),on
the other hand, both received significant increases. (The
infrastructure increase presumably factors in ADB new project
funding yet to be finalized.) Overall government spending
is scheduled to decrease by about FJ$140 million (USD 83
million) from the Qarase budget. Additional long-term
savings are considerable if the proposed termination of
scheduled back-pay and COLA payments for civil servants is
figured in.

Defense Budget Figures Questioned
--------------

5. (SBU) In interviews over the weekend, Chaudhry insisted
that he wouldn't tolerate overspending by ministries. No
supplementary allocations will be forthcoming. In an
editorial March 6, the Fiji Times challenged that statement,
noting that Chaudhry did not tell taxpayers how the interim
government will pay for military operations during and after
the coup. The Times surmised that the interim government
would announce a supplementary budget later in the year.

SUVA 00000149 002 OF 003


(Comment: The Fiji Times editorial is right on target. The
seemingly impossible "reduction" in military spending
contained in the revised budget would seem to call into
question the entire document's credibility. End comment.)

Revenues From Tariff Increases on "Luxury Items,"
Higher Departure Tax
-------------- --------------
6 (SBU) The revised budget does not include any significant
changes to tax rates. Tariffs were increased on a large
number of "luxury items," ranging from perfumes to jewelry to
household appliances. The departure tax was also increased,
from the current FJ$25 to FJ$40 (US$25). Tariffs were
reduced on a few food items, such as milk, cheese, and,
strangely, potato chips (though Chaudhry's feud with FMF's
Hari Punja offers a clue). While revenue estimates are well
below those projected in the Qarase budget, they still
represent a 6% increase from 2006 levels. A number of
commentators have observed that Chaudhry's revenue
projections appear remarkably optimistic given the predicted
GDP decline. (Note: The tariff increases target items
purchased by Fiji's middle and upper classes. The cuts in
food tariffs are not as deep or wide-ranging as some of our
contacts had predicted (reftel). End note.)

Looking Into the Future - Chaudhry Sees Deregulated
Telecommunications Industry, Sugar Boom, A New Bank
-------------- --------------

7. (SBU) Chaudhry announced a number of medium and
long-term initiatives that will be "explored" to improve the
economy. He offered few details on how these objectives
would be accomplished. Initiatives include:

--increasing sugar exports by 33% over the next three years.
(An unstated but clear assumption is that large-scale EU
sugar reform aid will flow shortly);
--deregulating the telecommunications industry;
--increasing tourism from East Asian and Southeast Asian
markets;
--promoting Fiji as a movie location;
--promoting import substitution, especially for agricultural
products that could be used in the tourism sector;
--encouraging the private sector to establish a new
Fiji-based bank; and
--developing an equitable land tenure framework.

Offshore Borrowing to Prop Up Reserves?
--------------

8. (SBU) In the budget presentation, Chaudhry said the
interim government would explore borrowing overseas instead
of domestically. In media interviews over the weekend,
Chaudhry explained that domestic borrowing is simply too
expensive, with interest rates at about 10%. He flatly
stated that borrowing from the Fiji National Provident Fund
(FNPF) would halt. Fiji can borrow overseas, he said, at
about 7%. The new funds will help build up Fiji's reserves,
while the US$150 million borrowed on overseas markets by the
Qarase government will be "brought in" to help cover debt
repayments and other expenses. (Comment: Fiji will not be
able to borrow overseas at anything close to the 7% interest
rate quoted by Chaudhry. Investors who purchased shares of
the US$150 million bond issued by the Qarase government at a
7% interest rate last September, when Fiji's prospects looked
bright, lost a bundle after the coup. Once burned,
international investors are unlikely to be enthusiastic about
a new Fiji offering. Another interesting issue is who will
pay interest to the FNPF (aka Social Security). The
Government has been the dominate taker of FNPF paper in the
past, to the benefit of Fiji's retirees. End comment.)

Comment: A Dose of Realism Needed
--------------

9. (C) We fail to see how this budget will do much to
stabilize Fiji's finances or pull it out of recession. It
may have a negative impact on both counts. In failing to
disclose the true level of military spending and the costs of
the coup, the interim government confirms the impression that
it has plenty to hide - not a very encouraging climate for
potential new investors or purchasers of Fiji bonds. In
adding new fees for tourists and cutting tourism promotion
spending, the interim government risks damaging the one
industry that has the potential of helping Fiji out of its
economic mess. Announced plans to borrow off-shore appear
naive and unrealistic, and will do little to solve Fiji's

SUVA 00000149 003 OF 003


reserves crisis. If a devaluation is in Fiji's future,
repaying off-shore loans will be especially difficult.


10. (C) Some of our contacts have expressed disappointment
that the interim government did not use this opportunity to
radically restructure the civil service or take other needed
steps to reform Fiji's economy (the one exception being
Chaudhry's advocacy of telecom deregulation which was already
in the works pre-coup). Indeed, other than ensuring that
special benefits doled out by the SDL to its supporters were
terminated, there is little appetite in this budget for major
reforms. Instead, the budget attempts to reassure Fiji's
citizens and the international community that economic
normalcy will soon be restored. Thus the budget's optimistic
revenue figures, its reliance on a revitalized tourism
industry to pay the bills, and Chaudhry's faith that sugar
production can be ramped up. The budget also assumes that
aid projects will continue and that international investors
will flock to buy Fiji bonds at pre-coup rates. What the
interim government apparently fails to realize is that Fiji's
economy cannot "return to normal" until democracy returns to
Fiji. We expect a very difficult economic year and a
recession that could well be even deeper than the 2.5%
contraction Chaudhry predicts.
DINGER