IMF GIVES FIJI INTERIM GOVERNMENT MIXED MARKS FOR

UNCLAS SECTION 01 OF 02 SUVA 000577

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON MARR FJ CH
SUBJECT: IMF GIVES FIJI INTERIM GOVERNMENT MIXED MARKS FOR
ITS HANDLING OF THE ECONOMY



1. (SBU) Summary. A visiting IMF Article IV mission said
Fiji's Reserve Bank and interim government (IG) have done a
fairly good job over the last 12 months managing a very
troubled economy, although it noted that many of the troubles
were brought on by 2006 coup that brought the IG to power.
Fiji has avoided a possible balance of payments crisis by
relentlessly suppressing imports and capital spending. As a
result, Fiji's budget is nearly in balance for 2007 and its
reserves have increased slightly from 2006 levels. The IMF
team said these actions were akin to emergency room
procedures. They can stop the bleeding in the short term,
but the economy can't remain "in a cast" if it is to have any
hope of recovery. The IMF estimates that Fiji's economy will
decline by 4.2% in 2007 and grow by less than 2% in 2008, a
slightly more pessimistic picture than that predicted by the
Fiji Reserve Bank. Growth in 2008 is dependent, the IMF team
said, on a strong rebound in tourism earnings. and an
increase in investment and capital expenditure. Assistance
from China might help a little, but the team leader warned
that assistance "will take longer to put into place than
people think, will start later than people think, and will
not help Fiji's balance of payments or reserve position."
The IMF team acknowledged that an economic recovery in Fiji
is unlikely unless progress is made in the political front,
which they understand to mean progress toward elections. End
summary.


2. (SBU) An IMF team led by Jeremy Carter, Advisor, Asia
Pacific Department, visited Fiji November 29-December 11 on
an Article IV mission. Carter briefed diplomats on the
tentative findings of the mission December 11. Carter said
an IMF Board Meeting on Fiji is expected in February and that
he hoped the Article IV staff report would be published in
conjunction with that meeting.

IMF Findings - Things Could Be a Lot Worse....
--------------

3. (SBU) Carter said Fiji's Reserve Bank and the Interim
Government's (IG) Ministry of Finance had "done a good job"
over the last 12 months in averting a balance of payments
crisis and a domestic financial crisis. The methods used
were fairly draconian and weren't necessarily the ones the
IMF would have chosen, but they worked. The IG took strong
measures to discourage imports and limit capital spending and
cut civil service wages. From a development point of view,
he said, these actions are a problem, but from a financial
point of view they helped keep Fiji solvent. Reserves, which
dropped to dangerously low levels in the months after the
coup, are now slightly higher than pre-cop levels. Through
reduced spending, the IG was able to virtually balance its
budget in 2007.

But Prospects for the Future Are Not Bright
--------------

4. (SBU) Carter said the actions taken by the IG in 2007
were like "emergency room measures in a hospital." Putting a
cast on a leg may be necessary for the short term, but it
cannot remain in place indefinitely. Similarly, the economy
cannot remain in the "cast" the IG has constructed if growth
is to return. Given fiscal austerity, minimal inflows of
investment and a slump in tourism, the economy fell by an
estimated 4.2% in 2007, said Carter. This figure is slightly
more pessimistic than the Reserve Bank's estimate of a 3.9%
drop in GDP. The Reserve Bank predicts economic growth of
2.2% in 2008. While that figure is "in the range of
possibility," Carter said he was concerned that some of the
assumptions underlying the Bank's forecast cannot be met.


5. (SBU) Given minuscule IG capital spending of FJ$120
million in 2007, said Carter, the 2008 budget estimate of
FJ$270 million for 2008 seems unrealistic. Since there are
few prospects for significant new overseas aid or investment
in 2008 and the IG has little access to overseas borrowing,
there simply does not seem to be funds available to invest in
capital spending projects. Other factors dampening growth
include the civil service wage cuts of 2007 and a continuing
slump in tourism. The wage declines, said Carter, were not
limited to the highly publicized cut of 5% in salaries (1% of
which was restored later). Promised cost of living increases
and bonuses were also cut. The IMF estimates that the total
drop in civil service wages in 2007 was about 9%. This drop
in income has, of course, large implications for domestic
consumption in 2008.

SUVA 00000577 002 OF 002



Tourism's Role
--------------

6. (SBU) The return to growth predicted by the Reserve Bank
is primarily predicated on a tourism rebound, said Carter.
(Note: Reserve Bank officials have told us they are assuming
a 10% increase in tourism revenues in 2008.) Carter said
that rebound may or may not take place. The additional bed
tax announced in the 2008 budget will hurt, and hotel
operators may decide they cannot indefinitely keep in place
the cut-rate deals they have used to attract business since
the coup. As long as Fiji's political situation is unstable
and its relations with its neighbors remained strained, said
Carter, travel advisories will remain in place, further
dampening demand.

Will Chinese Money Help?
--------------

7. (SBU) Carter expressed considerable skepticism about the
role of Chinese money in helping Fiji out of its economic
doldrums. While FJ$242 million in projects have been
promised and those funds are welcome, Carter said
Chinese-funded projects "will take longer to put into place
than people think, will start later than people think, and
will not help Fiji's balance of payments or reserve
position."

The Political Situation Holds the Key
--------------

8. (SBU) Carter said Fiji's economy remains deeply troubled
with many long-term structural problems that need to be
addressed. The international community needs to help.
However, it is clear that the level of assistance needed will
not be forthcoming until Fiji lays out a road map for
resolution of its political problems. The IMF is not in a
position to advise Fiji on how to do that, but recognizes
that political progress, essentially movement toward
elections, is the fundamental prerequisite to getting the
economy back on track.


9. (SBU) Comment: Carter told us that virtually all of the
IMF's interlocutors in Fiji also recognize that economic
recovery depends on movement in the political front. Whether
the IG's military leaders fully understand that basic fact,
however, remains an open question.














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