Fiji’s Aggressive Budget Sows the Seeds for SeriousEconomic Push for Next Fiscal Year and Beyond

Fiji’s national budget for the 202021 fiscal year was tabled in Parliament on July 17, and the appropriation bills were passed on July 30. The budget was constructed under the most extraordinary set of circumstances with the government confronted with the most severe economic crisis in Fiji’s modern history.

Budget papers show that taxation revenue for the next financial year (beginning 1 August) is forecast to fall by a massive 33.5 per cent (y/y).

The FijiFirst government had two choices: to continue the process of fiscal consolidation (ie adopt a ‘live within your means’ budget) or to choose a Keynesian style counter-cyclical program to revive the economy. The government chose the latter, and we think the choice to go into a large deficit in order to boost activity in a severe downturn is the right one.

The budget papers forecast revenue of FJ$1.7bn (16.9% of Gross Domestic Product (GDP)) and expenditure of FJ$3.7bn (37.1 per cent) leading to a deficit of FJ$2bn (−20.5 per cent for 2010-21 versus −8.2 per cent for 2019-20). These projections are in line with our expectations. So for now we are sticking to our forecast of a 12.9 per cent decline in GDP for 2020. We are optimistic about a strong rebound in 2021, driven initially by construction and joined later, hopefully by a recovery in tourism.

Stimulus strategy well-constructed

The budget’s additional spending initiatives include income support payments, indirect tax cuts and numerous reforms to ease the regulatory and cost burden of doing business in Fiji, with measures timed to come through progressively over 2020-21.

The broadened cash income support payments will be rolled out from 10 August, and most of the money will be spent this year which will support private consumption and jobs. The ‘shovel ready’ government building and infrastructure projects should start in fourth quarter of 2020 and ramp up next year. The First Home Owners Programme will add stimulus to the economy from late this year as new dwelling construction gets under way. Private investment held over from 2019, when tight funding conditions made some large projects financially unfeasible, could be rolled out progressively given loose monetary conditions. Liquidity as at July 30, was FJ$770m and is projected to push higher as foreign reserves lift in line with drawdowns on foreign currency loans for budget support.

The tax breaks for the tourism sector will make it cost competitive and help it recover from the second half of next year (assuming a vaccine is available by mid-2021 and international travel returns).

Broad-based legislative reforms could lay the foundation for a more balanced and diversified economy in the medium term, which is important for Fiji because, according to figures from International Air Travel Association, there is no certainty around whether international travel will return to pre-pandemic levels any time before 2024. By supporting near-term demand (particularly private consumption), lifting funds for construction, providing tax breaks to make tourism more competitive, encouraging business investment though reform and rebalancing the economy, the government has sown the seeds of a serious economic push in the next fiscal year and beyond.

The private sector will need to get on board While the stimulus will give the economy a boost, it alone won’t be the driving force. The government needs the private sector to take advantage of the incentives for business investment and partner in fighting the pandemic induced downturn.

Feedback from the business community during various post-budget briefings has been overwhelmingly positive. We are consequently optimistic that a more businessfriendly regulatory environment, looser funding conditions and a generally positive long-term view of the Fijian economy will see some of the private-sector projects earmarked for 2020 come through in the second half of this year and ramp up next year, supporting economic activity and jobs.

Income support payments will help private consumption

The government will provide income support to people hit by the tourism industry’s shutdown under a broader income support package. Workers who have lost jobs because of COVID-19 will continue to receive FJ$220 per fortnight.

However, employees who are underemployed (ie working fewer hours than they desire) can now access FJ$44 per fortnight from their retirement savings for every day they are not working. In addition, workers who have had their pay rates reduced by 50 per cent are allowed to make a one-off withdrawal of FJ$1,000 from their pension fund account.Those with pay rates cut by less than 50 per cent can make a FJ$500 withdrawal. Employees with insufficient funds will have their shortfalls met by government, so the lump sum withdrawals are guaranteed. The government has made available FJ$95m for these income support payments, while the Fiji National Provident Fund expects to release around FJ$40m for the socalled Phase 3 of pension fund withdrawals. The budget also has an allocation of FJ$5m for upskilling and retraining unemployed workers who would like to transition into a new job. The upshot is that income support is available for every person who has been negatively impacted by COVID-19 and/or restrictions, which will ease economic hardships and support private consumption expenditure and retail jobs.

Construction flow-ons will drive economic activity

Since 2011 construction in Fiji has been growing, with work done increasing across

the three categories of investment (dwelling building, non-residential building andcivil engineering construction). Total construction rose from an annual average of

FJ$238m over 2005–09 (inclusive) to FJ$275m 2010–14, and nearly doubled to FJ$512m over 2015–19. The bulk of investment came from private sources, increasing in share from 45 per cent in 2013 to 56 per cent in 2019.

Construction has high multiplier effects on the rest of the economy reflecting the flow-on impact for upstream material suppliers, downstream demand for fit-out items and the stimulus from rising employment, incomes and wealth. The rise in both public and private investment was a key driver of growth for most of last decade.

The 2020-21 budget has a sizable allocation for ‘shovel-ready’ projects.

These are projects for which the environmental impact assessment is complete, the design work is done, engineering drawings are complete and the projects are ready to go to tender. The government has several projects ready including:

■ A new maternity wing at the CWM hospital

■ Construction of the Prime Minister’s Office complex

■ Completion of new and refurbished police stations

■ New sporting facilities

■ Upgrade of several hospitals

Also included in the budget is the construction of multi-story housing projects across

Viti Levu under a public-private partnership (PPP) with the International Finance Corporation and the continuation of the upgraded First Home Buyer’s Programme, where government grants have been doubled to FJ$30k. Both these initiatives will boost new dwellings building.

Private non-dwelling building will also benefit from tax reductions on building raw materials and machinery, simpler regulations to reduce the cost of doing business and an easier business framework (see below). Some of the large projects that stalled in 2019 due to tight financial conditions may be revisited given excess banking system liquidity.

There are signs that construction work done will be quite solid in the second half of this year, supporting activity and jobs across the economy.

More competitive tourism industry to recover from late 2021

The government announced several tax reductions targeted at the tourism sector, including abolishing of the 6 per cent Service Turnover Tax, reducing the Environment and Climate Adaption Levy (ECAL) from 10 per cent to 5 per cent and a lifting the annual turnover threshold for ECAL to FJ$3m from FJ$1.25m.

Many small- to medium-sized tourism operators and tourism-related businesses such as restaurants, rental car companies and cafes will now have a zero ECAL rating. The departure tax has also been reduced by 50 per cent to FJ$100, while excise taxes on alcohol have been reduced by 50%. The government estimates it will forego about FJD500m in revenue once visitor arrivals return to pre-pandemic levels. In partnership with Fiji Airways the government will provide the first 150k visitors with a travel stipend of about FJ$400 per passenger to go towards their Fiji holiday expenses. This package is costed at FJ$60m. Tourism spending is discretionary and depends heavily on economic conditions, particularly income growth and the relative cost of undertaking leisure activity.

Obviously, with the borders of Fiji’s key markets shut, tourism is unlikely to start in earnest until there is a COVID-19 vaccine widely available. That said, even when the crisis wanes leisure travel may take time to recover as people’s attitudes, perceptions and confidence about international travel will have changed.

We may not see an immediate return to pre-pandemic levels of travel but rather a gradual rebuilding of numbers. When tourism does return, though, the budget measures will enhance the cost competitiveness of Fiji’s tourism industry and encourage international visitors to holiday in Fiji.

Reforms to encourage business investment and diversify the economy

According to the Minister for Economy, businesses in Fiji asked for a streamlined and efficient business licencing process to replace the current archaic system. The latter has been a deterrent for doing business in Fiji as applicants were often mired in bureaucratic processes. From 1 August, the old regime will be replaced by a simpler online application form, and the business licence application fee will be waived.

The budget also has policies to pivot Fiji towards a more balanced broad economy, with incentives for investors to relocate assembly and manufacturing lines to Fiji, as well as a focus on commercial agriculture, fishing and the ICT (information, communication and technology) industry sectors. In terms of manufacturing, the government is committed to establishing a Special Economic Zone in Navutu, with a tailormade manufacturing facility to suit a variety of manufacturing processes. This is being developed in partnership with the Fiji National Provident Fund and the International Finance Corporation.

Fiji needed a sizeable stimulatory budget, and it got one.

In the present environment, fiscal policy can’t be reactive (ie in line with revenue).

It needs to be set proactively to stimulate demand. Fiji’s 2020-21 budget strikes the right balance in addressing short- and medium-term economic priorities.

It tackles the immediate challenges and sets the stage for an economic push by focussing on building, community and infrastructure projects.

Through its targeted tax breaks to the tourism industry, it lays the ground work for a stronger economy once the pandemic is over. The aggressive budget will limit the adverse impact of the global recession and closed borders on Fiji’s economy and shelters the economy from a deeper recession.