Economic downturn
THE Fijian economy is certainly in the doldrums. Many people have pointed this out. I have been doing so in many presentations and articles, but more rigorously since 2013, pointing out our lack of attention on the supply side of the economy — investment, production and exports — which the Government now seems to accept is problematic.
It’s good the Government is listening and possibly taking steps towards mending the issues. However, to say, as appeared in another newspaper a few days ago, that “people should not despair” is quite outrageous. We should certainly be concerned.
The other newspaper says people should not despair since the economic downturn is everywhere around the world.
How does that fact help people in Fiji?
It’s true that other countries also face a slowdown but the solutions to Fiji’s economic problems do not lie outside our economy. In most cases they lie within it.
Most critics of the government’s economically optimistic line in the past five years, particularly those from USP, argued that the supply side of the economy was getting weaker in each successive year. The Government and its supporters vehemently objected to those suggestions and arguments.
In comparison with Australia and New Zealand (or even China and Japan), Fiji’s economic slump may well be far worse.
The Reserve Bank of Fiji (RBF) has pointed out that investment/construction related activity has declined significantly in the last quarter of 2019.
RBF points out that new bank lending for investment purposes fell by 20 per cent cumulative to May 2019, underpinned by a decline in loans to the real estate sector by around 31%, which, it argues, more than offsets the increase in loans to the building and construction sector (an increase of 5.2 per cent).
The RBF economic review also points out that the total value of building permits decreased by about 15 per cent. These decreases are significant and serious in terms of the seriousness of the problems.
Commercial banks’ new investment lending fell by onequarter (26 per cent) in the year to July 2019. This was due to a decline in lending to both the real estate sector (by about 33 per cent) and the building and construction sector (by about 11 per cent). This is alarming.
RBF’s June 2019 Business Expectations Survey (BES) results shows that investment intentions have weakened significantly compared to the December 2018 survey.
RBF argues that fewer firms are expected to invest in plant, machinery and buildings, in both the short and medium term. This is a clear result of eroding business conditions in the country.
It does not take a genius to understand this phenomenon. My recent article in The Fiji Times (Saturday, September 28, 2019) points this out.
The seriousness of the problem magnifies in the case of Fiji since Fiji lacks the “fiscal space” — that is, the ability to use Government spending — to address the problem.
Even dealing with the contractions in consumer demand would be quite challenging.
This is because public debt levels for Fiji are high and the Government cannot afford to run up more debt by spending more.
On top of the contracted consumption, Fiji faces stiff supply side constraints. Fiji’s key sector outputs are not expanding per cent not even a little bit. They are largely contracting.
The economy cannot handle the downturn in the short run per cent there is no extra money to keep things moving.
In fact, this was the fundamental reason why government’s planned expenditure projections for the 2019/20 budget were revised downwards by more than 17 per cent against the previous year.
Even more tragic was government’s decision to cut planned capital expenditures by almost one-third on the previous year. Capital expenditures — on roads, jetties, airstrips — normally contribute to keeping up the productive capacity in the economy. They keep the economy rolling.
The Ministry of Infrastructure and Transport’s capital expenditure for 2019/20 was cut down by nearly two-thirds compared to the previous year.
There were similar cuts in capital spending in critical social sectors such as health, community development, water supply and housing. These sectors are in dire straits.
The 2019/20 capital expenditure in the Health Ministry, for instance, was reduced by 44 per cent. For water supply it was reduced by around 26 per cent (capital expenditure by 31 per cent) against 2018/19 allocations.
Housing and community development capital expenditures was reduced by almost two-thirds (63 per cent).
These reductions were the deliberate action of the Government. The logic of all these reductions, as stated in the budget documents, was to adjust and adopt “financial consolidation” of government finances.
“Financial consolidation” is a euphemism for spending cuts.
Perhaps this is not surprising if the Government, as Opposition parties claim, was on a spending spree in the run up to elections in 2017/18.
Despite the problems, the Government should have taken a more staggered approach. Maybe the government’s game plan is to cut everything now (and save) and then become carelessly expansionary again come next elections, which is politically a good idea but economically a bad one.
This all casts a bad impression on Government planners. Only those who have no concern for the future can take such drastic and misplaced decisions.
Apart from bad populist expenditures closer to elections, the Government in earlier years failed to put in place policies that would lead to real sector output growth.
These were pointed out by lots of people on numerous occasions in the past, including me.
When referring to economies such as Australia, New Zealand, China and Japan one needs to understand and put issues into perspective.
The government positions in Australia and New Zealand are quite clear. Their economic positions are way different from where Fiji stands.
Both Australia and New Zealand are far better-off to cope with the downturn. Also these economies have very different characteristics. On fundamentals like debt levels and productive capacities, both Australia and New Zealand are in far better position than Fiji.
For instance, New Zealand’s current government debt ratio is around 20 per cent of GDP. Similarly, for Australia, the public debt to GDP ratio stands about 40 per cent, and is likely to decline to 37 per cent in the next two years. Fiji’s debt to GDP levels are nudging 50 per cent or more.
So Australia and New Zealand have the room to increase their debt by Government spending to address economic downturn.
On top of this, both Australia and New Zealand have reasonably robust economic fundamentals in place, which the Fijian economy does not have.
Both Australia and New Zealand are likely to grow by more than 2 per cent annually in 2019.
On top of this, both countries are likely to grow at this rate for the next three years. Such growth rates for advanced economies are well beyond par at the time of global downturn.
This is not the case for Fiji. The future looks far grimmer than what is projected by the other newspaper.
It would be a miracle if the Fijian economy could grow at all, particularly with the huge decline in key sectors such as sugar, wood products, gold, food services, construction and more.
Pain is likely to be felt in every part of the economy and the Government should gear up now to solve the problems.
The other newspaper’s solutions to the problem will not work to lessen the pain.
It’s only about cutting household expenditures. It may even worsen the problem.
Strangely, the other newspaper did not say anything about what the Government needs to do.
Ordinary people now ask about the problems they face daily in their lives. They ask whether the escalating prices of basic food items and medicine will ease.
They ask whether the escalating fines, fees and charges would be relaxed.
They ask whether the deteriorating road conditions, increasing crime, persisting squatter housing and the deteriorating health services would improve.
They ask whether the rising cost of construction and house prices would ease.
They ask whether their access to bank loans would improve.
The people constantly ask about the declining quality of government services.
The question is, who will address these problems? What is the Government’s role in solving the problems that it is largely responsible for creating in the first place?
The whole Government bureaucracy and the political fraternity needs to come out of the slumber it is in at the moment.
The seriousness of the problem magnifies in the case of Fiji since Fiji lacks the “fiscal space” — that is, the ability to use Government spending — to address the problem
– Dr Sunil Kumar