The Global Economic Outlook Remains Favourable, with an Above-Average Growth (4.3 Percent)

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22 02 February 2005

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OVERVIEW

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The global economic outlook remains favourable, with an above-average growth (4.3 percent) envisaged for this year, led by relatively strong growth in the US and continued expansion of the Chinese economy. Growth prospects for all our other major trading partners are anticipated to remain positive. On other developments, the effect of the recent Asian tsunami is not expected to adversely affect world growth, as it was contained mostly in Indonesia, Thailand and some smaller economies on the Indian Ocean rim. However, the risk of higher oil prices could derail the world growth momentum.

Domestically, the economy is estimated to have grown by 3.8 percent in 2004, driven largely by the construction, wholesale & retail trade and restaurants & hotels, agriculture and manufacturing sectors. The twin objectives of monetary policy – low inflation and an adequate level of foreign reserves – remained intact last year. For 2005, growth is expected to slow to 1.5 percent, mainly stemming from the lower-than-expected growth in the manufacturing, community, social & personal services and agriculture sectors.

Recent sectoral developments have generally been positive. The tourism industry is estimated to have set a new record in 2004. Other traditional sectors also performed well, with copra recording annual increases.

Domestic consumption continues to strengthen, evident by the latest partial indicators, especially with net Value Added Tax (VAT) collections rising to a record high in 2004. Moreover, currency in circulation, and lending for consumption purposes also rose during the same period. Higher consumer spending continues to be supported by favourable labour market conditions and strong growth in personal remittances from abroad.

Inflation was 3.3 percent in December, recently slowing to 2.9 percent in January.

Investment is expected to remain positive this year, led by the strong growth in the building and construction sector.

Consistent with the developments in the real sector, monetary and credit aggregates accelerated on an annual basis last year. Broad money continued to grow strongly, with commercial bank lending expanding by 19 percent. Lending by licensed credit institutions also increased significantly. Movements in the commercial banks’ interest rates were mixed in December. Over the month, the weighted average lending rate declined further by 2 basis points to 7.03, while the savings and time deposit rate remained unchanged at 0.36 percent and 1.77 percent, respectively. On the other hand, interest rates on new lending fell by 81 basis points to 6.91 percent during December.

According to the latest Overseas Exchange Trade (OET) data merchandise exports fell by around 50 percent in January 2005, compared with an increase of around 26 percent in the corresponding period last year. The decline in receipts was largely attributed to negative contributions from sugar, merchanted goods, textiles, clothing & footwear, other exports and fish, which more than offset positive contributions from timber and other re-exports. Merchandise imports fell by around 16 percent in January this year, compared to a growth of around 36 percent in the corresponding period in 2004. The decline in imports payments was broad-based, with lower payments for consumption goods (33.0 percent), intermediate goods (9.0 percent) and investment goods (3.0 percent).

As at end of February, foreign reserves were
provisionally around $761 million, sufficient to cover 3.4 months of imports of goods and non-factor services or 5.2 months of imports of goods only.

SECTORAL DEVELOPMENTS

Developments on the domestic front remained positive during the review period. Good growth was registered across all sectors of the economy. Consumption remained robust, while individual incomes continued to improve. On an annual basis, increases were noted for copra.

Copra

Latest statistics from the Coconut Industry Development Authority (CIDA) show that last year, copra production amounted to almost 10,100 tonnes, representing an increase of around 6 percent over 2003. Part of this growth is driven by base effects of low production in 2003, owing to the effects of Cyclone Ami.

The minimum mill gate price of copra for the month of December last year stood at $500 per tonne. Government’s subsidy towards the mill gate price was $61.35 per tonne.

Inflation

Inflation was 2.9 percent in January, compared to 3.3 percent in December. Over the month, consumer prices rose by 0.3 percent. During the month, prices of heating & lighting, clothing & footwear, services, transport, food, durable household goods and alcoholic drinks & tobacco rose. Prices of heating & lighting and transport rose as a result of the increases in fuel prices earlier in the month. Moreover, prices of housing and miscellaneous items remained unchanged.

In the months ahead, consumer prices are expected to remain around the current level. The 2005 year-end inflation is currently forecast at 4.5 percent from around 3.3 percent projected last year. This largely stems from the proposal by the Land Transport Authority (LTA) to raise bus and taxi fares, who are awaiting public submissions to increase bus fares by around 11 percent and taxi fares by 50 percent. These price changes will add over 1 percentage point to this year’s inflation rate. If the proposed increase in bus and taxi fares do not realize, then the year-end inflation would be 3.8 percent.

Labour Market

In January, around 1,408 new taxpayers were registered with the Inland Revenue Department, representing an annual increase of 8 percent. Sectors that recorded the most new taxpayers include Community, Social and Personal Services; Finance, Insurance, Real Estate & Business Services; Wholesale, Retail Trade, Restaurants and Hotels; Construction and Manufacturing.

Financial Aggregates

In line with strong domestic demand, monetary indicators strengthened further in December. During this period the total value of outstanding loans in the banking system increased by 19.3 percent to $1.6 billion. Higher lending to private individuals, real estate, manufacturing, and wholesale & retail trade sectors largely underpinned this outcome. Lending to public enterprises and building and construction continued to increase as well. On the downside, lending to mining & quarrying, agriculture and central & local government sectors contributed negatively to lending growth during the review period.

This high growth in lending was supported by the expansion in the value of new loans provided by commercial banks. New and renewed loans stood at around $87 million in December 2004, a rise of 65.3 percent over the month.

In addition, total loans and advances of licensed credit institutions (LCIs) also grew at an annual rate of 24 percent in December, with loans extended mainly to private individuals (mainly for housing purposes), real estate and the building & construction sector. The weighted average lending rate of LCIs was 11.65 percent during the review period compared with 11.78 percent in the previous month.

Broad money expanded at an annual rate of 10.3 percent at end-December 2004. This was largely attributed to increases in narrow and quasi money, which was led by rises in demand deposits and savings deposit. Narrow money grew at an annual rate of 13 percent in December 2004, while quasi money rose by 8.1 percent.

The determinants of broad money, comprising domestic credit and net foreign assets, grew by 12.6 percent and 9.9 percent respectively over the year. The increase in the former was spurred by higher credit to private sector, which rose by 18 percent.

Also, during the review period, total outstanding deposits of commercial banks increased by 4.5 percent, following a growth of 8.2 percent in the year to November. Higher demand and savings deposits by private individuals contributed to the increase in
total deposits.

The weighted average lending rate of commercial banks decreased by 2 basis point to 7.03 percent in December 2004, while the weighted average commercial bank time and savings deposit rates remained at 1.77 percent and 0.36 percent respectively during the review period.

Furthermore, interest rates on new lending fell by 81 basis points to 6.91 percent during December, with new loans extended at lower rates. Similarly, the new deposit rate offered by commercial banks declined by 3 basis points to 1.43 percent over the month.

Meanwhile, interest rates offered by LCIs on new loans and advances decreased to 11.71 percent, while the new time deposit rates increased to 3.64 percent at the of end December 2004.

Exchange Rates

In January 2005, the performance of the Fiji dollar was mixed against the major currencies. Bilateral movements in the exchange rate showed that the Fiji dollar strengthened against the Euro (3.4 percent), but weakened against the US dollar (1.1 percent), Australian dollar (0.4 percent) and the Yen (0.6 percent).

The Nominal Effective Exchange Rate index[1] of the Fiji dollar fell by 0.2 percent in the year to January 2005, indicating a depreciation of the Fiji dollar against the basket of currencies.

The Real Effective Exchange Rate (REER) index[2] of the Fiji dollar, a gauge of our international competitiveness, rose by 0.1 percent during the review period. The increase in the REER Index over the year reflects the deterioration in our international competitiveness and was largely due to higher domestic inflation outcomes. Domestic inflation was 2.9 percent in January 2005, while average trading partner inflation was around 2.5 percent during the same period.

External sector

The decline in imports of consumption goods was mainly due to negative contributions from other imports, food, beverages & tobacco, transport equipment, and duty free goods. Lower import payments for intermediate goods were attributed to negative contributions from other imports, textiles, clothing & footwear, and raw materials, while the decline in payments for investment goods was largely attributed to negative contributions from machinery & electrical equipment.

RESERVE BANK OF FIJI

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[1]The Nominal Effective Exchange Rate (NEER) index is the sum of the indices of each trading partner currency against the Fiji dollar, adjusted by their respective weight in the basket. Each weight reflects a trading partner’s contribution to Fiji’s total trade in goods and services. This index measures the overall movement of the Fiji dollar against the basket of currencies. An increase in this index indicates a slight appreciation of the Fiji dollar against the basket of currencies and vice versa

[2]The Real Effective Exchange Rate (REER) index is the sum of each component of the NEER index, adjusted by the relative price differential between Fiji and each of the major trading partners. This index measures the competitiveness of the Fiji dollar against the basket of currencies. A decline in the REER index indicates an improvement in Fiji’s international competitiveness and vice versa.