The Big Loan Company, IMF Recommendations

N227. THE BIG LOAN, ITS CRITICS, AND STOKING THE FIRE. Critics were never going to let Fiji's huge US$250m loan pass without comment. It provided much too good an opportunity to put the needle in.

Foremost among the more qualified critics is USP Economics professor Wadan Narsey whose primary criticism is not so much with the need for a loan (some US$150m will be used to pay off the pre-coup government's 2005 loan, made that much more expensive due to Fiji's dollar devaluation) but with its 9% interest rate and the amount being borrowed. He thinks a cheaper loan could have been obtained from the International Monetary Fund (IMF) if Fiji had agreed to certain budgetary conditions.

Wadan said, “There is very strong conditionality attached to it [the IMF loan] and I suspect that the Banimarama government did not want to abide by the conditionality rules, I presume they would have had to cut back on their budget deficit which means they would have had to cut government expenditure, recurrent expenditure and especially I suspect on the military budget.”

Wadan's one presumption and two suspicions could be correct, but even without IMF prompting government has been taking steps to reduce spending and downsize government. No one outside Government and the IMF knows what the conditions were but the IMF team that visited Fiji in February last year when a $1 billion loan was being talked about, noted with approval the improved foreign exchange position, greater bank liquidity, and they seemed to approve Fiji's monetary and fiscal policies.

In April Government was waiting for a decision from the IMF on a US$459m loan that obviously did not eventuate, but it was nearly double the loan whose size is now criticized by Prof. Narsey.

Fiji's ability to repay its loans (much of which is for capital developments although Wadan claims it is for recurrent expenditure), generate employment and improve living standards rests heavily on growing its economy, and this in large part depends on business confidence and foreign and domestic investment. The 9% interest rate criticized by Wadan (and bewailed by the anti-government blogs that claim future generations will be left to pay for today's debts) is higher than may be expected because there is some risk in investing in Fiji, and the higher the perceived risk, the higher the interest rate.

Fiji is considered risky because of the coup, the military government and the delayed elections, but it is also considered risky because people like Wadan,  former politicians and others in Fiji, and  the overseas anti-government bloggers have , to a greater or lesser degree, done their level best to discredit all Government policies and actions and to obstruct those they can.  They are  part-owners of "the Big Loan Company."

They have spread biased, misleading, alarmist and untrue reports, urged Fiji citizens not to cooperate with Government in taking the country forward, and urged the international community not to change its stance on Fiji.

They have stoked the fires that makes loans, reforms and economic recovery more difficult, and in doing so they have played their part in making the loans their children will repay just that much more costly.

Australia and New Zealand must also, of course, share the responsibility. Their policies aimed at Fiji's "return to democracy" must by now be seen to have failed, but they have had a detrimental effect on Fiji's economy and the cost of its loans. 

No one would expect those opposing the Bainimarama government to change their fundamental position but reasonable people would expect other reasonable people to support some of the things it is doing, and to refrain from activities that harm the living of the people they claim they wish to support. -- Crosbie Walsh.


N228.  IMF SAYS STRUCTURAL REFORMS NECESSARY. The IMF's Executive Board  said structural reforms are necessary in Fiji to spur growth and help protect macroeconomic stability.

Following its latest consultations  the Board said:
(1) Fiji needed well designed land reform and the removal of price controls should support investment and the diversification of economic activity;
(2) Civil service reform and adjusting tariffs for public services will help contain contingent liabilities and should increase efficiency;
(3) Retraining programmes and additional targeted social assistance to soften the social impact of redundancies and higher tariffs; and
(4) Help Fiji  from development partners, including technical and expert advice, to help design and implement these important structural reforms which are critical to improving the overall business environment. [This is where Australia and New Zealand really could help.]

The IMF noted that fiscal deficit (government expenditure exceeds revenue) is estimated to have fallen to 3.6% of GDP in 2010 from 3.9% in 2009. The improvement is due to Government's  freeze in hiring in the public service, lower-than-budgeted capital spending and stronger-than-projected VAT receipts but losses and mismanagement of the Fiji Sugar Corporation  have to led to pressures on the budget.

The deficit was financed mostly by the Fiji National Provident Fund as commercial banks remained near their sovereign lending limits. Central government debt at the end of 2010 is estimated at close to 56%  of GDP. Contingent fiscal liabilities are estimated at 17.6 percent of GDP at the end of 2010 and includeguarantees on bonds issued by the Fiji Development Bank.

N229. SUGAR:  THE IMF HAS ADVISED GOVERNMENT to quickly finalise the restructuring of the Sugar Corporation and then divest the troubled Fiji Sugar Corporation within three years,to bolster the economy The FSC was delisted from the South Pacific Stock Exchange last month after a profit loss of $US175 million last financial year. The IMF statement also suggested reforms to the Fiji National Provident Fund to increase economic sustainability.