Country Report

Fiji

June 2005

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Contents

Fiji

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06

8 The political scene

10 Economic policy

11 The domestic economy

12 Foreign trade and payments

The region

13 Summary

14 Outlook for 2005-06

15 The political scene

17 Economic policy and the domestic economy

List of figures

7 Fiji: gross domestic product 7 Fiji: consumer price inflation

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Fiji 3

Fiji June 2005 Summary

Outlook for 2005-06 The next general election in Fiji is not formally due until September 2006, but it is likely to be brought forward to the first half of 2006. This is because of rising political tensions between the Fijian-nationalist-dominated government led by the prime minister, Laisenia Qarase, and the leader of the ethnic-Indian- dominated Fiji Labour Party, Mahendra Chaudhry, who was ousted as prime minister after a coup in 2000. Growth is forecast to slow in 2005-06, mainly reflecting a decline in the garment industry following the loss of the US market quota for Fijian garment exports. The impact of this will be partly offset by the continued expansion of the tourism industry, although growth in the sector could be held back by a shortage of suitable accommodation.

The political scene The early release of coup-related offenders has continued to dominate the political scene, and has casued relations between the government and the army commander, Frank Bainimarama, to deteriorate even further. Mr Bainimarama has been warned against providing briefings to Mr Chaudhry. The government has announced plans to set up a “reconciliation and unity” commission.

Economic policy At 3.3% of GDP, the government’s budget deficit for 2004 was smaller than expected, thanks to strong value-added tax revenue. The three telecommunications monopolies have been instructed to cut their charges over the next three years. High world oil prices have led to revived interest in the production of ethanol from Fijian sugar. The new owners of the Vatukoula gold mine have called for tax concessions from the government.

The domestic economy The Reserve Bank of Fiji (the central bank) expects real GDP growth to slow in 2005 owing to a further contraction of the local garment industry. The ratio of gross investment to GDP rose to 17% in 2004, a 17-year high, but it was still well below the government’s target of 25%.

Foreign trade and payments Official foreign-exchange reserves fell to F$715m (US$415m) at end-March 2005, providing 4.7 months of import cover, but recovered slightly during April, to stand at F$725m, or 4.8 months of import cover, at the end of the month.

Editors: Kate Allard (editor); Gerard Walsh (consulting editor) Editorial closing date: June 6th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report June 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 Fiji

Political structure

Official name Republic of Fiji Islands

Form of state Parliamentary

The executive The president, appointed by the Great Council of Chiefs (Bose Levu Vakaturaga), appoints the prime minister, who selects the cabinet

Head of state The president, Ratu Josefa Iloilo

National legislature Bicameral parliament comprising an appointed upper house, the Senate (32 members), and an elected lower house, the House of Representatives (71 members). The 1997 constitution prevented the dominance of parliament by indigenous Fijians and abolished the requirement that the prime minister be an indigenous Fijian. There is universal suffrage for all citizens aged over 21. Voting is compulsory and preferential

Regional government Local administration is on a divisional basis, with separate councils for urban areas. There is a separate local government system for the indigenous Fijian population

Legal system Magistrates’ courts, High Court and Court of Appeal, presided over by the Supreme Court

National elections August 25th-September 1st 2001; the next election is due by September 2006

Main political parties Soqosoqo Duavata ni Lewenivanua (SDL, People’s Unity Party); Fiji Labour Party (FLP); Matanitu Vanua (MV, Conservative Alliance); National Labour Unity Party (NLUP); National Federation Party (NFP); United General Party (UGP); National Alliance (NA)

National government On September 10th 2002 Laisenia Qarase, the leader of the SDL, was appointed prime minister. The cabinet comprises 15 SDL members, two from the MV, two from the NLUP and one independent. In defiance of the constitution, Mr Qarase named a cabinet that did not include any members of the FLP. The Supreme Court has upheld the contention of the FLP leader, Mahendra Chaudhry, that his party is constitutionally entitled to cabinet seats, but Mr Chaudhry finally decided in November 2004 not to pursue the issue further

Prime minister & minister for Fijian & ethnic affairs Laisenia Qarase

Key ministers Agriculture, sugar & land resettlement Ilitia Tuisese Commerce, business development & investment Tomasi Vuetil ovoni Education Ro Teimumu Kepa Finance & national planning Ratu Jone Kubuabola Foreign affairs & external trade Kaliopate Tavola Home affairs, immigration & national disasters Josefa Vosanibola Information, communications & media relations Ahmed Ali Labour, industrial relations & productivity Kenneth Zinck Lands & mineral resources Samisoni Tikinasau Local government, housing, & environment Pio Wong National reconciliation, information & media Simione Kaitani Public enterprises & public-sector reform Jonetani Galuinadi Regional development Ted Young Tourism, culture & heritage Konisi Yabaki Transport & civil aviation Simione Kaitani Women, social welfare & poverty alleviation Adi Asenaca Caucau Central bank governor Savenaca Narube

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Economic structure

Annual indicators 2000a 2001a 2002a 2003a 2004b GDP at current prices (F$ m; at factor cost)d 3,505 3,764 3,969 4,396b n/a Real GDP growth (av; %)c -3.2 2.7 4.3 3.0b 3.8a Consumer price inflation (av; %)c 3.0 2.3 1.6 4.2 3.3a Population (m)c 0.81 0.82 0.83 0.83 n/a Exports fob (US$ m)d 584 538 546 671 n/a Imports cif (US$ m)d 825 794 893 1,168 n/a Current-account balance (US$ m)d -90 -56 -67 -275b n/a Reserves excl gold (US$ m)e 411.8 366.4 358.8 423.6 478.1a Total external debt (US$ m)f 209.1 188.5 209.6 n/a n/a Debt-service ratio, paid (%)d 6.3 5.5 5.9 n/a n/a Exchange rate (av; F$:US$)e 2.129 2.277 2.187 1.896 1.733a a Actual. b Economist Intelligence Unit estimates. c Reserve Bank of Fiji, Quarterly Review. d Asian Development Bank. e IMF, International Financial Statistics. f World Bank, Global Development Finance.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2001b % of total Agriculture, forestry & fishing 16.1 Private consumption 57.0 Mining & quarrying 2.5 Government consumption 17.1 Manufacturing 15.6 Fixed investment 14.5 Construction 4.3 Stockbuilding 1.0 Electricity & water 4.4 Exports of goods & services 55.7 Transport & communications 13.6 Imports of goods & services -60.7 Wholesale & retail trade, restaurants & hotels 19.5 Statistical discrepancy 15.4 Other services 24.0

Principal exports 2004a F$ m Principal imports 2004a F$ m Garments 256.4 Machinery & transport equipment 548.4 Sugar 178.4 Manufactured goods 481.0 Gold 88.5 Food 349.2 Fish 85.1 Mineral fuels 320.5 Timber 42.9 Miscellaneous manufactured articles 245.3

Main destinations of exports 2004a % of total Main origins of imports 2004a % of total Australia 29.6 Australia 34.0 US 27.2 New Zealand 20.2 UK 15.6 Singapore 12.5 Pacific Islands 8.7 Japan 4.5 New Zealand 5.6 US 3.7 a Reserve Bank of Fiji, Quarterly Review. b Asian Development Bank.

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Quarterly indicators 2003 2004 2005 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Government finance (F$ m) Total revenue & grants 276.5 275.4 270.9 260.3 282.8 299.2 329.9 n/a Expenditure 332.2 359.6 509.9 260.0 347.5 381.9 489.7 n/a Balance -55.7 -84.2 -239.0 0.3 -64.7 -82.8 -159.8 n/a Prices Consumer prices (1993=100) 131.2 130.5 131.6 133.0 134.9 134.5 135.9 137.2 Consumer prices (% change, year on year) 4.1 4.3 4.9 2.2 2.8 3.1 3.3 3.2 Financial indicators Exchange rate F$:US$ (av) 1.915 1.883 1.782 1.699 1.779 1.768 1.687 1.657 Exchange rate F$:US$ (end-period) 1.873 1.842 1.722 1.722 1.798 1.751 1.645 1.673 Bank (end-period; %) 1.75 1.75 1.75 1.75 2.25 2.25 2.25 2.25 Deposit (av; %) 0.52 0.48 0.47 0.44 0.37 0.35 0.36 0.36 Lending (av; %) 7.63 7.57 7.38 7.34 7.18 7.14 7.04 6.92 Money market (av; %) 0.79 0.99 0.80 0.80 0.88 0.88 1.03 0.97 Treasury bill (av; %) 0.55 1.25 1.22 1.19 1.46 1.80 1.79 1.83 M1 (end-period; F$ m) 728.9 748.3 877.5 729.4 902.9 900.2 995.1 1009.5 M1 (% change, year on year) 12.6 11.5 26.1 -11.9 23.9 20.3 13.4 38.5 M2 (end-period; F$ m) 1,667.5 1,800.5 1,958.0 1,818.8 2,016.0 2,034.2 2,162.8 2,192.1 M2 (% change, year on year) 10.5 17.1 25.0 6.2 20.9 13.0 10.5 20.5 Sectoral trends Sugar exports (‘000 tonnes) 34.7 79.1 134.0 26.0 28.7 66.3 140.7 n/a Tourism, visitor arrivals ('000) 101 130 114 105 121 150 n/a n/a Tourism, length of stay (av; days) 8.6 9.1 8.5 8.4 8.7 n/a n/a n/a Tourism, gross earnings (F$ m) 153.0 200.9 145.5 153.3 177.5 n/a n/a n/a Foreign trade (F$ m) Exports foba 343.4 302.7 403.5 216.7 263.6 313.5 381.5 n/a Imports cif -725.8 -501.2 -519.8 -490.8 -522.2 -554.4 -637.3 n/a Trade balance -382.4 -198.5 -116.3 -274.1 -258.6 -240.9 -255.9 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 372.3 361.4 423.6 421.2 407.0 422.2 478.1 427.7 a Includes re-exports. Sources: International Sugar Organisation, Statistical Bulletin; Fiji, Bureau of Statistics; IMF, International Financial Statistics; Reserve Bank of Fiji, Quarterly Review.

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Outlook for 2005-06

A general election is likely in The next general election in Fiji is not formally due until September 2006, but it the first half of 2006 is likely to be brought forward to the first half of 2006. This is because of rising political tensions between the Fijian-nationalist-dominated government led by the prime minister, Laisenia Qarase, and the leader of the ethnic-Indian- dominated Fiji Labour Party, Mahendra Chaudhry, who was ousted as prime minister after a coup in 2000. Mr Chaudhry continues to enjoy strong support among ethnic Indians at grass-roots level, and can also rely on a significant portion of the urban vote. Mr Qarase enjoys considerable Fijian support in rural areas, where government money aimed at improving the living standards of indigenous Fijians is having the greatest impact. However, support for Mr Qarase among indigenous Fijians is split, owing to Fijian provincial factionalism, thereby posing a significant risk to the security of his governing coalition of Fijian parties. The potentially wide appeal of a new indigenous Fijian-dominated party, the National Alliance, is of particular concern to the ruling Soqosoqo Duavata ni Lewenivanua (SDL) and Mr Qarase. A continuation of these trends, and the vagaries of the country’s preferential voting system, would see Mr Chaudhry well placed to win the next general election, although there are concerns that this would spark a new round of political instability and possibly another coup by Fijian nationalists. The army, led by its commander, Frank Bainimarama, is insistent that it will crush any attempt to overthrow a democratically elected government, including one led by Mr Chaudhry. However, even some senior FLP supporters are privately dismayed at the possibility that Mr Chaudhry could return to power, believing that instead of trying to appease Fijian nationalists by appointing one of the FLP’s Fijian allies as prime minister, he will choose to resume the post himself thereby risking more of the kind of friction with Fijian nationalists that contributed to his downfall in 2000. Uncertainty surrounding the political outlook will hamper efforts by investment promotion agencies to convince foreign investors of the country’s political stability, and friction between native Fijians and the descendants of Indian labourers could quickly resurface.

Economic growth is forecast to According to the Reserve Bank of Fiji (the central bank), real GDP growth slow in 2005-06 increased to 3.8% in 2004 but is likely to slow in 2005-06, mainly reflecting a decline in the garment industry following the loss of the US market quota for Fijian garment exports. The impact of this will be partly offset by the continued expansion of the tourism industry. Visitor arrivals reached a record level in 2004, thanks in part to the launch of low-cost flights from Australia and New Zealand, and will continue to rise. Growth in the tourism sector could be held back by the current shortage of suitable accommodation, although resort developments currently in the pipeline will result in an additional 2,000 first- class hotels rooms over the next four or five years, with the first new resort expected to open in October 2005. A rash of tourism-related construction projects and important road, water, sewage, port and other infrastructure projects, funded mainly by Asian Development Bank and EU grants, will tax the capacity of construction companies already short of skilled labour. The possible deregulation of the superannuation (pensions) industry is to be

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examined by the government, while a decision on whether to grant the Fiji Development Bank a commercial banking licence will also be taken later in 2005.

Fiji: gross domestic product Fiji: consumer price inflation (% change, year on year) (av; %)

Fiji Asia excl Japan Fiji Asia excl Japan 8.0 4.5

6.0 4.0 3.5 4.0 3.0 2.0 2.5 0.0 2.0

-2.0 1.5

-4.0 1.0 01 02 03 04 01 02 03 04 2000 2000

The political scene

The after-effects of the coup in A little more than a year before the next general election is formally due, 2000 are still being felt Laisenia Qarase, the prime minister and leader of the ruling Soqosoqo Duavata ni Lewenivanua (SDL), continues to be caught between the need to be seen as a democratic leader of a harmonious, multiracial society and the demands of some of his more strident indigenous-Fijian supporters, who want to preserve Fijian political supremacy over the shrinking but still large and commercially dominant Indian community. Part of the problem is the desire by many in Fiji, including the army commander, Frank Bainimarama, to see all those connected with the coup in 2000 brought to justice, whereas Fijian nationalists continue to agitate for coup-related investigations to be brought to an end and for those already jailed for their part in the uprising to be released. Relations between the government on one hand and the 3,500-strong army (and more particularly Mr Bainimarama) on the other have sunk to a new low following the early release in April of Ratu Naiqama Lalabalavu, who is the leader of the right-wing nationalist Conservative Alliance Party (MV, which is part of the SDL-led coalition government) and the minister for land, and another senior MV figure, Ratu Josefa Dimuri. The pair had been jailed for eight months for their involvement in a mutiny at the army’s barracks during the coup. The prisons department insisted that it was normal policy to free those convicted for supervised community work if their prison sentences were less than 12 months. However, the releases were denounced as a mockery of the judicial system by the main opposition force, the ethnic-Indian-dominated Fiji Labour Party (FLP), and Mr Bainimarama. Mr Qarase has denied that any political influence was exerted to secure the pair’s release, although there is growing suspicion among the public at large that the SDL is trying to curry favour with the MV, whose

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five parliamentary seats are essential to preserving Mr Qarase’s majority. The MV’s sixth parliamentary seat has been left vacant following the jailing for six years of Ratu Raquita Vakalalabure, another influential figure in the party. He is appealing against the conviction and his disqualification from parliament. Mr Qarase has rejected MV demands for the release of all convicted coup conspirators, including the supposed coup leader, George Speight, who received a life sentence (which in Fiji usually means 12 years). However, Mr Qarase has given Ratu Naiqama’s cabinet position to Mr Speight’s brother, Samisoni Tikonasau, who is also a member of the MV and a campaigner for the release of those convicted of coup-related charges. Having received a briefing on coup investigations from the police commissioner and army commander, the FLP leader and former prime minister, Mahendra Chaudhry, was informed by the home affairs minister, Josefa Vosanibola, that both officials had been instructed not to give him any further information without the government’s permission. Mr Bainimarama, a persistent and vocal critic of what he claims are government efforts to protect coup plotters, was also instructed to refrain from commenting on public security issues without first consulting Mr Vosanibola. Mr Bainimarama retorted that he would not be gagged. Amid these exchanges, Mr Vosanibola told parliament that the army commander and his family remained under threat of assas- sination and were being guarded. Mr Vosanibola added that elements wishing to destabilise the country were still a large and could “strike when the opportunity presented itself”.

A “reconciliation and unity” The government has announced plans to set up what it describes as an commission is to be set up independent “reconciliation and unity” commission, which would be given powers to recommend amnesties for coup supporters and compensation for victims of the coup. However, the move has been dismissed by the FLP and the smaller opposition parties as a device for letting conspirators off the hook by allowing coup suspects to confess and thereafter live free of the fear of prosecution. Mr Qarase claims that the government had no intention of granting conspirators an automatic pardon, and that people who had parti- cipated in the coup with criminal intent would remain subject to the law. However, he indicated that Fijian chiefs who had hoped to restore law and order by invoking their traditional authority during the coup could expect to receive an amnesty. At least six convicted and imprisoned chiefs, including the former vice-president, Ratu Jope Seniloli, who was released from jail shortly after his conviction, ostensibly on health grounds, have claimed that their only part in the coup was to exercise rank to avert violence and restore order. Mr Qarase added that the new commission’s purpose was to achieve closure for those who had suffered as a result of the coup, so that the country could put the events of 2000 behind it and move on. However, confirmation by the government that the commission would be empowered to conduct secret hearings has aroused further suspicion about the motives behind it. The commission, which will comprise up to five members, is expected to be established in early 2006.

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The government wants to The government has announced plans to revive local Fijian courts in the hope reinstate local Fijian courts that they will help in the restoration of village discipline, which began to decay after the courts were abolished in the late 1960s. However, the move has been opposed by the FLP, which claims that it would lead to separate justice systems for indigenous Fijians, as well as by Fijian women’s organisations, which argue that women will be disadvantaged, since the administration of village justice has traditionally been a male domain. The government also hopes to introduce bills for freedom of information and a code of conduct for political leaders later in 2005.

Economic policy

The budget deficit for 2004 The latest provisional data from the Ministry of Finance indicate that the was smaller than expected underlying fiscal deficit for 2004 (excluding asset sales) stood at F$150.4m (US$90m), or 3.3% of GDP, which compares favourably with a forecast deficit of F$220.5m, or 4.8% of GDP. The better than expected performance last year mainly reflected a strong increase of 11% in revenue collection, thanks in part to robust consumer spending, which pushed up value-added tax (VAT) receipts. VAT revenue rose by a further 14% year on year in the first quarter of 2005. The government forecasts a deficit of around 4.3% of GDP in 2005.

The telecoms monopolies are The Commerce Commission has instructed the country’s three telecoms instructed to cut their charges monopolies to cut their charges by as much as 80% over the next three years. Telecom Fiji (the country’s sole provider of national and local fixed-line calls, which is 51%-owned by the Fiji National Provident Fund), and Vodafone Fiji (the sole provider of mobile-phone services) have accepted the ruling. However, Fiji International Telecommunications (Fintel, which is 41%-owned by an international telecoms company, Cable and Wireless, and has the monopoly on international calls), has sought a ruling in the High Court, after it claimed that the commission had no jurisdiction over it. High telephone charges have been condemned by the government, the business community and consumer agencies as a serious impediment to the growth of business and industry. In other telecoms-related developments, the telecoms minister, Ahmed Ali, has said that since the current licences held by the telecoms operators did not apply to third-generation (3G) technology, which did not exist when they were issued, the market for 3G-based services would, in contrast with other telecoms services, be open to competition.

High oil prices revive interest Ross McDonald, the chairman of the government-controlled Fiji Sugar in ethanol fuel from sugar Corporation (FSC), has said that high world oil prices had make the production of ethanol fuel from sugar an attractive long-term proposition for the struggling sugar industry in Fiji. Speaking about plans for the revival of the industry, Mr McDonald added that the industry would not survive without the whole- hearted co-operation of the highly politicised, 18,000-strong, predominantly ethnic-Indian canegrower community. The sugar harvest is forecast to increase to around 3m tonnes in 2005, owing to the reforms being undertaken in the 120-year-old industry to help it survive after a steep fall in a EU sugar subsidies

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in 2006. The FSC hopes that a successful reorganisation and modernisation of the industry will see annual production rise to 4.5m tonnes next year.

The owners of the Vatukoula A South African mining company, Durban Roodeport Deep, which bought a gold mine call for tax breaks major stake in Fiji’s Emperor gold-mining company in 2004, have called on the government to grant tax concessions to help keep the main Vatukoula gold mine viable. The mine’s new owners claim that delays in expanding the 72-year-old mine, higher power costs than expected, flooding and a decline in the rate of gold recovery (which could see gold production fall by 20% in 2005) all pose a threat to the mine’s future in the absence of such concessions. More than 6.4m ounces of gold have been mined at Vatukoula since 1933, and current reserves are estimated at 1m ounces.

The domestic economy

The central bank expects real The Reserve Bank of Fiji (RBF, the central bank) estimates that real GDP GDP growth to slow in 2005 expanded by 3.8% in 2004, up from 3% in 2003, thanks to buoyant construction activity, an expansion in the wholesale and retail trades and a boom in the hotels and restaurants sector, thanks to strong tourist arrivals. However, the bank expects growth to slow in 2005, owing in part to a further contraction in the local garment industry. Employment in the industry has already dropped by at least 4,000 because of the closure of several large factories that lost their US markets when US quotas expired at the end of 2004, and at least another 2,000 jobs are likely to be shed. The Australian government’s decision to extend preferential access to its clothing and footwear markets to Fijian manufacturers for another seven years will help to prevent a steeper decline in the industry, although Australian demand is expected to fall owing to increased competition from low-cost textile producers in China.

Investment reached a 17-year According to the RBF, the ratio of gross investment to GDP rose to 17% in 2004, a high in 2004 17-year high, but it was still well below the government’s target of 25%. The Fiji Trade and Investment Board (FTIB) approved a record 442 investment applications in 2004, which if implemented would result in investment worth around F$1.1bn (US$636m) and would create nearly 15,000 new jobs. Invest- ment worth F$1.8bn was carried out in 2004, up from F$42.8m in 2003. Investor interest remained strong in early 2005; the FTIB received 123 applications in the first quarter alone, a rise of almost 30% year on year, for projects thought to be worth around F$147m. More than 50 projects, worth an estimated F$95m, were implemented in the first quarter of 2005, compared with none in the first quarter of 2004.

Foreign trade and payments

Import cover declined in the According to the Reserve Bank of Fiji (RBF, the central bank), official foreign- first quarter of 2005 exchange reserves fell from F$789m (US$479m, equivalent to 5.3 months of import cover) at end-December 2004 to F$715m at end-March 2005 (4.7 months of import cover). However, official foreign-exchange reserves recovered slightly during April, to stand at F$725m, or 4.8 months of import cover, at the end of the month. The real effective exchange-rate index of the Fiji dollar rose by 0.7% in the year to March 2005, pointing to a deterioration in the country’s international competitiveness. The deterioration reflected higher domestic inflation (3% year on year in March) than in Fiji’s main trading partners (averaging 2.4% year on year in March). According to the RBF, remittances from several thousand Fijians working abroad as soldiers with the British Army, private security guards in Iraq, nurses and schoolteachers now exceed F$300m (US$180m) a year. This exceeds foreign earnings from either sugar or garments, and is second only to tourism earnings.

The region June 2005 Summary

Outlook for 2005-06 Officials of the Fiji-based Pacific Islands Forum (PIF, the main political organisation in the region) will begin to implement the PIF’s Pacific Plan for greater co-operation between the 14 island states on political, economic and social development later in 2005. Despite continued political instability in the region, most island economies are showing signs of improving economic activity and will continue to expand in 2005-06. Foreign aid will remain crucial to economic development. The economic importance of tourism will continue to grow.

The political scene The drafting of the Pacific Plan is proceeding slowly, reflecting extensive country-by-country consultations. According the PIF’s general secretary, the first stage of the plan will be the completion of projects already under way, including: the promotion of regional trade; adding value to fisheries exports; cost savings through the bulk purchase of pharmaceuticals, school materials and petroleum; and strategies for improving regional air services. Taiwan and China continue to vie for influence in the region. Measures to detect illegal fishing are under discussion. The PIF has protested again about the shipping of nuclear waste in the Pacific Ocean, but to little effect.

Economic policy and the The island states are being urged to present a united front on the Tuna domestic economy Commission to prevent overfishing. High oil prices are prompting renewed regional interest in alternative fuel sources, such as ethanol made from local sugar.

The region Outlook for 2005-06

The Pacific Plan will receive During the outlook period, island governments will begin to implement the formal approval later in 2005 Pacific Islands Forum’s Pacific Plan for greater co-operation between the forum’s 14 island states on political, economic and social development. (The Pacific Island Forum, or PIF, is the main political organisation in the region.) Practical guidelines for implementing the plan will be submitted for formal approval at the annual PIF summit, to be held in Papua New Guinea (PNG) later this year. The summit was originally scheduled for August, although it is likely to be pushed back to October to suit leaders who have other commitments in the earlier month. Despite continued political instability in the region, most island economies are showing signs of improving economic activity and will continue to expand in 2005-06.

Australia will continue to play Australia will continue to play a crucial role in the region, supported by New a crucial role in the region Zealand. France is also being courted more warmly by both countries as a development aid partner and a power for assisting with fisheries surveillance and responding to natural disasters, to which the region is prone. Although some in the region will continue to view Australia’s involvement with suspicion, most island leaders now appear more accepting of the country’s higher profile in the region’s affairs. This is in part thanks to the largely successful intervention of an Australian-led force in the troubled Solomon Islands, and to the tact with which the head of the PIF, an Australian former diplomat, Greg Urwin, has so far handled the key issues of reform, improved governance and co-operation since his controversial appointment in 2003. Island governments are now largely resigned to the fact that future flows of aid will be conditional on the implementation of reforms to their governmental and economic systems.

Security issues will need to be Pacific island governments will come under mounting pressure from the addressed governments of Australia, New Zealand and the US to adopt tougher security measures against organised crime, drug smuggling and money-laundering, amid concern that such activities could serve as platforms for international terrorist organisations. The Solomon Islands, Vanuatu and PNG are regarded as being particularly soft targets for drug smuggling and money-laundering.

Political instability will remain Election upsets engineered by votes of no confidence could occur at any time in a problem in the region Vanuatu, PNG, Kiribati and Tuvalu, while a political upheaval in Fiji cannot be ruled out. Although the next general election in Fiji is not due until September 2006, antipathy between the Fijian-nationalist-dominated government of the prime minister, Laisenia Qarase, and the leader of the Indian-dominated Fiji Labour Party, Mahendra Chaudhry, who was ousted as prime minister after a coup in 2000, could result in an early election and a possible victory for Mr Chaudhry. In the Solomon Islands, where an election is due at the end of 2005, investigations by the Australian-led intervention force into alleged

corruption by senior politicians could further fuel discontent at the force’s continued presence, while the political fallout from an acrimonious power struggle between anti- and pro-independence politicians will continue to be felt in French Polynesia. However, Tonga has made a significant move towards democratic government after a general election in March that led to the inclusion in the cabinet, for the first time, of two of the nine directly elected “commoner” MPs.

Most island economies will Despite continued political instability in the region, most island economies are expand in 2005-06 showing signs of improving activity and will continue to expand in 2005-06, thanks to expansion in the tourist industry, diversification in the agricultural sector and the development of the aquaculture and fishing industries. Some Melanesian countries will benefit from higher prices for mineral and com- modity exports, unlike the generally poorly resourced countries of Polynesia and Micronesia. Concern is growing about falling tuna stocks in the region. Intense debate on the causeoverfishing, climate change, still little-understood natural weather and ocean-temperature cycles, or a combination of all of thesewill continue. Other problems include a heavy dependence on imported oil and diesel.

Foreign aid will remain crucial The relative weakness of most of the Pacific island economies, as well as to economic development problems of poverty, law and order, population pressure and poor governance, mean that the region will remain heavily dependent on aid from Australia, New Zealand, Japan, China and, in the case of some of the islands, Taiwan, as well as the EU. However, China’s efforts to spread its influence in Oceania through diplomacy and economic aid is causing some concern in Australia, New Zealand and the US, and in some parts of the region the displacement of small, locally owned retail stores and other firms by Chinese-owned businesses is generating anti-Chinese resentment.

The economic importance of Despite the nervousness of the Australian and, to a lesser extent, the New tourism will continue to grow Zealand governments about stability in the region, the Pacific islands will continue to be regarded as safe and pleasant destinations for holiday travel. The tourism boom in some of the region’s main destinations is expected to continue, thanks to the increase in air capacity and the expansion of low-cost airline services, which have underpinned a strong rise in the number of tourist arrivals from the key markets of Australia and New Zealand. However, some tourist destinations, such as French Polynesia and New Caledonia, appear to be losing market share to Fiji, which has become the primary focus of low-cost operators.

The political scene

The drafting of the Pacific Plan Work has continued on the drafting of the so-called Pacific Plan, proposed by is proceeding slowly the Pacific Islands Forum (PIF) in consultation with other regional development agencies. It is hoped that the plan will provide a blueprint for co-operative political and economic development by the PIF’s 14 Melanesian, Polynesia and Micronesian members. The Pacific Plan will run alongside the Pacific Island

Countries Trade Agreement (PICTA), under which the PIF’s island members are working towards the establishment of a free-trade area by 2012. French and US dependent territories in the Pacific will be permitted to join PICTA if they wish; the French territory of New Caledonia began negotiations to join in March 2005. The prime ministers of Papua New Guinea, Samoa and New Zealand met the PIF’s secretary-general, Greg Urwin, in Auckland, New Zealand in March to discuss the Pacific Plan. The prime minister of New Zealand, Helen Clark, reportedly expressed impatience with the slow pace of work. According to PIF officials, however, this reflected the extensive consultations that Mr Urwin had been obliged to hold with individual countries at the request of their governments, as well as the need to consult planners and bureaucrats in the various countries associated with the plan. PIF officials and the leaders at the Auckland meeting have rejected the notion, advanced by some academics and journalists, that the plan would lead eventually to a federation of Pacific island states. Such a concept would, in any case, be difficult to implement given the great divergence in the size, resources, political systems, cultures and geographical spread of the island economies. Ms Clark said after the meeting that the PIF’s objective was “regionalism, not federalism”. It is widely hoped that a stronger regional focus will enable the PIF to present itself to the rest of the world as a credible united front. Meanwhile, the specifics of the plan appear to be taking shape. According to Mr Urwin, the first stage will be the completion of various projects already under way, including the promotion of regional trade, adding value to fisheries exports, cost savings through the bulk purchase of pharmaceuticals, school materials and petroleum, and strategies for improving regional air services. Later plans include regional schools for training nurses and seafarers, and the creation of a regional statistical database.

Taiwan and China continue to Competition between China and Taiwan for political influence in the region vie for influence in the region has continued to have an impact on the domestic political scenes of several PIF members. In May the Taiwan president, Chen Shui-bian, paid brief visits to the Marshall Islands, Kiribati and Tuvalu, which all receive substantial aid from Taiwan in exchange for maintaining diplomatic relations with Taiwan rather than China. Meanwhile, the leader of the opposition in the Solomon Islands said on his return from a visit to China that, if elected to government, his party would break off the country’s long-standing relationship with Taiwan in favour of China. Separately, the New Zealand government has reportedly insisted that a draft constitution being prepared for its small dependent territory of Tokelau commits future governments there to recognising China.

Measures to detect illegal France, Australia and New Zealand have begun to discuss a satellite-based fishing are under discussion surveillance system for the detection of illegal fishing in the region. The air forces of all three countries already make occasional fisheries patrol flights over the exclusive economic zones (EEZs) of countries that agree to them.

The PIF protests again about In April the latest passage through the region by the Sandpiper, a British vessel the shipping of nuclear waste that transports nuclear waste from Japan for reprocessing in the UK and France, led the PIF to renew its protests against such ships travelling through the EEZs of some of its members. As usual, the protests were ignored. The PIF has long complained that the three countries involved in shipping nuclear waste in the region have refused to accept full responsibility for any spillage that might occur there.

Economic policy and the domestic economy

Island states are urged to According to Michael Lodge, the British chief executive of the newly prevent overfishing inaugurated Commission for the Conservation and Management of Highly Migratory Fish Stocks in the Western and Central Pacific Ocean (otherwise known as the Tuna Commission), the Pacific island states will need to engage more actively with France and its Pacific territories, as well as other EU countries and China, if they are to act as an effective counterweight against the more powerful fishing nations, such as Taiwan, South Korea and Japan. The Tuna Commission is currently dominated by the 17 members of the PIF’s main fisheries body, the Forum Fisheries Agency (FFA), but this will change when the US, Japan and the EU join shortly. Mr Lodge has also expressed his concern that the FFA states have been too quick to give other countries access to their EEZs, and that they should focus instead on maintaining a common front to help prevent exploitation of their tuna stocks by long-established and powerful Asian fishing nations. The Tuna Commission’s primary function is to regulate fishing in high-seas areas beyond the boundaries of the 200-mile EEZs claimed by its members. Priority is being given by the agency to preventing the depletion of yellowfin and big-eye tuna stocks, which have come under strain owing in part to overfishing by Asian fleets.

High oil prices prompt interest Concern about the impact of high world oil prices on Pacific island economies, in alternative fuel sources which are heavily dependent on imported oil, has sparked renewed interest in alternative fuel sources. The Fijian government has reopened studies into the production of alternative fuels, such as ethanol made from local sugar, while the PIF is looking into bulk fuel purchases and the expansion of storage facilities. The South Pacific Applied Geoscience Commission (SOPAC), which is supported by numerous island governments, has reported renewed interest in the use of coconut oil as a substitute for diesel fuel, although the agency believes that its use will be limited to specialised areas. Its viability as an alternative fuel would also be affected by coconut oil prices, which can fluctuate widely. Samoa’s Electric Power Corporation is experimenting with a fuel mix of 10% coconut oil to 90% diesel fuel, while the government of Vanuatu is encouraging the addition of coconut oil to diesel fuel for use in cars.