2004 September

Country Report

Fiji

September 2004

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 2004-05

8 The political scene

10 Economic policy

11 The domestic economy

12 Foreign trade and payments

The region

13 Summary

14 Outlook for 2004-05 15 The political scene 16 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 September 2004 Summary

Outlook for 2004-05 Tensions between the prime minister, Laisenia Qarase, and the leader of the ethnic Indian-dominated Fiji Labour Party (FLP), Mahendra Chaudhry, will continue to mar the political outlook and hamper efforts by investment promotion agencies to convince investors of the country’s political stability. The prospects for the tourism industry are bright, but a rash of construction projects will tax the capacity of construction companies already short of skilled labour.

The political scene The impasse between Mr Qarase and Mr Chaudhry over the FLP’s demands for what it regards as a fair share of key cabinet posts is unresolved and is likely to remain so until the next election, due by September 2006. The vice-president, Ratu Jope Seniloli, has been convicted and jailed for offences related to the coup in 2000.

Economic policy There are mixed developments for the ailing sugar industry. The government has moved to restrict foreign ownership in some industries, such as fishing, construction and timber.

The domestic economy There are concerns that the expansion of the tourism industry could be throttled by a shortage of first-class hotel rooms, and local construction companies have warned that they do not have enough skilled workers to proceed with all the resort projects waiting to be started. Australia has extended its preferential trade agreement with Fiji.

Foreign trade and payments Import coverage fell slightly in the second quarter of 2004, with official foreign- exchange reserves standing at F$732m, or US$407m (equivalent to 4.8 months of import cover) at end-June 2004. Editors: Kate Allard (editor); Graham Richardson (consulting editor) Editorial closing date: August 26th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report September 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 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 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 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 was constitutionally entitled to cabinet seats, but in July 2004 ruled it was the repsonsibility of the two leaders to decide how the portfolios should be allocated

Prime minister & minister for Fijian affairs Laisenia Qarase

Key ministers Agriculture, sugar & land resettlement Jonetani Galuinadi Commerce, business development & investment Tomasi Vuetilovoni Education Ro Teimumu Kepa Finance & national planning Ratu Jone Kubuabola Foreign affairs & external trade Kaliopate Tavola Home affairs & immigration Joketani Cokanasiga Labour, industrial relations & productivity Kenneth Zinck Lands & mineral resources Ratu Naiqama Lalabalavu Multi-ethnic affairs George Shiu Raj National reconciliation, information & media Simione Kaitani Public enterprises & public-sector reform Irami Matairavula Tourism, culture, heritage & civil aviation Konisi Yabaki Women, social welfare & poverty alleviation Adi Asenaca Caucau Central bank governor Savenaca Narube

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Economic structure

Annual indicators 1999a 2000a 2001a 2002a 2003b GDP at current prices (F$ m; at factor cost)c 3,137 3,071 3,300 3,463 n/a Real GDP growth (av; %)c 9.6 -3.2 3.0 4.1 5.0 Consumer price inflation (av; %)c 0.2 3.0 2.3 1.6 4.2a Population (m)c 0.81 0.81 0.82 0.83 n/a Exports fob (US$ m)d 609 584 538 546 n/a Imports cif (US$ m)d 903 825 794 893 n/a Current-account balance (US$ m)d -72 -90 -56 n/a n/a Reserves excl gold (US$ m)e 428.7 411.8 366.4 358.8 423.6a Total external debt (US$ m)f 235.6 208.7 188.1 n/a n/a Debt-service ratio, paid (%)f 3.5 2.7 2.0 n/a n/a Exchange rate (av; F$:US$)e 1.970 2.129 2.277 2.187 1.896a 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 2003a F$ m Principal imports 2003a F$ m Garments 252.7 Machinery & transport equipment 664.4 Sugar 230.7 Manufactured goods 440.8 Fish 85.0 Food 332.5 Gold 76.5 Mineral fuels 325.0 Timber 33.2 Miscellaneous manufactured articles 228.6

Main destinations of exports 2003a % of total Main origins of imports 2003a % of total Australia 26.5 Australia 34.6 US 18.1 New Zealand 17.3 UK 14.6 Singapore 10.7 Pacific Islands 10.0 Japan 4.9 New Zealand 4.5 US 3.6 a Reserve Bank of Fiji, Quarterly Review. b Asian Development Bank.

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Quarterly indicators 2002 2003 2004 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Government finance (F$ m) Total revenue & grants 258.9 n/a n/a n/a n/a n/a n/a n/a Expenditure 350.7 n/a n/a n/a n/a n/a n/a n/a Balance -91.7 n/a n/a n/a n/a n/a n/a n/a Prices Consumer prices (1993=100) 125.1 125.5 130.1 131.2 130.5 131.6 133.0 1,34.9 Consumer prices (% change, year on year) 0.8 0.3 3.4 4.1 4.3 4.9 2.2 2.8 Financial indicators . Exchange rate F$:US$ (av) 2.152 2.117 2.004 1.915 1.883 1.782 1.699 1.779 Exchange rate F$:US$ (end-period) 2.164 2.065 1.992 1.873 1.842 1.722 1.722 1.798 Bank (end-period; %) 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 Deposit (av; %) 0.57 0.56 0.57 0.52 0.48 0.47 0.44 n/a Lending (av; %) 8.02 7.87 7.82 7.63 7.57 7.38 7.34 n/a Money market (av; %) 0.83 0.85 0.87 0.79 0.99 0.80 0.80 n/a Treasury bill (av; %) 1.68 1.56 1.23 0.55 1.25 1.22 1.19 1.46 M1 (end-period; F$ m) 681.7 712.0 843.1 744.9 763.3 900.6 743.8 n/a M1 (% change, year on year) 14.5 14.7 31.7 12.7 12.0 26.5 -11.8 n/a M2 (end-period; F$ m) 1,548.8 1,582.6 1,727.9 1,683.5 1,815.5 1,981.1 1,833.2 n/a M2 (% change, year on year) 5.7 7.9 15.3 10.5 17.2 25.2 6.1 n/a Sectoral trends Sugar exports (‘000 tonnes) 102.8 135.8 26.0 34.7 79.1 134.0 26.0 28.7 Tourism, visitor arrivals ('000) 115 100 86 101 130 114 105 n/a Tourism, length of stay (av; days) 9.0 8.5 8.5 8.6 9.1 8.5 n/a n/a Tourism, gross earnings (F$ m) 174.0 139.0 124.1 139.3 205.4 153.3 n/a n/a Foreign trade (F$ m) Exports foba 345.4 367.1 223.5 343.4 302.7 403.5 216.7 n/a Imports cif -507.5 -581.5 -467.8 -725.8 -501.2 -519.8 -490.8 n/a Trade balance -162.1 -214.4 -244.3 -382.4 -198.5 -116.3 -274.1 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 356.2 358.8 332.2 372.3 361.4 423.6 421.2 n/a 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 2004-05

Tensions the two major Tense relations between the prime minister, Laisenia Qarase, and the leader of parties’ leaders will persist the ethnic Indian-dominated Fiji Labour Party (FLP), Mahendra Chaudhry, will continue to mar the political outlook and hamper efforts by investment promotion agencies to convince investors of the country’s political stability. Mr Qarase remains at loggerheads with Mr Chaudhry over the latter’s demand for the 14 seats in Mr Qarase’s cabinet to which the Supreme Court has ruled his party is entitled. However, Mr Qarase insists Mr Chaudhry has forfeited the FLP’s role in the cabinet by rejecting the portfolios already offered to the party. Mr Qarase is reluctant to risk losing support for the coalition government, led by his predominantly indigenous Fijian party, Soqosoqo Duavata ni Lewenivanua (SDL, People’s Unity Party), by ejecting ministers from the minor parties in his coalition government to make room for the FLP. Moreover, there is a growing belief that neither side genuinely wishes to participate in what would be an unwieldy, contentious administration, and that the two leaders will draw out the dispute until parliament is dissolved for a general election, due by September 2006. Opinion polls show that Mr Chaudhry continues to enjoy strong support among ethnic Indians at grass- roots level, and also has a significant portion of the urban vote. Support for Mr Qarase among indigenous Fijians is more splintered, owing to Fijian provincial factionalism, thereby posing a significant risk to the security of his governing coalition of Fijian parties. A continuation of these trends 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. Meanwhile, the recent conviction and subsequent jailing of the vice-president, Ratu Jope Seniloli, and four other politicians, for illegal oath-taking during the 2000 coup which toppled Mr Chaudhry’s government, will fuel calls from Fijian nationalists for quick pardons for those serving sentences for coup-related offences, creating tensions with opposition parties and civil-society organisations.

Strong investor confidence Strong local and foreign private-sector investor confidence is underpinning could easily evaporate expectations of an economic boom, driven mainly by tourism, construction, the growth of some manufacturing industries and new businesses, such as the emergence of an embryonic information-technology industry. Private business confidence could, however, be overoptimistic, as serious political issues between native Fijians and the descendants of Indian labourers will not be settled quickly, and could easily be reignited. A short-term real GDP growth target of 8%, set by the prime minister, is widely regarded as far too optimistic. The Reserve Bank of Fiji (the central bank) is more cautious, forecasting real GDP growth of 4.7% in 2004 (compared with growth of 5% in 2003).

The prospects for the tourism Visitor arrivals rose by 22% year on year in the first five months of 2004, and industry are bright full-year figures are expected to break the new record set in 2003, thanks to the launch of “no-frills” flights from New Zealand and Australia. Work on two large resorts is under way, after delays caused by fears of further political instability.

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Planning for more large resorts and several small “boutique” resorts, is well- advanced or in progress. However, a rash of tourism-related construction projects and important road, water, sewage, port and other infrastructure projects, funded mainly by Asian Development Bank (ADB) and EU grants, will tax the capacity of construction companies already short of skilled labour.

The political scene

The battle over cabinet seats The impasse between the prime minister, Laisenia Qarase, and the leader of seems set to continue the Fiji Labour Party (FLP), Mahendra Chaudhry, over the FLP’s demands for what it regards as a fair share of key cabinet posts remains unresolved. It seems increasingly likely that the two leaders intend to continue their duel over the issue until the next election, due by September 2006, and that occasional formal and informal discussions between them are merely a delaying tactic. Having earlier confirmed that the FLP is constitutionally entitled to a number of cabinet seats in proportion to its parliamentary numbers, the Supreme Court ruled on July 9th that it was the responsibility of the two leaders, not the court, to decide how the cabinet should be structured. As a result, Mr Qarase announced that he would ask the president to appoint a cabinet of 16 ministers of Mr Qarase’s choice and 14 FLP ministers. However, Mr Chaudhry complained that a 30-member cabinet would be too unwieldy and costly, and suggested that 19 ministers would be more affordable and workable. Mr Chaudhry has returned to court to complain that the portfolios offered to the FLP are too insignificant and that the offer of cabinet posts does not extend to himself and two other FLP politicians that he claims Mr Qarase does not like. For his part, Mr Qarase says that he has accepted that the FLP has a right to representation in the cabinet, but that he has the sole prerogative to decide who should get which jobs. He also argues that by rejecting the offer of 14 cabinet seats, Mr Chaudhry has surrendered his party’s rights to be in the cabinet and should take up the role of leader of the opposition, a post Mr Chaudhry previously turned down.

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The army chief thwarts an The army commander, Frank Bainimarama, who in early 2004 had his enquiry into allegations appointment renewed by the president, Ratu Josefa Iloilo, has thwarted the government’s attempt to have an independent commission investigate allegations by dissident senior army officers that in December 2003 Mr Bainimarama had ordered them to plan for the removal of Mr Qarase’s government. As temporary military ruler, Mr Bainimarama effectively ended the parliamentary crisis of 2000, during which Mr Chaudhry’s then government was imprisoned in parliament by Fijian nationalist militants, led by the now imprisoned George Speight. The army commander has since insisted that all those involved in the coup removing Mr Chaudhry’s government, and a mutiny in November 2000 in which Mr Bainimarama was targeted for assassination, be brought to trial. Mr Qarase’s coalition government, led by his predominantly indigenous Fijian party, Soqosoqo Duavata ni Lewenivanua (SDL, People’s Unity Party), would prefer to see the coup-related prosecutions brought to an end. After some tense exchanges between the prime minister and Mr Bainimarama, the president in mid-July rejected Mr Qarase’s request for an enquiry and expressed his satisfaction with an assurance of army loyalty. A chagrined Mr Qarase said that he had no choice but to accept the president’s decision, even though much of the preparatory work for the enquiry had been completed.

The vice-president is convicted On August 6th the vice-president, Ratu Jope Seniloli, the deputy parliamentary of coup-related offences speaker, Ratu Raquita Vakalalabure (of the right-wing, nationalist Conservative Alliance Party), and three others, were convicted of illegally swearing oaths and agreeing to be ministers in a government that rebels holding Mr Chaudhry’s government hostage in parliament were attempting to put together. The sports minister, Isireli Leweniqila, was acquitted. The vice-president received a four- year jail sentence, and Mr Vakalalabure was sentenced to a six-year jail term. In anticipation of an angry reaction from Fijian nationalists, the judge on the case was given police protection. The police commissioner, Andrew Hughes, warned that he would not allow a repetition of the violent events that led to the 2000 coup. At the annual summit of the Pacific Islands Forum (PIF, the main political organisation in the region) in Samoa, Mr Qarase said that he was shocked by the severity of the sentences and remarked that the convicted men were “only Fijians doing their duty, as they saw it”, to maintain Fijian political supremacy. Agitation for pardons began almost immediately. The imprisoned vice-president and deputy speaker continued to hold office and draw their pay, having declined to resign on the advice of their lawyers.

A former coup leader is The government has confirmed that it has nominated Sitiveni Rabuka as Fiji’s nominated as US ambassador ambassador to the US. As an army colonel, Mr Rabuka led a 1987 coup against a new Indian-dominated government, obtained immunity from prosecution and served a term as an elected prime minister until 1999. The Citizens Constitutional Forum (CCF, a non-partisan civil-society organisation promoting human rights, accountability and multiculturalism in Fiji) has urged the US

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Embassy in Suva to advise Washington against the appointment, on the grounds that it would be rewarding a coup leader. According to the CCF, Mr Rabuka also has questions to answer about his role in the 2000 coup.

Economic policy

There are mixed developments The government’s main priority on the economic policy front is to prevent the in the ailing sugar industry collapse of the 120-year-old sugar industry. Sugar production, which is still a key export on which around 200,000 people depend for their livelihood, has become highly inefficient. The industry faces an even tougher struggle from 2007, when EU subsidies for tropical sugar, which have kept Fijian sugar viable, will be cut back sharply. The government-owned Fiji Sugar Corporation (FSC) is also alarmed about the possible ramifications of a World Trade Organisation (WTO) ruling in August on the preferential treatment given by the EU to Fiji and some other sugarcane producing countries. The EU has been ordered to end what the governments of Australia, Thailand and Brazil claim is discrimination against their sugar industries. According to the EU, the ruling will not remove preferential access rights enjoyed by Fiji, although the FSC is bracing itself for another reduction in subsidised prices, at a heavy cost to the Fijian sugar industry. One positive development for the technically insolvent FSC was agreement between the prime minister, Laisenia Qarase, and the leader of the Fiji Labour Party (FLP), Mahendra Chaudhry, on the appointment of a new board, to include Ross McDonald as chairman, and Rashid Ali, a former FSC chief executive. Mr McDonald, a former chief executive of two large South Pacific trading companies, Carpenters and Burns Philp, is confident that a plan, devised with the assistance of consultants supplied by the Indian government and funded by a loan of about F$58m (US$32m) from India, will have been put into action by the end of 2004.

The government moves to The government has invoked foreign investment rules to restrict the ownership restrict foreign ownership of 15 categories of small businesses to Fijian citizens. New fishing, construction, timber and cruise businesses are now required to be at least 49% locally owned. In other developments, the prime minister has urged commercial banks to devote more resources to the needs of the rural sector and to help to change the attitude of some indigenous Fijians towards money. Mr Qarase, a former managing director of the Fiji Development Bank, wants the banks, which mainly focus on business in the larger towns, to co-operate with the government in efforts to convince Fijians that they should save money to invest in small business rather than spend it or give it away.

The NPF is to invest in resort The government has authorised the F$2.5bn (US$1.4bn) Fiji National Provident development Fund (NPF, a social security savings scheme, set up in 1966 and jointly supported by employees, employers and the government) to invest in resort development, to overcome the lack of suitable investment opportunities available to the fund. Previously barred from financing hotels, the fund will now invest F$257m, through a trust company subsidiary, in two large resorts and a golf course at Natadola Beach and a 240-room resort and golf course at

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Momi Bay. However, the fund, which by law is required to hold 60% of its assets in government bonds, has been instructed by the Reserve Bank of Fiji (the central bank) to halt investment overseas to conserve foreign-exchange funds until there has been a significant improvement in export earnings.

The domestic economy

A shortage of labour could There are concerns that the expansion of the tourism industry could be hold back tourism projects hampered by a shortage of first-class hotel rooms, power and water, as well as the lack of skilled labour needed to construct and run hotels. Local construction companies have warned that they do not have enough skilled workers to proceed with all the resort projects waiting to be started. The annual Fiji Tourism Forum in July heard that builders were already stretched to capacity, with around 2,200 workers currently being employed on existing projects. It is estimated that another 1,800 people with construction skills could be tempted back to the industry, although architects estimate that builders are short by around 1,700-2,000 of the skilled workers necessary to complete upcoming projects. Two more large resorts are under construction at the Denarau resort near Nadi, and Denarau’s Singaporean developers have announced plans for an F$83m (US$46.1m) investment in an additional 125-room project and the building of a small township and another hotel there. Meanwhile, developers at Natadola Beach have announced that work on a 340-room resort and golf course, to be run by the Intercontinental hotel group, is due to begin in January 2005, to be followed by the construction of a 125-room resort to be managed by the Four Seasons hotel group. Several smaller resorts are in the planning stage, and many established resorts are being extended, refurbished or upgraded. A New Zealand developer plans to build a large retirement resort at Saweni Beach, near Lautoka. According to a study commissioned by the Fiji Visitors Bureau, the number of hotel rooms in Fiji rose by 31% between 1993 and 2003, whereas visitor arrivals grew by 49%. According to estimates from Air Pacific (Fiji’s national carrier, which is part owned by the Australian airline, Qantas) there is currently a shortage of around 4,525 hotel rooms, based on 2003 arrival figures and assuming an average stay per visitor of 7.7 days. The airline expects the accommodation shortage to last until at least 2007.

Australia has extended its Australia has extended by seven years (from 2005), its preferential trade preferential trade agreement agreement with Fiji relating to Fijian exports of garments and shoes, thereby preserving the jobs of up to 15,000 Fijians. However, the garment industry has warned that several thousand jobs will be lost if an expiring three-year trade agreement with the US is not renewed in 2005.

Output is set to triple at the Fiji The Canadian chairman of Fiji Water, David Gilmour, has announced a Wate r facto ry US$15m expansion to triple bottled-water production at the factory at Yaqara, on the main island of Viti Levu. Sales of Fiji Water are up by 50% so far this

year and the brand now has the second-largest market share in the US after Evian. The export of bottled water was worth more than F$30m in 2002.

Foreign trade and payments

Import coverage fell slightly in At end-June 2004 official foreign-exchange reserves stood at F$732m, or the second quarter of 2004 US$407m (equivalent to 4.8 months of import cover), down from F$752.1m at end-April (5 months of import cover). According to the Reserve Bank of Fiji (the central bank), the real effective exchange rate index of the Fiji dollar rose by 0.8% in the year to June 2004, pointing to a deterioration in the country’s international competitiveness. The deterioration largely reflects a higher domestic inflation rate (2.7% year on year in June) than that of Fiji’s main trading partners (averaging 2% year on year in June).

The region September 2004 Summary

Outlook for 2004-05 Officials of the Fiji-based Pacific Islands Forum (PIF, the main political organisation in the region) will begin implementing the PIF’s Pacific Plan, for greater co-operation between the 14 island states on political, economic and social development, by the end of 2004. Despite their many problems, most island economies are forecast to expand in 2004-05, although financial aid will remain crucial.

The political scene The Australian prime minister, John Howard, used the opportunity of the PIF annual summit to expand further on what he saw as Australia’s role in the region. Samoa has lost out to Papua New Guinea (PNG) over the region’s nomination for the post of secretary-general of the Africa, Caribbean and Pacific (ACP) grouping.

Economic policy and the Negotiations with the EU on trade and aid under the Cotonou agreement are domestic economy set to begin. Concern has grown about how little the Pacific islands benefit from fish resources in their region. Rugby union has been designated as one of the economic and social priorities to be included in the Pacific Plan. The growth of cheaper flights to the region is having a significant impact on travel and tourism in the region. Editors: Kate Allard (editor); Graham Richardson (consulting editor) Editorial closing date: August 26th 20044 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

The region Outlook for 2004-05

Island governments will begin Officials of the Fiji-based Pacific Islands Forum (PIF, the main political implementing the Pacific Plan organisation in the region) will begin implementing the PIF’s Pacific Plan, for greater co-operation between the 14 island states on political, economic and social development, by the end of 2004. Details of the grand vision floated by the leaders of the PIF’s 16 member governments (from 14 Melanesian, Polynesian and Micronesian independent states, together with New Zealand and Australia) at a “consultation” convened by the prime minister of New Zealand, Helen Clark, in Auckland in April 2004 (June 2004, The region), and confirmed by the PIF annual summit in Apia, Samoa in August, will be devised in the coming months by a task-force. The task-force will comprise the heads of various regional organisations and representatives from each country. Practical guidelines for implementing the plan will be submitted for formal approval at the 2005 annual PIF summit to be held in Papua New Guinea (PNG), although some measures are likely to be implemented later this year, so that some progress can be seen to have been made by the 2005 summit.

Acceptance of Australia’s Although some in the region will continue to view greater intervention by higher profile is growing Australia in the region with suspicion, most island leaders now appear more accepting of Australia’s higher profile in the region. This is largely thanks to the successful intervention in July 2003 of an Australian-led force in the troubled Solomon Islands and the tact with which the new head of the PIF, a former Australian diplomat, Greg Urwin, has so far handled the key issues of reform, improved governance and co-operation since his controversial appointment at last year’s annual summit. Island governments are now largely resigned to the fact that future flows of aid will be conditional on the implementation of reforms to their government and economic systems. Australia has pledged funds and technical expertise to help the small, bankrupt island nation of Nauru and the PIF will post an official there to help its beleaguered government tap aid sources for which it had little need when phosphate exports helped it to become one of the richest countries in the world per head. Nauru’s phosphate mines are now almost depleted and the revenue squandered, leaving the country in financial crisis.

A new strategy to tackle PIF member governments have also unanimously approved the launch in HIV/AIDS will be launched December 2004 of an aggressive new plan to tackle the spread of HIV/AIDS in the region, which is particularly prevalent in PNG. New funds to tackle the problem have been pledged by the UN and the Australian government, among others. Meanwhile, concern in Australia, New Zealand and the US about the possibility that the region could be targeted by international criminal organisations that could serve as platforms for supporting international terrorism is expected to grow following the discovery in Fiji of a major clandestine factory producing the drug crystal methamphetamine, allegedly run by a criminal gang of Chinese origin.

Most islands economies will Despite continued political instability in the region, most island economies are expand in 2004-05 showing signs of improving activity and will continue to expand in 2004-05. The tourism boom in some of the region’s main destinations is expected to continue, thanks to the region’s image as being safe and peaceful, the increase in air capacity and the expansion of low-cost airline services. However, some tourism destinations appear to be losing market share to Fiji, which has become the primary focus of low-cost operators. Indeed, some representatives of the tourism industry and island governments are beginning to question the real value of cut-price airlines based in New Zealand and Australia that are now operating in some parts of the region. Government concern mainly reflects fears about the impact that low-cost operators will have on the slender financial viability of their own limping national airlines. Concern is also growing about greatly reduced tuna catches in the region. Intense debate on the cause of the slump!overfishing, climate change, still little-understood natural weather and ocean-temperature cycles, or a combination of all of these!will continue.

The political scene

The Australian prime minister At the 2004 PIF summit in Apia in early August the Australian prime minister, outlines his country's role John Howard, took the opportunity to expand further on what he saw as Australia’s role in the region. For many years the Australian government had appeared to display little interest in the region, but the decision by the government in mid-2003 to intervene directly to help to restore law and order in the Solomon Islands signalled an important shift in policy to one of active engagement with the region. At this year’s annual summit, Mr Howard declared the Pacific island region to be “Australia’s patch” and one regarded as such in many other parts of the world. Mr Howard noted that Australia was now deeply involved in the region, following Australian intervention (in various ways and at the request of the governments concerned) in the Solomon Islands, Nauru and PNG. He also insisted that Australia was motivated only partly by fears that weak or failing island states could become innocent harbourers of international criminal gangs and terrorist groups, emphasising that Australia’s leadership in the region was also justified on economic, historic and geographic grounds. The New Zealand prime minister went along with Mr Howard, although in a more muted way, in keeping with the New Zealand government’s feeling that it, not the Australian government, really knows the Pacific region best. Meanwhile, Ms Clark announced that New Zealand’s last territorial dependency, the three atolls of Tokelau which have around 1,200 inhabitants, was progressing towards autonomy and could become the PIF’s 17th member by around 2006.

Samoa loses out to PNG over The fallibility of the much-vaunted “Pacific Way”!the belief that Pacific ACP nomination islanders can overcome differences by means of informal discussion and consensus!was once again demonstrated at the summit when a dispute arose between the Samoan and PNG leaders over who the Pacific region should nominate for the post of secretary-general of the ACP (Africa, Caribbean and

Pacific) secretariat at the EU headquarters in Brussels. Pacific leaders feel that it is their turn to fill the role currently held by an African. The Samoan government wanted to nominate Dr Pa’o Luteru, a Samoan trade expert who is already a senior ACP official, although the PNG government favoured a PNG politician, Sir John Kaputin. PNG had long lobbied for Sir John’s candidacy prior to the meeting in Apia. In the event, the 14 Pacific island members of the ACP failed to reach a consensus and held a ballot, which PNG won by 11 votes to 3. Samoan officials were apparently disappointed by what they said was a degree of anti-Samoan feeling. However, it remains to be seen whether Sir John will be appointed in the role, with Fijian officials predicting the job would go to another African candidate. The dispute over who to nominate for the post followed a similar debacle at last year’s summit when Pacific island leaders were unable to agree on who should succeed the outgoing PIF secretary-general and resorted to a secret ballot. This saw Mr Urwin, who has a wealth of experience in the region, appointed to the job, which is traditionally reserved for a Pacific islander.

Economic policy and the domestic economy

Negotiations with the EU on The 14 island members of the PIF will formally begin negotiations with the EU trade and aid are set to begin on new trade arrangements under the Cotonou Agreement (an agreement signed in 2000 to succeed the Lomé convention, setting out trade relations between the EU and the ACP states) in Suva, the Fijian capital, on September 10th. The talks are scheduled for completion by December 2006 and the resulting economic partnership agreement (EPA), which will underpin aid and trade relations between the Pacific island states and the EU (by far their most important aid donor), is expected to take effect from January 2008. Preliminary talks have been complicated by WTO rulings, such as the one in August cutting the level of subsidies Fiji receives from the EU for its sugar. Apart from trade, the EPA will also cover technical standards, plant and animal health regulations, rules of origin and investment. The agreed EPA is expected to oblige the Pacific island states to develop closer trade ties with Asian trade groups, the US, Australia and New Zealand.

Concern grows about scant PIF member governments have directed the Forum Fisheries Agency (FFA) to benefits from fish resources research and then convene a meeting of fisheries ministers on the revenue that each country receives from the annual tuna catch of around 1m tonnes, valued at US$2bn, taken from the island states’ 200-mile exclusive economic zones, mainly by licensed Asian fishing fleets. The FFA estimates that the Pacific islands currently receive only 5-8% of the total value of the catch. Rather than raising licence fees, FFA countries want to attract more onshore fish processing, vessel repair, fuelling and servicing facilities, and more joint-venture fishing businesses. They also want more local seamen to be hired as fishing crew. Meanwhile, a major new fisheries institution, the Tuna Commission, was established in June in Pohnpei, in the Federated States of Micronesia, to regulate high seas fishing in the western and central Pacific. Members of the new agency include the FFA countries and major fishing countries such as

China, Japan, Taiwan, Korea and the US. The creation of the new agency reflects mounting concern about the health of the region’s core yellowfin tuna stock, which like the stock of big-eye tuna, is under strain owing in part to overfishing by Asian fishing fleets.

Rugby union is designated a It was decided at the PIF annual meeting in August that sport, particularly key priority rugby union, should be designated as one of the economic and social priorities to be included in the Pacific Plan. The PIF wants Pacific island rugby unions accepted on the board of the International Rugby Union and the newly formed Pacific Islanders rugby union team (made up of top Samoan, Tongan and Fijian players) admitted to the Super 12 series, comprising teams from Australia, New Zealand and South Africa. Rugby is now important economically as well as socially in the region, with many of the top players recruited to play professionally for teams in Australia, New Zealand, England and Japan. Pacific island governments also want to set up regional rugby competitions, which are seen as potential revenue earners and tourism attractions.

The impact of cheaper flights The growth of cheaper flights to the region, which began in May 2004 with is starting to be felt lower fares introduced by Air New Zealand for travel to all its Pacific island destinations and the launch of “no-frills” flights, initially to Fiji by its subsidiary, Freedom Air, is having a significant impact on travel and tourism in the region. Pacific Blue, an offshoot of the Australian low-cost airline, Virgin Blue, will begin flights to Fiji and Vanuatu in September, and also has New Caledonia and the Cook Islands in its sights. In August, the Samoan government confirmed it was talking to Virgin Blue about a joint venture with the fully government-owned national carrier, Polynesian Airlines. Meanwhile, the Fijian national carrier, Air Pacific, has cut fares on its Australia and New Zealand routes by about 30%, while maintaining a full cabin service. According to the South Pacific Tourism Organisation (SPTO), which represents 12 national tourist offices, visitor arrivals to the region in the first quarter of 2004 were up by 8.5% year on year, although most of the increase was attributable to the sharp rise in arrivals to Fiji. Visitor arrivals to French Polynesia, New Caledonia, the Cook Islands and Tonga were down, although Vanuatu experienced some growth. The SPTO believes that the numbers reflect the beneficial impact of cheaper airfares to Fiji and Vanuatu, with both countries winning a greater share of the key markets of Australia and New Zealand.