Country Report

Fiji

December 2005

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

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Contents

Fiji

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07

8 The political scene

10 Economic policy

11 The domestic economy

12 Foreign trade and payments

The region

13 Summary

14 Outlook for 2006-07

16 The political scene

17 Economic policy and the domestic economy

List of figures

8 Gross domestic product 8 Consumer price inflation

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Fiji December 2005 Summary

Outlook for 2006-07 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 (FLP), Mahendra Chaudhry, are rising ahead of the next general election, which is formally due by September 2006 but is likely to take place in August that year. Conflict between the army and the government, and the possibility of a return to power by the FLP (which was removed from government in May 2000 after a civilian-led coup by Fijian nationalists and opportunists), are fuelling investor nervousness, although not enough to have a substantial negative effect on investment in the tourism sector, which will continue to expand rapidly. The army is insistent that it will crush any attempt to overthrow a democratically elected government, although another coup cannot be ruled out. Real GDP growth will be subdued, owing to a decline in the garment industry (following the loss of the US market quota for Fijian garment exports) and the restructuring of the ailing sugar industry. However, the negative impact of these factors will be partly offset by the continued expansion of the tourism industry.

The political scene The two major political parties have begun to position themselves ahead of the next general election. A Methodist backlash could be significant setback for the ruling Soqosoqo Duavata ni Lewenivanua (SDL, People's Unity Party) come election time. Mr Qarase has again been criticised for pandering to his nationalist allies.

Economic policy The Reserve Bank of Fiji (RBJ, the central bank) raised the official interest rate from 1.75% to 2.25% in October. The government’s efforts to cut the annual cost of the civil service could be thwarted by rising public-sector pay. The government has announced a new excise tax of 5-10% on a range of imports.

The domestic economy The restructuring of the sugar industry has finally begun. Telephone call charges have been cut. The tourism sector has continued to expand at a rapid pace. Fiji wants the Australian government to relax its local-content rules on Fijian garment exports.

Foreign trade and payments Official foreign-exchange reserves fell from F$992m (US$583m) at the end of June (equivalent to 5.6 months of import cover), to F$940m (5.3 months of import cover) at the end of September, owing to sluggish export receipts and rising import costs. Editors: Kate Allard (editor); Kil Dosanjh (consulting editor) Editorial closing date: November 29th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report December 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 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 decided in November 2004 not to pursue the issue further

Prime minister & minister for Fijian & national reconciliation Laisenia Qarase

Key ministers Agriculture, sugar & land resettlement Ilitia Tuisese 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 & national disasters Josefa Vosanibola Information, communications & media relations Marieta Rigamoto Labour, industrial relations & productivity Kenneth Zinck Lands & mineral resources Samisoni Tikinasau Local government, housing, & environment Pio Wong Public enterprises & public-sector reform Jonetani Galuinadi Regional development Ted Young Tourism, culture & heritage Konisi Yabaki Transport & civil aviation Ratu Naiqama Lalabalavu Women, social welfare & poverty alleviation Adi Asenaca Caucau

Central bank governor Savenaca Narube

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Economic structure

Annual indicators 2001a 2002a 2003a 2004a 2005b GDP at current prices (F$ m; at factor cost)d 3,835.8 3,969.3 4,396.3 4,674.0 n/a Real GDP growth (av; %)c 2.7 4.3 5.0 4.1 2.0 Consumer price inflation (av; %)c 2.3 1.6 4.2 3.3 2.5 Population (m)c 0.82 0.83 0.83 0.84 n/a Exports fob (US$ m)d 538 546 671 678 n/a Imports cif (US$ m)d 794 893 1,168 1,272 n/a Current-account balance (US$ m)d 16 48 -4 -34 n/a Reserves excl gold (US$ m)e 366.4 358.8 423.6 478.1 n/a Total external debt (US$ m)d 188.5 209.6 263.6 n/a n/a Debt-service ratio, paid (%)d 5.5 5.9 n/a n/a n/a Exchange rate (av; F$:US$)e 2.277 2.187 1.896 1.733 1.690 a Actual. b Economist Intelligence Unit estimates. c Reserve Bank of Fiji, Quarterly Review. d Asian Development Bank. e IMF, International Financial Statistics.

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 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Government finance (F$ m) Total revenue & grants 270.9 260.3 282.8 299.2 329.9 266.0 282.5 n/a Expenditure 509.9 260.0 347.5 381.9 489.7 281.4 345.9 n/a Balance -239.0 0.3 -64.7 -82.8 -159.8 -15.4 -63.3 n/a Prices Consumer prices (1993=100) 131.6 133.0 134.9 134.5 135.9 137.2 137.5 137.5 Consumer prices (% change, year on year) 4.9 2.2 2.8 3.1 3.3 3.2 1.9 2.2 Financial indicators Exchange rate F$:US$ (av) 1.782 1.699 1.779 1.768 1.687 1.657 1.676 1.705 Exchange rate F$:US$ (end-period) 1.722 1.722 1.798 1.751 1.645 1.673 1.702 1.709 Bank rate (end-period; %) 1.75 1.75 2.25 2.25 2.25 2.25 2.25 2.25 Deposit rate (av; %) 0.47 0.44 0.37 0.35 0.36 0.36 0.39 n/a Lending rate (av; %) 7.38 7.34 7.18 7.14 7.04 6.92 6.82 n/a Money market (av; %) 0.80 0.80 0.88 0.88 1.03 0.97 1.13 1.24 Treasury bill (av; %) 1.22 1.19 1.46 1.80 1.79 1.83 1.93 1.87 M1 (end-period; F$ m) 877.5 729.4 902.9 900.2 995.1 1,009.5 1,081.8 n/a M1 (% change, year on year) 26.1 -11.9 23.9 20.3 13.4 38.5 19.8 n/a M2 (end-period; F$ m) 1,958.0 1,818.8 2,016.0 2,034.2 2,162.8 2,192.1 2,294.7 n/a M2 (% change, year on year) 25.0 6.2 20.9 13.0 10.5 20.5 13.8 n/a Sectoral trends Sugar exports (‘000 tonnes) 134.0 26.0 28.7 66.3 140.7 47.6 30.2 n/a Tourism, visitor arrivals ('000) 114 105 121 150 n/a n/a n/a n/a Tourism, length of stay (av; days) 8.3 8.4 8.7 n/a n/a n/a n/a n/a Tourism, gross earnings (F$ m) 145.5 153.3 177.5 n/a n/a n/a n/a n/a Foreign trade (F$ m) Exports foba 403.5 216.7 263.6 313.5 381.5 270.9 272.3 n/a Imports cif -519.8 -490.8 -522.2 -554.4 -637.3 -549.4 -663.6 n/a Trade balance -116.3 -274.1 -258.6 -240.9 -255.9 -278.5 -391.3 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 423.6 421.2 407.0 422.2 478.1 427.7 427.1 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 2006-07

The general election is Political tensions between the Fijian-nationalist-dominated government, led by

expected in August 2006 the prime minister, Laisenia Qarase, and the leader of the ethnic-Indian- dominated Fiji Labour Party (FLP), Mahendra Chaudhry, will rise ahead of the next general election, which is formally due by September 2006 but is likely to take place in August. Conflict between the army and the government, and the possibility of a return to power by the FLP (which was removed from government in May 2000 after a civilian-led coup by Fijian nationalists and opportunists), are fuelling investor nervousness, although not enough to have a substantial negative effect on investment in the tourism sector, which will continue to expand rapidly. Given that the two main parties are neck and neck in the opinion polls, an FLP- led government, in coalition with two or three smaller parties, could emerge victorious at the next election. Mr Chaudhry, who was ousted as prime minister in 2000, 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, but must hold together a shaky alliance of five Fijian political parties to ensure his political survival. The army, led by its commander, Frank Bainimarama, is insistent that it will crush any attempt to overthrow a democratically elected government. 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 fill the post himself, thereby risking more of the kind of friction with Fijian nationalists that contributed to his downfall in 2000.

Economic growth will be Real GDP growth will be relatively subdued, owing to a decline in the garment relatively subdued in 2006-07 industry (following the loss of the US market quota for Fijian garment exports) and the restructuring of the ailing sugar industry, which will get fully under way in 2006. Political obstructions and the unwillingness of many sugarcane growers to accept the tougher husbandry disciplines required of them could still sink the beleaguered industry. The negative impact of these factors will nevertheless be partly offset by the continued expansion of the tourism industry. Visitor arrivals are likely to have reached a new record in 2005, thanks in part to low-cost flights from Australia and New Zealand, and will continue to rise, assuming that political stability is maintained. 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 two years. Rising tourism receipts and remittances from Fijian citizens working abroad will help to offset expected falls in the value of exports of garments, gold, fish, timber and other products.

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

Fiji Asia excl Japan Fiji Asia excl Japan 8 4.5

4.0 6 3.5

4 3.0

2.5 2 2.0

0 1.5 02 03 04 05 02 03 04 05 2001 2001

The political scene

Election manoeuvring by the The two major political parties—the ruling Soqosoqo Duavata ni Lewenivanua political parties has begun (SDL) and the ethnic-Indian-dominated Fiji Labour Party (FLP)—have begun to position themselves ahead of the next general election. This is likely to take place in mid-August 2006, a month before the government’s current five-year term is due to expire. The two parties are currently running neck and neck in the opinion polls, raising the prospect of a return to power of the FLP leader, Mahendra Chaudhry, as leader of a coalition supported by two or three smaller parties. The prospect of an FLP-led government has fuelled fears of a repeat of the coup that removed Mr Chaudhry from power in 2000, although the army commander, Frank Bainimarama, has continued to insist that it will smother any attempt to destabilise a constitutionally elected government. That said, even some FLP supporters are privately fearful that if re-elected Mr Chaudhry will resume the dictatorial style of leadership that characterised his previous time in office and is thought to have contributed to his downfall in 2000. Another government led by Mr Chaudhry would also have to contend with underlying hostility from Fijian nationalists within and outside the public service. As a result, many in the business sector, including many ethnic-Indians and other ethnic minorities, would welcome the return to power of the SDL as an assurance of another five years of economic growth and relative political stability. The SDL has signed a “grand coalition agreement” with five other parties: the Soqosoqo Vakavulewa ni Taukei (SVT, a former ruling party which was eliminated from parliament following the 2001 general election), the right-wing nationalist Conservative Alliance Party (MV), which has six parliamentary seats, and three much smaller parties of limited significance. Given that the SDL now accepts non-Fijian members, the party intends to contest all 71 seats in the House of Representatives (the lower house), including those reserved for Indian and “general” (non-Fijian, non-Indian) members of parliament (MPs). It can also count on strong support from the 60,000-strong Muslim community and at

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least some degree of support from the once influential National Federation Party (NFP), which is supported mainly by Indian business owners and professionals and did well in municipal elections in October. Mr Chaudhry had previously claimed the NFP hoped to secure seven safe seats reserved for Indian MPs by exchanging preferences with the FLP, but this was subsequently denied by the NFP. For its part, the FLP has signed a coalition agreement with the United People's Party (UPP), a revived version of the defunct General Electors’ Association. The UPP could secure two of the three seats reserved for the small “general” voter community and, with FLP support, perhaps a few of the 25 seats open to all candidates. The new National Alliance Party (NAP), which hopes to contest all seats, has also made an informal approach to the FLP as a prelude to some form of coalition agreement. Launched earlier this year by Ratu Epeli Ganilau, a former army commander and the son of the highly respected former Fijian president, Ratu Sukuna, the NAP has a multiracial and conciliatory philosophy that is diametrically opposed to the Fijian nationalist tendencies of the SDL. The new party’s election hopes are probably over optimistic, but it could secure three or four seats in parliament, potentially giving the FLP the edge it needs to form the next government.

A Methodist backlash could be While the FLP can rely on a significant portion of the urban vote, the ruling

a setback for the ruling SDL SDL enjoys strong Fijian support in rural areas. However, in what could be a significant setback for the SDL, the influential Fijian-dominated Methodist Church, a past fomenter of Fijian nationalism, reacted angrily when the Fijian high court declared unconstitutional the conviction and imprisonment of an Australian visitor and a local man for homosexual conduct. The Methodists and several new evangelical churches subsequently demanded the amendment of the 1998 constitution to restore homosexuality as a criminal offence. The government permitted the Methodist Church to hold one protest march in support of the demand, but permits for further protests were denied at the urging of the Fiji Human Rights Commission on the grounds that they could incite hatred of homosexuals. In response, some senior Methodist officials threatened to call on supporters to abandon the SDL at the next election.

Mr Qarase is criticised for Mr Qarase’s critics have once again accused him of making political

pandering to his allies appointments that pander to his nationalist allies. In September, Ratu Naiqama Lalabalavu, a high-ranking chief and parliamentary leader of the nationalist CAMV, was restored to the cabinet in the transport and civil aviation portfolio after completing an eight-month extramural prison sentence for supporting the 2000 coup. He took over the portfolio from Simione Kataini, who became minister without portfolio. Mr Kataini was acquitted by the Fijian high court on coup-related charges in August. George Shiu Raj has also been restored to the cabinet as minister for multicultural affairs after his acquittal on corruption charges. Mr Raj is the only ethnic Indian in the cabinet. Meanwhile, Mr Qarase has appointed to the Senate (the upper house) the de facto wife of a founding member of the SDL who lost his Senate seat after being jailed for inciting an army mutiny in which eight soldiers died.

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Economic policy

The central bank has raised The Reserve Bank of Fiji (RBJ, the central bank) raised the official interest rate

interest rates to 2.25% from 1.75% to 2.25% in October, the first increase since May 2004. It justified the increase on the grounds that consumer credit growth remained strong, robust domestic demand growth was sucking in imports at an increasing rate and rapid growth in mortgage lending, if left unchecked, risked straining households’ capacity to service rising debt. It also warned that rising import prices, in part attributable to higher world oil prices, threatened to push up local production costs, thereby pushing up consumer price inflation and wage settlements.

The public-sector pay bill is set The government’s efforts to cut the annual cost of the civil service, from the

to rise sharply equivalent of around 11% of GDP to 9% of GDP, could be thwarted by rising public-sector pay. Concern centres on the impact of a new performance-based bonus scheme for public-sector workers, which replaced the previous system of annual cost-of-living adjustments. The government believes the new scheme could inflate the annual civil service pay bill by F$40m (US$22.5m). Public- sector unions continue to oppose the new system, which could now be abandoned. The public service pay bill will in any case be pushed up further as an independent arbitrator gave a 5% cost of living award to 29,000 civil servants in 2004 (although the government has not yet said when it will be in a position to pay it), which will cost an estimated additional F$42m. The finance ministry has yet to decide how to meet the cost of the 2004 settlement. According to a recent report by the World Bank, the number of civil servants needs to be cut to 25,000 over the next five years if the government is to meet its target of reducing the cost of the civil service to the equivalent of 9% of GDP. However, such redundancies have been ruled by Mr Qarase. Indeed, the education minister, Ro Teimumu Kepa, recently announced that her ministry would create 8,000 new teaching positions in 2006.

The government has The government has announced a new excise tax of 5-10% on imported alcohol,

announced a new excise tax tobacco, cars, white goods and luxury goods, and on some other imported goods that are also produced locally. This new tax will be charged on top of existing tariffs. The government has also announced that ten-year tax holidays will be available for information technology (IT) companies that set up in specified zones, while tax exemptions of up to 80% will be available for IT companies operating outside the prescribed zones. Small agricultural, fishing and tourism concerns with annual turnovers of up to F$200,000 (US$112,000) will benefit from eight-year tax holidays. The government is also to enact electronic commerce transaction legislation to facilitate the growth of the IT industry.

Telephone call charges have The cost of telephone calls has been cut, after the government, the business

been cut community and consumer agencies complained to the Commerce Commission that the high tariffs charged by the country’s three telecoms monopolies were stifling growth in business sector. The price of mobile phone calls has been reduced by 70%, from F$1.73 (97 US cents) to F$0.52 per minute, while fixed-line

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calls have been cut by 9.8% to F$0.13 a minute. Charges for international calls and calls within the Pacific region have also been reduced by around 50%. The impact of the call reductions will be offset in part by steep increases in line rental charges, particularly for businesses. Telephone charges will be reviewed again in 2007. Predictably, Telecom Fiji (the country’s sole provider of national and local fixed-line calls, which is 51%-owned by the Fiji National Provident Fund) has complained about the cuts in charges, which it claims will adversely affect its investment plans. Meanwhile, Vodafone Fiji (the sole provider of mobile-phone services) has announced that it will spend around F$100m (US$56m) on modernising its network and introducing third-generation (3G) mobile technology to Fiji, in partnership with Ericsson, a Swedish-based telecommunications equipment provider.

The restructuring of the sugar The restructuring of the sugar industry has finally begun, with contracts worth

industry has finally begun US$50m for new equipment required to improve the government-controlled Fiji Sugar Corporation’s (FSC) four sugar mills issued to successful Indian bidders in November. The FSC has a credit facility with the Indian government and will appoint an Indian sugar industry expert as its next chief executive. In a worrying development, the FSC’s chairman, Ross McDonald, told the annual shareholders’ meeting that despite a positive start to the current sugar harvest, by September around 96% of the sugarcane supplied by the 20,000 mainly Indo-Fijian growers was burnt cane, as opposed to fresh green cane. Burnt cane is more easily cut but yields lower quality sugar and costs far more to process. Mr McDonald warned that the salvage of the declining industry was not dependent on mill improvements alone and that a good supply of fresh cane was a crucial component in the recovery plan. Sugar output in Fiji has fallen from a peak of 517,000 tonnes in 1994 to an estimated 320,000 tonnes in 2005. Meanwhile, in October the Asian Development Bank (ADB) launched a F$100m (US$56m) “alternative livelihood” project to assist some 8,000 farmers, cane-cutters, mill workers and landowners likely to be affected by the restructuring of the sugar industry.

The domestic economy

The tourism industry is The tourism sector continues to expand at a rapid pace. A 300-room resort is

expanding rapidly due to open at the Denarau integrated resort in early December. The resort, a joint venture between the national airline, Air Pacific, and the Colonial Life Fiji financial group, will be managed by the Accor international hotel group, which has also taken over two other hotels in Fiji. The construction of a large resort complex at Mimi Bay is progressing rapidly, the building of another complex at Natadola Beach has begun, and the first of several hotels has been announced for the Yaqara resort scheme in northern Viti Levu (the main island, which is home to around 75% of the population). The Fiji Visitors Bureau (FVB, the main tourism body) has forecast that the number of hotel rooms in the country will rise by 1,000 in 2006 and by a further 1,000 in 2007. The FVB projects that visitor arrivals will reach a new record of 532,000 in 2005 (up from the previous record of 507,000 in 2004) and will rise further to 565,000 in 2006 and 658,000 in 2008.

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Fiji wants Australia to relax The Fiji Australia Business Council, which promotes business and trade content rules on some exports between the two countries, has asked the Australian government to lower the Australian content rules relating to Fijian garments exports from 50% to 25%. Australia, the main export market for the Fijian garment industry, has agreed to consider the request. The loss of the US market quota for Fijian garment exports, as a result of the expiry at end-2004 of the World Trade Organisation’s Agreement on Textiles and Clothing, has seen the industry shed around one- half of its workforce, which peaked a few years ago at around 18,000. Industry representatives believe that the textile and footwear industry could be rejuvenated if Australian rules of origin were relaxed, enabling Fiji to source cheaper fabrics from China.

Emperor Mines secures a gold The Australian-listed Emperor Mines, the parent company of Fiji’s Emperor mine purchase Gold Mines (EGM), has reached agreement with another Australian company, Alcaston Mining, on the terms for acquisition by Emperor of the Tuvatu gold mine near Nadi on Viti Levu. The mine will be jointly developed by Emperor and Alcaston in a strategic alliance arrangement which could be extended to Emperor’s other gold exploration projects in Fiji. Around 7m ounces of gold have been mined from Emperor’s main Fijian gold mine at Vatukoula since 1933, and current reserves are estimated by the company at 3m-4m ounces. The Vatukoula mine is Fiji’s second-largest private-sector employer, with around 2,000 employees.

Foreign trade and payments

Import cover fell in the third According to the Reserve Bank of Fiji (the central bank), official foreign-

quarter of 2005 exchange reserves fell from F$992m (US$583m) at the end of June (equivalent to 5.6 months of import cover) to F$940m (5.3 months of import cover) at the end of September, owing to sluggish export receipts and rising import costs. After rising for much of the year, the real effective exchange-rate index of the Fiji dollar fell by 0.1% in September 2005, pointing to an improvement in the country’s international competitiveness. The improvement reflected lower domestic inflation (at 1.7% year on year in September, down from an average of 2.4% in the three months to August) than in Fiji’s main trading partners. In a less positive development, the value (in local-currency terms) of total merchandise exports fell by 17% in the 12 months to August 2005, owing to a fall in export receipts from textiles, sugar and fish. At the same time, the total value of merchandise imports rose by 12%, owing to a rise in deliveries of consumption, investment and intermediate goods.

The region December 2005 Summary

Outlook for 2006-07 Island governments will start to execute the long-awaited Pacific Plan, produced by the Pacific Islands Forum (PIF, the main political organisation in the region). The plan is intended to improve co-operation between the 14 island states on political, economic and social development. Talks with the EU on free-trade and aid arrangements will continue, and Australia will continue to play a crucial role in the region. Despite political instability in the region, most island economies are showing signs of improving economic activity and will expand further in 2006-07. Foreign aid will remain crucial to economic development. The economic importance of tourism will grow.

The political scene The Pacific Plan was approved unanimously at the PIF’s annual summit in Papua New Guinea in October 2005. The Australian and New Zealand governments have rejected calls for greater labour mobility in the region, although the Australian government is to fund the building of a college to train carpenters, plumbers, electricians and other trades people to Australian standards. A referendum on Tokelau’s future status will be held in December 2005. A study commissioned by the PIF has proposed that the region’s key institutions be amalgamated to improve efficiency.

Economic policy and the The Pacific Plan outlines a framework for promoting trade in goods and services domestic economy between its members, based around the main existing mechanisms for boosting trade. Other priorities agreed at the summit include the launch of a regional statistics service, boosting revenue from fishing and improving vocational training. Concern is growing about the potential cost to island countries of World Trade Organisation membership. Tourist arrivals rose by 5% year on year in the first half of 2005.

Editors: Kate Allard (editor); Gerard Walsh (consulting editor) Editorial closing date: November 29th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

Island governments will start Island governments will co-operate more closely on political, economic and executing the Pacific Plan social development during the outlook period, following the adoption in Papua New Guinea (PNG) in late October 2005 of the Pacific Islands Forum’s Pacific Plan by the regional body’s 16 member governments, comprising 14 island states plus Australia and New Zealand. (The Pacific Island Forum, or PIF, is the main political organisation in the region.) Some academic and non- governmental organisations (NGOs) are critical of what they describe as a blueprint riddled with inadequacies resulting from a lack of consultation with the local island communities. However, government leaders at the PIF summit argued that there could be no further delay in tackling the long list of economic, social and political problems facing the region’s mostly economically weak and, in some cases, politically unstable island nations. The PIF secretariat, based in the Fijian capital, Suva, will begin implementing 24 initiatives outlined for the next three years, including the expansion of trade within the region and with non-PIF members, maximisation of returns from fisheries, regional co-operation on civil aviation, the development and implementation of waste-disposal plans, the development of anti-corruption institutions, strengthening law enforcement and improving the collection of national and regional statistics. However, requests by island governments for greater labour mobility in the region, which would allow, for example, seasonal fruit-pickers and other temporary workers from the Pacific Islands into Australia and New Zealand, have been rejected by the latter two governments. Island governments will continue to campaign for the concession, and the issue is likely to be raised again at the PIF’s next annual summit in 2006, which will be held in Tonga. Meanwhile, a Pacific Plan Action Committee, to be headed by the PIF chair—currently the prime minister of Papua New Guinea (PNG), Sir Michael Somare—will be given the task of ensuring the smooth and steady implementation of the Pacific Plan, and will provide PIF member governments with quarterly progress reports.

Talks with the EU on free trade Formal negotiations between the EU and the PIF’s 14 island members on free-

will continue trade and aid arrangements will continue. The EU intends to anchor the arrangements to the implementation of the Pacific Plan, but also wants to speed up the pace of negotiations. According to Anders Henriksson, the EU’s director for the Pacific, who toured the region in October 2005, the talks, timetabled for completion in December 2007, were already falling behind schedule. Mr Henriksson says that the EU is ready to start paying direct grants to countries such as PNG, but only on condition that concerns such as fiscal transparency and efficiency were fully addressed and measures taken to conserve forestry, fisheries and other resources. The EU is expected to increase its focus on improving resource management and conservation in the region, as well as on the impact of climate change, by providing technical assistance.

Australia will continue to play Australia will continue to play a crucial role in the region, supported by New a crucial role Zealand. 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 secretary-general 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 appoint- ment in 2003. Some politicians in the regions have suggested that Australia should dilute its leading role in the mission to placate Pacific island government sensitivities. Island governments are nevertheless largely resigned to the fact that future flows of aid will be conditional on the implementation of reforms to their governmental and economic systems.

PoliticalMost instabilityisland economies will remain will Despite continued political instability in the region, most island economies are expand ina problem 2006-07 showing signs of improving activity and will continue to expand in 2006-07, thanks to the expansion of the tourism industry, diversification in the agricultural sector and the development of the aquaculture and fishing industries. Some Melanesian countries will benefit from high prices for mineral and commodity exports, unlike the countries of Polynesia and Micronesia, which are generally poor in resources. Concern remains about falling stocks of certain species of tuna in the region. Intense debate on the cause—overfishing, climate change, still little-understood natural weather and ocean-temperature cycles, or a combination of all of these—will continue. Other problems include a heavy dependence on high-cost imported oil and diesel fuel. High oil prices are prompting renewed regional interest in alternative fuel sources, such as ethanol made from local sugar.

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 government and, to a lesser extent, tourism will continue to grow that of New Zealand about political instability 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 an 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, could lose market share to Fiji, which has become the primary focus of low-cost operators.

The political scene

The Pacific Plan was approved The annual summit of the Pacific Island Forum (PIF, the main political

at the PIF’s annual summit organisation in the region) took place in Papua New Guinea (PNG) in October. Among the most pressing issues discussed at the summit were the damaging impact on already weak economies of the sharp rise in the cost of oil imports (which the Pacific Plan seeks to address through the setting up of a joint bulk- purchase scheme), the growing threat posed by the spread of HIV/AIDS, and the need to prepare for a possible outbreak of avian influenza (bird flu). The Australian government has agreed to provide an A$8m (US$5.8m) grant to help island governments to prepare for such an outbreak, while the New Zealand government announced an additional grant of NZ$12m (US$8.2m) for the Pacific region’s HIV/AIDS programme. Separately, the PIF summit strongly endorsed the continued presence in the Solomon Islands of the Australian-led regional assistance mission in the country, which it said would be needed for many years. The long-awaited Pacific Plan was approved unanimously at the summit, with one exception. Some island governments interpreted hopefully the plan’s reference to a study of prospects for greater mobility of labour in the region— seen as an open door to the Australian and New Zealand labour markets for seasonal fruit-pickers and other temporary workers from the Pacific Islands. However, such an interpretation was rejected bluntly by the Australian and New Zealand governments. The Australian prime minister, John Howard, said that his country preferred to take permanent migrants rather than see a return to the days of the 19th century, when thousands of Melanesian labourers came to Australia to work on sugar plantations in Queensland. Meanwhile, Helen Clark, the prime minister of New Zealand, said that her country already accepted some temporary workers from Polynesia but did not wish to admit seasonal workers. This partly reflects concern that such workers could overstay their visas. In what some island governments took as a sop to ease anger at his refusal to accept temporary workers, Mr Howard told the PIF summit that the Australian government would spend a significant sum on building a college to train carpenters, plumbers, electricians and other trades people to Australian standards. The location of the main college remains undecided, although the plans also include the setting up of smaller “satellite” institutions elsewhere in the region. The main objective of the measure is to equip the islands with pools of skilled labour, although the scheme would also benefit Australia, which has skills shortages in these areas and encourages those with appropriate qualifications to become skilled migrants.

An amalgamation of regional A radical reorganisation of the structure of the Pacific’s key regional

institutions is proposed organisations has been proposed by Tony Hughes, a former Solomon Islands central bank governor, in a study commissioned and received, with reservations, by the PIF secretariat. According to Mr Hughes, huge savings and efficiencies could be achieved by amalgamating five of the ten major organisations: the Secretariat, the Forum Fisheries Agency, the South Pacific Applied Geoscience Commission, the South Pacific Community and the South

Pacific Environmental Programme. The study was highly critical of the Council of Regional Organisations (CROP), which was formed in the 1980s to co-ordinate the work of other organisations. According to Mr Hughes, CROP had become a cumbersome, time-consuming, excessively formal and wasteful body. Mr Hughes argued that a chief difficulty for the PIF, which was initiated in 1971, was that its affairs were dominated by its two most powerful members, Australia and New Zealand. This was in contrast to a similar regional organisation, the Caribbean Community, to which the US and Canada, the dominant regional powers, did not belong. According to the study, Australia and New Zealand supplied over two-thirds of the PIFs funds and were therefore in a strong position to advance their national interests. Mr Hughes argued that the Australian and New Zealand governments’ sometimes confrontational stance, and the assumption that their security priorities were shared by island governments, grated on the sensitivities of many Pacific islanders. Meanwhile, a study of the Pacific Plan conducted by the Asian Development Bank (ADB) has reported that PIF island members could significantly improve their economic governance by adopting a regional system of analysis, audit and technical support services and co-operating closely in key regional transport and telecommunications sectors.

Tokelau will hold a The New Zealand-administered dependency of Tokelau, which, with a land

referendum on independence area of just 12 sq km and a population of about 1,600, is the region’s smallest dependency, is expected to vote for independence in free association with New Zealand in a referendum in December 2005. More than 6,000 former Tokelau residents already live in New Zealand and Tokelau is dependent on aid of around US$1.5m a year from its larger neighbour. The new arrangement is expected to take effect in June 2006, after which Tokelau will be eligible for full membership of the PIF (the territory currently has observer status in the body). A NZ$25m (US$17.1m) trust fund, financed mainly by New Zealand and Australia, will be a key prop for the tiny economy.

Economic policy and the domestic economy

Trade promotion forms a key The Pacific Plan outlines a comprehensive framework for promoting trade in

element of the Pacific Plan goods and services between its members. These are based around the main existing mechanisms for boosting trade links; the Pacific Island Countries Trade Agreement (PICTA), which aims to foster trade mainly between the PIF’s Melanesian members, and the Pacific Agreement on Closer Economic Relations (PACER), which was signed in 2002 and provides for negotiations on an eventual free-trade deal between Pacific island countries, Australia and New Zealand. Aside from the promotion of trade, it was decided at the PIF annual summit that the initial priorities of the Pacific Plan will include the launch of a regional statistics service, boosting revenue from fishing, waste-management projects and the expansion of regional technical and vocational training institutes for nurses, seamen and tourism workers.

The cost of WTO membership An analysis by the PIF secretariat of the potential cost to its island members of

may be too high meeting World Trade Organisation (WTO) rules and obligations has found that costs have escalated to the point where they may outweigh the potential benefits of membership. The secretariat also noted the declining ability of Pacific island countries to attract foreign direct investment, inflows of which have failed to keep pace with the depreciation of existing capital stock in recent years. Samoa, Tonga and Vanuatu are currently negotiating accession to the WTO, with the latter country having renewed its application after suspending its initial one when faced with demands that many claimed went beyond those that some much wealthier countries had signed up to.

Tourist arrivals rise by 5% in Figures from the South Pacific Tourism Organisation (SPTO) show that tourist the first half of 2005 arrivals in the Pacific region rose by 4.6% year on year in the first half of 2005 to 524,689, although the main tourist destination, Fiji, enjoyed stronger growth of 7.7%. The number of tourists visiting French Polynesia, the second most important tourist destination, continued to decline, while New Caledonia, the third most important tourist destination in the region, reported flat tourist arrivals over the same period. The disappointing outcomes for French Polynesia and New Caledonia mainly reflected a fall in arrivals from their main markets, Japan, North American and France. The SPTO expects overall tourist arrivals to grow at a similar pace in the second half of the year, supported mainly by the expansion of lower-cost airline services.

Scientists warn that key tuna Scientists from the Western and Central Pacific Tuna Commission have warned

species are overfished that two of the western Pacific’s four most commercially-important tuna species are probably being overfished (mainly by the purse-seine and domestic fleets of the Philippines and Indonesia) and are certain to be so within five years if current fish catches are maintained. They also noted that yellowfin tuna, like big-eye tuna, is now an endangered species and that the preservation of both was of “crucial economic importance” to small Pacific island states for which tuna is their main economic resource. Scientists from the Forum Fisheries Agency first listed big-eye tuna as endangered in the late 1990s and warned in late 2003 that yellowfin tuna was heading in the same direction. The Tuna Commission’s assessments for the two other important commercial tuna species, skipjack and albacore, were more optimistic, indicating that present catch rates were sustainable. According to latest available figures, an estimated 1.9m tonnes of tuna, worth around US$2bn, was landed in the western and central Pacific in 2003. This accounted for 72% of the entire tuna catch in the Pacific region and about 50% of the world total tuna catch. Skipjack tuna accounted for 64% of the western and central Pacific catch, yellowfin for 24%, bigeye for 5% and albacore for 7%.

Population statistics reveal According to the latest estimates published by the Secretariat of the Pacific

diverging trends in the region Commission’s (SPC) statistics department, based in New Caledonia, the total population of the Pacific islands reached 8.6m in 2004, an increase of about 1.7m people over the previous decade. Population distribution remained largely unchanged over that period, with the five largest island countries and

territories—those of Melanesia—accounting for 86.4% of the regional population, compared with Polynesia's 7.4% and Micronesia's 6.2%. Two out of every three Pacific islanders live in PNG, while Fiji’s current population of 836,000 is 25% greater than the population of all ten Polynesian island states and territories combined. The SPC reported that the historic and ongoing political associations that Polynesian and Melanesian states have with former colonial powers such as New Zealand and the US had enabled a significant number of their people to migrate. As a result, Micronesian and Polynesian states such as Samoa, the Cook Islands and Niue had low rates of population growth or falling populations. By contrast, Melanesian states such as PNG, the Solomon Islands and Vanuatu had high population growth, owing to relatively high fertility rates and falling death rates.