Country Report

Fiji

June 2006

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ 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.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2006 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

Symbols for tables "n/a" means not available; "–" means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Fiji 1

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

7 Fiji: Gross domestic product 7 Fiji: Consumer price inflation

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 2 Fiji

Fiji June 2006 Summary

Outlook for 2006-07 The re-elected prime minister, Laisenia Qarase, has taken the initiative by appointing opposition members to be cabinet members. But many political problems may lay ahead, with the military leader, Frank Bainimarama, still antagonistic towards Mr Qarase. The national economic outlook is shaky, with tourist arrivals suffering as a result of the election and the sugar industry under threat from the phased withdrawal of EU subsidies.

The political scene Mr Qarase!s manoeuvrings following his re-election have so far proven successful. He has created an enlarged cabinet of 35 ministers, incorporating members of the Fiji Labour Party (FLP) and obliging the leader of the parliamentary opposition, Mahendra Chaudhury, to step down in favour of Mick Beddoes, the leader of a tiny rival party. Tensions between the ruling Soqosoqo Duavata ni Lewenivanua (SDL) and the military are unresolved. Two former military leaders have been brought to court on charges relating to the attempted removal of Mr Bainimarama.

Economic policy The Reserve Bank of Fiji (RBF, the central bank) has revised its 2006 GDP forecast upwards, although its confidence may be misplaced. The prime minister has cited sugar industry and land reforms as his main priorities. Government spending growth is high, and the Reserve Bank has tightened monetary policy.

The domestic economy The national economy is likely to face serious damage when sugar subsidies from the EU start to be phased out from July. A local sugar growers! association has asked for a further F$1.8bn (US$1bn) to help to reconstruct roads to key sugar mills after storm damage. Some 15% of the workforce at Emperor Gold Mines has been laid off, with the company suffering from the effects of poor- quality ore, and productivity and infrastructure problems.

Foreign trade and payments An ongoing trade dispute with Papua New Guinea over imports of tinned beef has been resolved. A Chinese company, COVEC, has had its contract terminated after failing to complete more than 35% of its infrastructure project within the designated period of time. Fiji and Indonesia have signed a memorandum of understanding in order to jointly improve and promote their tourism industries.

Editors: Graham Richardson (editor); Gerard Walsh (consulting editor) Editorial closing date: June 6th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Fiji 3

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 Held four months early in May 2006; next election due 2011

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 May 18th 2006 Laisenia Qarase, the leader of the SDL, was re-appointed prime minister. In an unprecedented move, he expanded the cabinet to include nine FLP members alongside 26 SDL members.

Prime minister & minister for Fijian & national reconciliation Laisenia Qarase

Key ministers Agriculture Gyani Nand Commerce & industry Adi Sivia Tora Education Ro Teimumu Kepa Energy & mineral resources Lekh Ram Vayeshnoi 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 Justice Qoriniasi Bale Labour & industrial relations Krishna Datt Local government & urban development Chaitanya Lakshman Public enterprises & public-sector reform Jonetani Galuinadi Provincial development & disaster management Ted Young To u r i s m Pita Nacuva Transport & civil aviation Ratu Naiqama Lalabalavu Women, social welfare & poverty alleviation Adi Caucau-Felipe

Central bank governor Savenaca Narube

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 4 Fiji

Economic structure

Annual indicators 2001a 2002a 2003a 2004a 2005a GDP at current prices (F$ m; at factor cost)b 3,835.8 3969.3 4,396.3 4,674.0 n/a Real GDP growth (av; %)c 2.7 4.3 3.0 4.1 1.0 Consumer price inflation (av; %)c 2.3 1.6 4.2 3.3 2.7 Population (m)d 0.82 0.83 0.83 0.84 n/a Exports fob (US$ m)b 538 546 671 678 n/a Imports cif (US$ m)b 794 893 1,168 1,272 n/a Current-account balance (US$ m)b 16 48 -4 -34 n/a Reserves excl gold (US$ m)d 366.4 358.8 423.6 478.1 314.7 Total external debt (US$ m)b 228 229 246 267 n/a Debt-service ratio, paid (%)b 3.4 3.4 3.1 3.1 n/a Exchange rate (av; F$:US$)d 2.277 2.187 1.896 1.733 1.691 a Actual. b Asian Development Bank. c Reserve Bank of Fiji, Quarterly Review. d IMF, International Financial Statistics.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2001b % of total Agriculture, forestry & fishing 16.3 Private consumption 57.0 Mining & quarrying 1.4 Government consumption 17.1 Manufacturing 15.6 Fixed investment 14.5 Construction 5.0 Stockbuilding 1.0 Electricity & water 3.7 Exports of goods & services 55.7 Transport & communications 13.5 Imports of goods & services -60.7 Wholesale & retail trade, restaurants & hotels 16.3 Statistical discrepancy 15.4 Other services 28.2

Principal exports 2004a F$ m Principal imports 2004a F$ m Garments 226.3 Mineral fuels 587.0 Sugar 204.2 Machinery & transport equipment 559.1 Gold 88.5 Manufactured goods 486.2 Fish 81.4 Food 351.7 Timber 41.6 Miscellaneous manufactured articles 253.5

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 8.8 Japan 4.5 New Zealand 5.6 US 3.7 a Reserve Bank of Fiji, Quarterly Review. b Asian Development Bank.

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Fiji 5

Quarterly indicators 2004 2005 2006 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Government finance (F$ m) Total revenue & grants 282.8 299.2 329.9 266.0 282.5 n/a n/a n/a Expenditure 347.5 381.9 489.7 281.4 345.9 n/a n/a n/a Balance -64.7 -82.8 -159.8 -15.4 -63.3 n/a n/a n/a Prices Consumer prices (1993=100) 134.9 134.5 135.9 137.2 137.5 137.5 138.8 n/a Consumer prices (% change, year on year) 2.8 3.1 3.3 3.2 1.9 2.2 2.1 n/a Financial indicators Exchange rate F$:US$ (av) 1.779 1.768 1.687 1.657 1.676 1.705 1.726 1.743 Exchange rate F$:US$ (end-period) 1.798 1.751 1.645 1.673 1.702 1.709 1.745 1.794 Bank rate (end-period; %) 2.25 2.25 2.25 2.25 2.25 2.25 2.75 3.42 Deposit rate (av; %) 0.37 0.35 0.36 0.36 0.39 0.4 0.37 0.49 Lending rate (av; %) 7.18 7.14 7.04 6.92 6.82 6.72 6.66 6.73 Money market (av; %) 0.88 0.88 1.03 0.97 1.13 1.24 1.79 4.24 Treasury bill (av; %) 1.46 1.80 1.79 1.83 1.93 1.87 2.13 3.41 M1 (end-period; F$ m) 902.9 900.2 995.1 1,009.5 1,081.8 1,136.4 1,173.7 n/a M1 (% change, year on year) 23.9 20.3 13.4 38.5 19.8 26.2 17.9 n/a M2 (end-period; F$ m) 2,016.0 2,034.2 2,162.8 2,192.1 2,294.7 2,416.9 2,490.4 n/a M2 (% change, year on year) 20.9 13.0 10.5 20.5 13.8 18.8 15.1 n/a Sectoral trends Sugar exports (‘000 tonnes) 28.7 66.3 140.7 47.6 30.2 103.9 n/a n/a Tourism, visitor arrivals ('000) 121 150 123 117 130 n/a n/a n/a Tourism, length of stay (av; days) 7.9 9.1 8.2 8.9 8.9 n/a n/a n/a Tourism, gross earnings (F$ m) 181.7 203.4 171.7 157.5 165.9 n/a n/a n/a Foreign trade (F$ m) Exports foba 318.8 408.7 455.6 309.3 356.1 517.4 545.5 n/a Imports cif -582.3 -645.0 -733.4 -549.4 -663.6 -724.9 -784.8 n/a Trade balance -263.5 -236.3 -277.8 -240.1 -307.6 -207.6 -239.3 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 407.0 422.2 478.1 427.7 427.1 389.5 314.7 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.

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 6 Fiji

Outlook for 2006-07

Multiethnic government could Fiji has thus far emerged unscathed from its early May general election, despite

face probl ems predictions that tensions between the two main parties"Soqosoqo Duavata ni Lewenivanua (SDL) and the Fiji Labour Party (FLP)"and the military could escalate into open conflict. The SDL retained its majority in the House of Representatives after the election, but in an unprecedented move, the prime minister, Laisenia Qarase, has expanded his cabinet to incorporate nine of the opposition FLP!s candidates. There will be numerous problems ahead, particularly as the famously abrasive former leader of the opposition, Mahendra Chaudhry, has been left out in the cold. Tensions will remain between the SDL and the military commander, Frank Bainimarama, and one of the crucial tasks for Mr Qarase will be how to deter the military from involvement in national politics without tipping it into pre- emptive action to secure its influence. Mr Bainimarama has made a series of comments about "fighting all the way" should there be any move to emasculate his influence, despite condemnation from the local media and overseas observers.

Slow growth in 2006 A further challenge for Mr Qarase will be accommodating the wishes of this expanded cabinet of 35 ministers, with the national budget already sorely stretched. Operating expenses have been highlighted as the most pressing area in which the government must exercise fiscal control if it is to avoid facing serious financial crisis. The estimated GDP growth rate for 2005 has recently been revised down to 1% by the Reserve Bank of Fiji (the central bank), and the sugar industry (on which Fiji!s economy remains heavily dependent) is facing a serious struggle to adjust from the phased loss of EU subsidies from July. The central bank nonetheless remains relatively upbeat about Fiji!s prospects in the coming year or so, with its GDP forecasts recently revised up to 2.7% for 2006 and 2.2% for 2007. But with the range of difficulties faced by Fiji!s main industries, it is hard to share in this optimistic view. Only slow growth, of perhaps 2%, seems likely in 2006.

The volatile election build-up may have discouraged tourism in the first half of 2006. In the usually active months of February and March, tourist arrivals were down amid fears of social and political instability in the country. Australia issued a travel warning to its citizens, urging caution as media reports tended to sensationalise domestic issues. Arrivals may pick up from June, but the tourism industry could perform below expectation for some time to come.

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Fiji 7

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 7.0 4.0 6.0 3.5 5.0

4.0 3.0 3.0 2.5 2.0 2.0 1.0 0.0 1.5 02 03 04 05 02 03 04 05 2001 2001

The political scene

Elections pass peacefully In accordance with expectations, the prime minister, Laisenia Qarase, announced in March that a general election would take place in Fiji between May 6th and 13th for the 71-seat House of Representatives (the lower house). Despite much speculation that in the run-up to the election, tensions between the opposition Fiji Labour Party (FLP), the incumbent Soqosoqo Duavata ni Lewenivanua (SDL) and the military would lead to severe unrest, or even another military coup, the aftermath of the election has thus far proven relatively calm. The SDL won 36 of the 71 seats available, with the FLP taking 31, the United Peoples! Party (UPP) two and independents also two. Both of the successful independent candidates have since joined the SDL, giving them a comfortable majority.

King-size cabinet created In an unprecedented and (on the face of it) conciliatory move, Mr Qarase offered to create Fiji!s first multiracial cabinet, in which nine ministerial positions would go to members of the ethnically Indian FLP. Mahendra Chaudhry, leader of the FLP and a bitter rival of Mr Qarase, accepted this offer and the nine new cabinet members were sworn in on May 24th. The cabinet is the biggest in Fiji!s history, comprising 23 full ministers and 12 junior ministers, nearly one-half of the parliament. Going some way to reflect the 40% of the population that is ethnically Indian, there are now nine Indian cabinet ministers.

UPP head becomes leader of By allowing the FLP to be represented in the cabinet, Mr Qarase rendered

the opposition Mr Chaudhry!s position as the formal leader of the parliamentary opposition untenable. After much wrangling, during which time Mr Chaudhry appeared reluctant to relinquish his role, the leader of the UPP, Mick Beddoes, was formally installed in his place on June 2nd. In order for this to happen, the UPP was obliged to sever ties with the FLP-Party of National Unity (PANU) coalition, with which it had allied itself earlier in the year. Mr Qarase!s political manoeuvrings have proven potentially beneficial to the SDL, as the

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 8 Fiji

government is now faced with an opposition leader in control of only two seats in the lower house.

A successful election process Despite accusations of tampering and interference, and some military

despite initial hiccups posturing, the observer team sent in as independent monitors by the Pacific Islands Forum (PIF, the region!s main political grouping) declared the May election to have been generally free and fair. The EU and the University of the South Pacific also sent observer missions, but the UN was unable to follow suit owing to lack of time. The PIF team pointed to certain aspects of the voting process that it felt could be improved, but concluded that the majority of voters were able to exercise their right to elect local leaders. However, proceedings had got off to a chaotic start as the late distribution of ballot papers saw voters turned away, and Mr Chaudhry alleged that the SDL had printed thousands of bogus ballot papers. The electoral commission duly refuted the allegations (Mr Chaudhry made the same claims, again without the corroboration of any observers in 2001). Mr Qarase claimed that the election was the most transparent Fiji has ever seen. Voter turnout was provisionally put at 69%, rather lower than in the 2001 election. The cost of the election is estimated to have been in the region of F$48m (US$27.6m).

Interference from the military With Fiji!s history of three military coups since the 1980s, it was inevitable that there should have been some considerable muscle-flexing by the military in the run-up to Fiji!s general election. Commodore Bainimarama, the head of Fiji!s armed forces, strongly opposes moves by the SDL to pass a "Unity Bill" that would see amnesty granted to those involved in the political upheavals of 2000 (when a group of Fijians, led by a businessman, George Speight, detained and then attempted to seize power from a government led by Mr Chaudhry).

Action to be taken against Mr Mr Bainimarama has also long been engaged in a war of words with Mr

Baininarama Qarase. When Mr Qarase called the election for May, Mr Bainimarama complained that a census would first need to be conducted before valid elections could take place. Following the merging of the nationalist Matanitu Vanua party with the SDL, he alleged that this alliance was racially biased, and therefore a threat to national stability, refusing to rule out the possibility of a military coup. In March Mr Bainimarama locked the army barracks and rallied troops to conduct "shooting practice", following which, on the day that parliament was formally dissolved, he marched 400 soldiers through the capital, Suva, dressed in full battle fatigues and carrying automatic weapons. He publicly urged troops to vote against the SDL, ostensibly because of threatened military cuts, and once the election was decided and Mr Qarase reinstated, announced that he would "fight all the way" if moves were made to try to emasculate the military!s powers. In response to this, Mr Qarase has been looking into options for legal recourse to silence the irrepressible military leader. In March he submitted a request to the president, Ratu Josefa Iloilo, calling on him as commander-in-chief to rein in the leader of his forces. At the end of April the prime minister revealed that he was looking to consult the Supreme Court for a proper interpretation of the provisions in the constitution concerning the military, and since being re-

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Fiji 9

elected, has entrusted the task to the minister of home affairs, Josefa Vosanibola. Mr Bainimarama has come in for external criticism too. In February Australia!s foreign minister, Alexander Downer, warned him to stop meddling in Fijian politics, a caution already issued a year earlier amid similar circumstances. Even the national media, which Mr Bainimarama manipulated with relative success in the run-up to the election, finally turned on him after the results had been declared, calling for him to resign from his post.. The military leader has subsequently pronounced himself to be pleased with the formation of a coalition cabinet, and has been unwilling to comment on the activities of Mr Vosanibola.

President and vice-president Fiji!s Great Council of Chiefs met on March 8th to appoint a new president and

re-elected by Fijian chiefs vice-president, and re-elected Mr Iloilo and Ratu Joni Madraiwiwi respectively. The two were sworn in for another five-year term on March 17th, and despite previous rumblings of disapproval from the SDL arising from Mr Iloilo!s failure to address Mr Bainimarama!s political machinations, the appointments were widely approved.

Ex-leader charged with inciting A former Fijian prime minister, Sitiveni Rabuka, appeared in court in May

mutiny charged with inciting a military mutiny in 2000 in which eight soldiers were killed. The incident occurred shortly after the military coup in which Mr Chaudhry and his FLP government were formally deposed, after being held hostage by Mr Speight and his armed followers. Mr Rabuka is alleged to have incited a former senior officer, Viliame Seruvakula, to oust Mr Bainimarama as armed forces leader, forcing the commodore to flee for his life. Mr Rabuka did not enter a plea in court, but told waiting journalists that he was innocent. He has been granted bail of US$1,000 and forced to surrender his passport. More recently, the former commander of land forces, Jone Baledrokadroka, has been charged on a similar basis, accused of urging Mr Bainimarama to resign in January of this year, and then threatening to kill him when he failed to comply. It is unclear whether or not he will face a court martial.

Economic policy

Fiscal discipline called for Mr Qarase!s decision to double the size of the cabinet will not have been welcomed by those concerned about the level of government spending. The government was warned at the beginning of March by an economist from the University of the South Pacific, Mahendra Reddy, that it risked facing unsustainable debt levels if it did not manage to bring down its operating expenditure (public-service salaries, fuel allowances etc) in the short term. Mr Reddy believes that annual growth would need to be around 4-5%, rather than the 2% forecast, for such expenditure to be sustainable, and a moratorium on new operating expenses was suggested.

Monetary policy is tightened At the end of March the Reserve Bank of Fiji (the central bank) announced new monetary tightening measures, effective from May 8th. The margin between the official indicator rate and the minimum lending rate (MLR) has been raised by 50-100 basis points, taking the MLR to 3.75-4.25%. The statutory reserve

Country Report June 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 10 Fiji

requirement has also been raised from the equivalent of 5% of all commercial banks assets and liabilities to 7%. The aim is to tighten liquidity and make interest-rate increases a more effective policy tool. The bank is concerned that credit growth continues to outpace economic growth, and that this is leading to an unsustainable rise in imports.

The domestic economy

EU sugar subsidies are scaled Despite Mr Qarase!s promises of further modernisation in Fiji!s sugar industry,

back the overhaul of an EU policy that has been sustaining producers in former colonies for more than 30 years portends hard times ahead for Fiji!s sugar growers. Subsidised EU payments have been the main support for the country!s revenues from sugar, but they have fallen foul of World Trade Organisation (WTO) rules. As a result, the EU will slash subsidies by 36% over the next four years from July. The Fiji Cane Growers! Association estimates that a collapse in the industry would affect almost 200,000 people, roughly a quarter of the population. It is now up to Fiji to ensure that it qualifies for a share of the US$51m compensation package being offered by the EU to make up for the loss of preferential prices. A complaint has been lodged by the Sugar Cane Growers Council, stating that the F$1.2m (US$690,000) granted by the government to maintain access roads to the country!s sugar mills following storm damage falls short by approximately F$1.8m of what is needed. The council is requesting a total of F$3m in grants as road conditions deteriorate further owing to flooding, prohibiting access to the mills for cane growers. The newly appointed agriculture minister, Gyani Nand, has promised to investigate the matter.

Emperor mine lays off staff The Emperor goldmine at Vatukoula announced in April that it would be laying off around 15% of its workers following the Easter holiday. Blaming the redundancies on the low grade of ore, poor productivity and infrastructure problems, the management ceased mining operations for a day in order to discuss the situation with the local government and the workers! union. A memorandum of understanding was signed by the three parties, and redundancy packages were awarded from a F$300,000 (US$172,000) fund. The local police force put security measures in place in expectation of social unrest, but the proceedings took place without incident.

Tourism industry suffers The chief executive of the Visitor Bureau, Viliame Gavoka, admitted that visitor numbers had suffered as a result of what was perceived to be a volatile build- up to the May general election. Arrivals were down 2% year on year for the first quarter of 2006, and looked weak for the second, but Mr Gavoka said that there was some renewal in airline bookings for June. In April the government signed a memorandum of understanding with Indonesia, to promote tourism in both countries. Information and experience will be shared to develop investment and trade-related aspects of the tourism industry and the countries will assist each other in developing improved training programmes for those working in the sector.

Chinese roadbuilding contract The government has terminated a contract with China!s National Overseas

terminated Engineering Corporation (COVEC) following its failure to fulfil the terms of a roadbuilding agreement. Work commenced in 2001, and was due to have taken four years, but by 2005 only 35% of the project had been completed, and when penalties for missing the deadline were introduced by the Fijian government, COVEC ceased operations altogether. With the termination of the contract, COVEC forfeits a US$36.7m bond that will go some way to assisting the government in its mission to complete the full 55km of new road and 16 bridges envisaged in the agreement.

Foreign trade and payments

Import growth is rapid According to provisional figures from the Fiji Islands Bureau of Statistics, imports in March were up by 61.3% year on year to F$285.6m, with domestic exports rising by 60.2% to F$94.9m, and re-exports increasing by 76.5% to F$39.4m. Strong import growth in recent months appears largely to be consumption driven, although imports of investment goods have also increased. The increase in imports is linked to the relatively easy credit situation that currently worries the Reserve Bank of Fiji (the central bank).

Tinned-beef war resolved Earlier this year Fiji found itself embroiled in an escalating trade dispute with its neighbour, Papua New Guinea (PNG), over the import of tinned beef. Fiji had prohibited the import of "Ox & Palm" brand tinned beef from PNG amid fears that the country was not certified as BSE-free. PNG!s trade minister, Paul Tiensten, threatened to raise import tariffs on Fijian tinned beef to 55%, and at one stage called for the intervention of the World Trade Organisation. After a series of heated exchanges, Fiji!s foreign minister, Kaliopate Tavola, eventually reached an agreement with Mr Tiensten in March and submitted a draft regulation permitting the imports.

The region March 2006 Summary

Outlook for 2006-07 Fiji!s election in May proved less divisive than many had expected, but events elsewhere demonstrate just how fragile many political systems are. Political unrest will continue to stem from ethnic divides, but will not be helped by corrupt or inept governments. The Pacific Islands are now trying to implement their Pacific Plan for regional economic improvement, but it is unlikely that they will be left to muddle through on their own. Australia will, whether it likes it or not, become more deeply involved in the region, and in more than just an advisory capacity. The rising influence of China in the region will be of concern to many. The region will continue to benefit from high commodity prices, mostly through increased mining activity. Tourism is also likely to continue to grow, with several new resorts planned.

The political scene The incumbent Soqosoqo Duavata ni Lewenivanua (SDL) won a narrow victory in Fiji!s election, but the country!s prime minister, Laisenia Qarase, then created a multiracial cabinet, which may be more conducive to effective gover- nance. With tension among ethnic groups assuaged, the military will have less excuse to intervene. The Samoan election returned the Human Rights Protection party (HRPP) to power. The immediate result of the Solomon Islands elections, held in March, was chaos, with Australian and New Zealand intervention needed to restore order. In Tonga, Frank Sevele has been confirmed in office as prime minister, but now has to deal with major fiscal problems and increasing demands for full democratisation. China!s prime minister, Wen Jiabao, visited Fiji in May and offered grants to a number of Pacific island countries. Japan has agreed to a significant increase in its aid contributions.

Economic policy and the Tsunami warning tests were held in May, but the region!s plan for dealing with domestic economy longer-term environmental problems remains unclear. Although GDP growth has generally remained low across the region, public spending has increased significantly in several countries. China!s recent offer of funds to several countries may exacerbate this trend. Rapid credit growth is helping to push up imports in several countries, and attempts to tighten monetary policy may not be fully effective. The most important mining development is in New Caledonia, but there are also other smaller projects across the region. The growth in cheap air travel across Asia will have spill-over benefits for tourism, as will China!s more relaxed attitude towards outward travel. The phased reduction of EU sugar price subsidies has already led Fijian growers to seek increased funding from their own government. Editors: Graham Richardson (editor); Gerard Walsh (consulting editor) Editorial closing date: June 6th 2006 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

Political stability will remain Domestic politics will remain troublesome in many countries. Fiji!s election in elusive May proved less divisive than many had expected, and the threat of a military coup has (for now) been averted, but events elsewhere in the region demonstrate just how fragile many political systems are. The March elections in the Solomon Islands were followed by violent unrest, only quelled by the intervention of foreign forces. In Tonga, despite the confirmation in office of a "commoner" prime minister, Fred Sevele, the forces for democratisation are gathering pace and are likely to lead to increased public protest. In New Caledonia, industrial unrest against new nickel plants could yet cause major political headaches. In Vanuatu, the prime minister, Ham Lini, remains under pressure. The region!s political problems cannot be ascribed to one source. At the root of many of them are ethnic divides, sometimes owing to the way in which old colonial boundaries were drawn, or because of relatively recent economic immigrants (as in Fiji). But incompetent and corrupt administrations have not helped either, and it is difficult to see how either of these problems can be resolved. Fiji!s new "grand coalition" government, which pulls in Fijian-Indian ministers alongside native Fijians, offers a new way forward, but could easily be put off course by wrangling within the Fijian community or by military intervention. The lack of strong central governments elsewhere means that efforts to bridge ethnic divides are usually likely to prove futile. The big question is whether there will be increased foreign intervention. The Pacific Islands has its own ambitious plans for regional co-operation on economic, social and political issues, encapsulated in the Pacific Plan, which was approved at the October 2005 summit meeting of the Pacific Islands Forum (PIF, the main regional political body) in Papua New Guinea. At the bureaucratic level, there is already debate within the PIF, the Secretariat of the Pacific Community (SPC) and several other key regional economic development agencies as to how best cut costs, improve efficiency and avoid duplication of effort. But progress on the plan is likely to be faltering at best. Australia will become more deeply involved in the region, potentially causing ructions. When the current head of the PIF, Greg Urwin, was appointed there was considerable regional disquiet about an Australian holding this senior role. But more recent events"notably Australia!s military re-engagement in the Solomon Islands, and its indirect influence on Fijian politics"highlight the fact that Australian influence is likely to be more than advisory. Australia may not welcome its new role as default colonial power; its small military forces are already stretched by involvement in Iraq and Afghanistan. But it, and New Zealand, will be forced to intervene in the region if things go wrong, for a variety of reasons. One well-rehearsed threat is that of mass migration. New Zealand, for example, has a large Pacific Islander community and is aware that any downturn in the islands! fortunes could lead to a further inflow. But both Australia and New Zealand are also being dragged into rather deeper international conflicts, as they become"in a sense"the US!s "right-hand

man" in the region. Australia has been quite open about this role for some time"the prime minister, John Howard, has famously talked about being the US!s "deputy sheriff". New Zealand!s recruitment to the cause has been more recent, and less obvious. But New Zealand, keen to negotiate a free-trade agreement (FTA) with the US, will want to demonstrate that it can help too by policing its own backyard. Although the US is unlikely to want to become directly involved, at least militarily, it is certain to keep a close eye on the region. The threat posed by the region!s often opaque financial systems, and their possible aid to terrorism is an old one, and has probably been reduced. The rising influence of China is now perhaps a bigger concern. It was deeply symbolic that at the same time that the flag was coming down for the last time on British diplomatic representation in Tonga, after about 180 years, China was offering several loans or grants to countries in the region, to bail out some distinctly shaky government finances. In the past, China!s interest in the region has largely been as a foil to Taiwan, in that it has tried to encourage some states to switch back diplomatic recognition to it. But this new money may usher in an era of Chinese involvement, whereby China uses the Pacific Islands to extend its influence and test its relationship with the US.

Growth prospects are mixed The region should benefit from high world commodity prices in as much as they encourage the expansion of mining for gold, nickel and copper in the Melanesian countries in 2006-07. Growth also does not appear to have been pushed off course by high oil prices over the last year, and domestic inflation rates (despite some warnings) seem likely to be kept under control. Continued growth in world tourism should also be beneficial: new resort developments have been announced in Fiji, Vanuatu, Samoa and French Polynesia, and visitor arrivals to the Pacific Islands will reach a new peak in 2006. But the region!s tourism sector remains vulnerable to the rickety state of the region!s airlines (particularly for inter-island travel) and also to political concerns. Political uncertainties in Fiji in the run-up to the May election had an adverse impact on tourist arrivals, and this pattern could be repeated elsewhere in the region. Growth in the primary sectors could also be erratic. Fisheries exports have already been hurt in many countries, and exports of specific agricultural products (eg kava) may suffer from restrictions. The phasing out of EU sugar price subsidies will cause problems for Fiji. The region will thus remain heavily dependent on inflows of foreign aid and (for Samoa, Tonga and Fiji) strong inflows of remittances from citizens working abroad. Australia!s attitude towards migrant workers will prove particularly important here. Over the next few years, increasing attention is likely to be paid to public finances of several countries in the region. As events in Tonga demonstrate, these can be easily undermined by politically motivated decisions such as upping of public-service salaries. The amounts involved are not enormous, but foreign help will doubtless have political costs. Sustained political unrest will also have an effect on investment, and the region!s long-term development

potential: mining companies are used to dealing with this, but tourism and other services companies are likely to prove more faint-hearted.

The political scene

Elections have varying results Fiji held its general election in May, with no political unrest, and no military intervention despite some threatening sounding noises from the military commander, Frank Bainimarama. The incumbent Soqosoqo Duavata ni Lewenivanua (SDL) won a narrow victory, winning 36 of the 71 seats in the House of Representatives. Fiji!s prime minister, Laisenia Qarase, then created a multiracial cabinet, with nine members of the Indian-based Fijian Labour Party (FLP) being sworn into office at the end of May. Mr Qarase!s decision to create a multiracial cabinet has two obvious benefits for him. First, by a removing a source of political tension it will make it more difficult for the military, at least in short term, to intervene. Second, with the FLP in the government, it means that the official parliamentary opposition is now the United Peoples! Party (UPP), which has only two members of parliament (MPs). But in the medium term, cracks in the coalition government could still prove destabilising: Fiji is unused to this sort of government, and many highly contentious policy problems remain unresolved. Political developments elsewhere in the region have been less happy. The Samoan election, held in March, could be described as papering over the political cracks, rather than mending them. The Human Rights Protection Party (HRPP) was returned to power, losing only a few seats. But opposition parties have been critical of the way the election was held, and a number of major political disputes, for example regarding land sales, still loom on the horizon. The Samoan election and its aftermath were at least peaceful, something that cannot be said of the election in the Solomon Islands, held in March. As predicted, the election returned a large number of unknown and unaffiliated MPs. The result was chaos, as the emergence of a government led by a former deputy prime minister, Synder Rini, led to violent clashes in Honiara, with the country!s Chinese majority a particular target. Australian and New Zealand forces were necessary to bring the violence under control: a replacement government, composed of parties in opposition to the previous government and led by Manasseh Sogovare of the Social Credit Party (Socred), was installed. Political stirrings were evident elsewhere in the region. In Tonga, the pro- democracy prime minister, Fred Sevele, was confirmed in office by the king. But Mr Sevele now has to wrestle with some major economic problems, largely the result of the civil service being awarded massive pay increases last year. Tonga!s Public Service Association has emerged as a major, if divided, political force, and increased demands for a rapid transition to full democracy looks certain. However, the maintenance of the status quo looks more likely in New Caledonia, where the government is committed to maintaining the territory!s ties with France. But labour relations could cause problems here too, if for quite different reasons. There have been major protests in New Caledonia about new mining developments, and these could spiral into something bigger. As ever, the political situation in Vanuatu has remained unstable, with the prime minister,

Ham Lini, forced to reshuffle his cabinet, ostensibly because of a dispute over exports of kava.

China is raising its profile In April China!s premier, Wen Jiabao, visited Fiji to meet officials from those Pacific island countries that recognise China but not Taiwan. Mr Wen followed a multilateral economic development "conference" with meetings with individual prime ministers of a number of countries. (Others"Tuvalu, Kiribati, Palau, the Solomon Islands, Nauru, Palau and the Marshall Islands"sell their loyalty to Taiwan). The visit was a potential embarrassment to the Pacific Islands Forum (PIF, the main political organisation in the region), which has its headquarters in Suva, the capital of Fiji, and includes the Taiwan-supporters as well as the China-supporters among its membership, but any embarrassment was quickly forgotten in the face of the largesse shown by Mr Wen to a number of the participating countries. The amounts of money involved are loose change to China, but useful for the recipients. The next major diplomatic event was on May 26th-27th, when Japan!s prime minister, Junichiro Koizumi, hosted the fourth Japan-Pacific Islands meeting in Japan!s southernmost prefecture, Okinawa. This event, often referred to as the PALM meeting, is held every three years and is Japan!s big pitch to the Pacific Islands; in the wake of China!s largesse, Japan had no option but to follow suit. It announced that aid would be increased from ¥32bn (US$290m) to ¥45bn over the next three years, via both multilateral and bilateral assistance schemes. Japan, New Zealand and Australia also announced a statement of donor co- operation. In the long term, Japan!s assistance may be of more use in ensuring real economic development in the region than China!s.

Economic policy and the domestic economy

Tsunami tests are held In mid-May countries around the Pacific held tests of tsunami warning systems. The principal aim was to establish how reliably a warning from the Pacific Tsunami Warning Centre in Hawaii could be transmitted around the region. The tests appear to have gone reasonably well. The next stage after establishing warning systems is, of course, setting up systems to deal with the effects of tsunamis. Some of these can be surprisingly cheap, for example the preservation and planting of mangrove swamps for coastal protection. Most Pacific island states are already used to coping with hurricanes, which accounted for around three-quarters of reported disasters in the region between 1950 and 2004. The sharp reduction in hurricane-related deaths since the mid-1980s, when weather satellites allowed early warnings to be given, suggests the value of such systems. Problems remain, however: in early May a large undersea earthquake off Tonga managed to temporarily knock out the country!s power supply, disabling warning systems. Pacific island states remain in a quandary about how to counteract the longer- term problem of climate change. Initiatives will presumably need to be co- ordinated by the PIF, which has much broader development aims. The PIF is now gearing up to deal with its Pacific Plan, which prescribes a wide range of avenues for regional co-operation, with the aim of accelerating economic

development and achieving common political objectives. The secretariat of the PIF will establish a small office of officials who will have the task of liaising with the region!s other economic development agencies for the execution of an initial 22 projects over the first three years of the plan!s ten-year time-frame. If global warming does result in significant long-term raising of water levels, many Pacific Islands will be unable to do much to prevent this: attention will then focus on how their populations can be re-housed elsewhere: Australia!s attitude towards immigration will be important here. Some independent environmental initiatives have been launched, outside the ambit of the PIF. In late March a scheme was launched designed to protect nearly one-third of the coastal waters, and around one-fifth of the land mass of Micronesia. A marine park is also to be created in Kiribati.

Public spending could be an Although the rate of inflation has increased recently in several Pacific Islands, it

issue remains in single digits. Significant macroeconomic problems persist, however. Although GDP growth has remained low across the region, as gains from tourism have largely been offset by disappointing performances from some traditional industries, public-spending growth has been high. Fiji has recently been warned about the sustainability of its public-spending growth; even more dramatic growth has been recorded in Tonga owing to the increase in public- sector salaries agreed last year. Increased wage bills are not the only problem here: ramshackle government structures, involving the creation of large number of ministries to assuage multiple ethnic or other interests, can also help to inflate government spending. China!s recent offer of funding to a number of countries is likely to exacerbate the problem. Many Pacific island countries may be suffering from a form of "moral hazard": they know that other countries will bail them out, if necessary. The costs to Australia of any of these countries going bankrupt"in terms of political instability, or labour migration"would be far higher than simply handing over more money to keep the whole ship afloat. Increased public spending may already be leading to demand-management issues. Fiji tightened monetary policy in May: the country!s central bank said that it was concerned that overly strong credit growth was boosting exports"a trend observed elsewhere in the region. Simply raising interest rates may not, however, be enough to control demand across the region if public spending continues to escalate.

Mining and tourism are Continued high world metals prices have given a fillip to mining industries

key hopes across the region. The most obvious example of this is in New Caledonia, where development of the Goro nickel mine continues"the largest industrial development project in the South Pacific. But there are smaller scale mining developments elsewhere in the region: for example, the Vanuatu government is to allow a US mining firm to recover manganese residues left behind by an old, long-shut, mine and processing works. Many countries are trying to develop tourism further, despite the political uncertainties. The advent of budget airlines such as Virgin Blue is helping to ensure that flights between major tourism sources (ie Australia) and the islands continue. The rapid increase of cheap air travel within Asia will also have spill-

over benefits, as will China!s increasingly relaxed attitude towards outward tourism. But the poor state of many of the national airlines will make it difficult for tourists to move around within many Pacific island countries, limiting the growth potential of the sector. By contrast, some of the traditional agricultural sectors have continued to perform poorly. The phased reduction of EU sugar price subsidies to Fiji has already led sugar growers to seek more money from the Fijian government, and import restrictions have remained in place in some countries against exports of kava. But all is not bad news: high international prices are leading to increased interest in agricultural commodities such as palm oil.