Country Report

Fiji

September 2006

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

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Fiji 1

Contents

Fiji

2 Summary

3 Political structure

4 Economic structure 4 Annual indicators 5 Quarterly indicators

6 Outlook for 2006-07

7 The political scene

9 Economic policy

11 The domestic economy

12 Foreign trade and payments

The region

13 Summary

14 Outlook for 2006-07

15 The political scene

17 Economic policy and the domestic economy

List of figures

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

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Fiji September 2006 Summary

Outlook for 2006-07 The multi-party government will stagger on for some time, as no one organisation will wish to be seen as the precipitator of a cabinet collapse. Recent ructions within the Fiji Labour Party (FLP) may lead to change in the party!s upper echelons, although the FLP!s leader, Mahendra Chaudhry, still appears to have a firm grip on the situation. The economy will remain in the doldrums for at least the next two years as fiscal policy is overhauled. The Reserve Bank of Fiji (the central bank) forecasts growth of just 2.7% this year.

The political scene The new 36-member cabinet has been accused of being too big, particularly in the context of government attempts to cut spending. Operating guidelines for the cabinet will soon be approved. A rift in the FLP has led to a challenge to Mr Chaudhry!s leadership. A revised version of the controversial Unity bill is due to be submitted to parliament. Relations between the military and the government have improved. A corruption scandal has emerged in connection with funding for the South Pacific Games in 2003. Fiji!s human rights commission has condemned the affirmative action programmes of the prime minister, Laisenia Qarase.

Economic policy The Ministry of Finance has announced the main targets for a new five-year plan to run from 2007 to 2011. There has been speculation about a possible Fiji dollar devaluation. A number of major changes to public spending are necessary if the economy, currently burdened with debt, is to make any kind of recovery. Moves by the government to privatise Fiji!s water supply have been met with resistance by local non-governmental organisations.

The domestic economy The government will be obliged to keep borrowing in order to cover capital expenditure costs, despite already high levels of debt. The telecommunications sector is set to benefit from price cuts, and the UK-based telecoms company, Vodafone, is expanding its network across the islands. The government is looking to engineer a revival in the rice industry in order to ease pressure on the trade deficit. The dangers of emissions from Fiji!s vehicles have been highlighted, as moves are made towards implementing national fuel standards.

Foreign trade and payments The Chinese foreign minister, Li Zhaoxing, paid a visit in August and signed a grant worth US$1.26m to further economic co-operation between the two countries, apparently in return for Fiji!s political support for the !one-China! policy. Editors: Graham Richardson (editor); Gerard Walsh (consulting editor) Editorial closing date: August 17th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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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); People!s United Party (PUP); 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 27 SDL members.

Prime minister & minister for sugar & investment Laisenia Qarase

Key ministers Agriculture Gyani Nand Commerce & industry Adi Sivia Qoro Education Ro Teimumu Kepa Energy & mineral resources Lekh Ram Vayeshnoi Environment Poseci Bune Fijian affairs, lands & provincial development Ratu Naiqama Lalabalavu Fisheries & forests Itaitia Tuisese Finance & national planning Ratu Jone Kubuabola Foreign affairs & external trade Kaliopate Tavola Home affairs &immigration Josefa Vosanibola Information & communications Isireli Lewenigila Justice Qoriniasi Bale Labour & industrial relations Krishna Datt Local government & urban development Chaitanya Lakshman Multi-ethnic affairs & national reconciliation Ratu Meli Saukuru Public enterprises & public-sector reform Savenaca Draunidalo Public utilities & infrastructure development Robin Irwin Provincial development & disaster management Ted Young To u r i s m & t ra n s p o r t Tomasi Vuetilovani Women, social welfare & poverty alleviation George Shiu Raj

Central bank governor Savenaca Narube

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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 0.7 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 538 546 671 678 691 Imports cif (US$ m)b 794 893 1,168 1,272 1,610 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 2005a % of total Components of gross domestic product 2001b % of total Agriculture, forestry & fishing 15.8 Private consumption 57.0 Mining & quarrying 1.0 Government consumption 17.1 Manufacturing 14.5 Fixed investment 14.5 Construction 6.0 Stockbuilding 1.0 Electricity & water 3.8 Exports of goods & services 55.7 Transport & communications 14.2 Imports of goods & services -60.7 Wholesale & retail trade, restaurants & hotels 17.9 Statistical discrepancy 15.4 Other services 30.5

Principal exports 2005c F$ m Principal imports 2005c F$ m Sugar 217.9 Mineral fuels 784.1 Garments 120.4 Machinery & transport equipment 591.1 Fish 82.9 Manufactured goods 452.2 Gold 59.3 Food 355.5 Timber 9.9 Miscellaneous manufactured articles 264.0

Main destinations of exports 2005c % of total Main origins of imports 2005c % of total Australia 20.3 Singapore 29.9 Singapore 20.3 Australia 24.6 US 15.5 New Zealand 18.0 UK 15.1 Japan 4.2 Pacific Islands 8.6 US 3.8 a Fiji Islands Bureau of Statistics b Asian Development Bank. c Reserve Bank of Fiji, Quarterly Review.

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Quarterly indicators 2004 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Government finance (F$ m) Total revenue & grants 299.2 329.9 266.0 282.5 n/a n/a n/a n/a Expenditure 381.9 489.7 281.4 345.9 n/a n/a n/a n/a Balance -82.8 -159.8 -15.4 -63.3 n/a n/a n/a n/a Prices Consumer prices (1993=100) 134.5 135.9 137.2 137.5 137.5 138.8 140.1 139.6 Consumer prices (% change, year on year) 3.1 3.3 3.2 1.9 2.2 2.1 2.1 1.5 Financial indicators Exchange rate F$:US$ (av) 1.768 1.687 1.657 1.676 1.705 1.726 1.743 1.749 Exchange rate F$:US$ (end-period) 1.751 1.645 1.673 1.702 1.709 1.745 1.794 1.768 Bank rate (end-period; %) 2.25 2.25 2.25 2.25 2.25 2.75 3.75 5.25 Deposit rate (av; %) 0.35 0.36 0.36 0.39 0.4 0.37 0.49 n/a Lending rate (av; %) 7.14 7.04 6.92 6.82 6.72 6.66 6.73 n/a Money market (av; %) 0.88 1.03 0.97 1.13 1.24 1.79 4.24 4.24 Treasury-bill rate (av; %) 1.80 1.79 1.83 1.93 1.87 2.13 3.41 6.86 M1 (end-period; F$ m) 900.2 995.1 1,009.5 1,081.8 1,136.4 1,173.7 1,153.9 n/a M1 (% change, year on year) 20.3 13.4 38.5 19.8 26.2 17.9 14.3 n/a M2 (end-period; F$ m) 2,034.2 2,162.8 2,192.1 2,294.7 2,416.9 2,490.4 2,557.2 n/a M2 (% change, year on year) 13.0 10.5 20.5 13.8 18.8 15.1 16.7 n/a Sectoral trends Sugar exports (‘000 tonnes) 66.3 140.7 47.6 30.2 103.9 121.3 33.7 n/a Tourism, visitor arrivals ('000) 150 123 120 132 163 135 114 n/a Tourism, length of stay (av; days) 9.1 8.2 8.9 8.9 8.9 8.9 n/a n/a Tourism, gross earnings (F$ m) 203.4 171.7 160.4 169.3 214.9 188.6 160.8 n/a Foreign trade (F$ m) Exports foba 344.5 379.3 238.1 271.5 324.7 352.5 248.3 n/a Imports cif -645.0 -733.4 -549.4 -663.6 -724.9 -784.8 -682.7 n/a Trade balance -300.5 -354.1 -311.4 -392.1 -400.2 -432.3 -434.4 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 422.2 478.1 427.7 427.1 389.5 314.7 246.0 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

Multi-partyism will continue The multi-party cabinet established by the prime minister, Laisenia Qarase, has so far held together, and it is largely in the interest of the two main parties" Soqosoqo Duavata ni Lewinivanua (SDL) and the Fiji Labour Party (FLP)"that it continues to do so. As illustrated by Mr Qarase!s thinly veiled accusations that internal wrangling at the FLP might be responsible for a cabinet collapse, and the subsequent insistence by the FLP!s leader, Mahendra Chaudhry, that the party was capable of resolving its own affairs without any knock-on effects, neither party wishes to be seen as the cause of a change to the status quo. Even so, the recent rift in the FLP may well portend change for the party, as a slim majority of the organisation!s members of parliament (MPs) were prepared to put their signatures to a call for a reappraisal of Mr Chaudhry!s position as leader. Many of those who did not sign were probably motivated more by self- preservation instincts than any particular fondness for their leader. Mr Chaudhry has so far succeeded in dealing with the attack by summoning five of the main insubordinates for internal party disciplining. Whether they will be expelled from the FLP remains to be seen, as Mr Chaudhry would presumably not want to risk gifting the SDL with five possible turncoats. Mr Qarase has wasted no time in letting the rebels know that they would be welcomed in the SDL, should they lose faith in the FLP. Tensions earlier this year between a posturing military and the government have, for the time being, subsided. This may in part be due to the satisfaction of the long-term wish of the military commander, Commodore Baininarama, to see an ethnic balance on the political scene, in the form of Mr Qarase!s multi- party cabinet. However, the government has not deviated from its quiet commitment to downsize Fiji!s military forces and should more palpable moves be made towards this, it is likely that relations between government and military would quickly deteriorate.

A new five-year plan is The Ministry of Finance is designing its five-year plan for 2007 to 2011, but of

imminent more pressing concern is the state of Fiji!s public finances, and the serious fiscal revolution that will have to occur before debts are brought under control. For now, reports suggest that the government will have to continue borrowing in order to cover necessary capital expenditure, and so far no concrete plans have been proposed by the government that address the issue. The Reserve Bank of Fiji (RBF, the central bank) forecasts GDP growth of 2.7% in 2006, up from 0.7% in 2006, and the bank suggests that growth will be broad- based. But the central bank governor, Savenaca Narube, continues to stress that future growth needs to be based on investment and exports, both of which currently disappoint. The RBF has also warned that inflation could pick up from its currently low rate, owing in part to higher oil prices, and forecasts an end-2006 consumer price inflation rate of 3.5%.

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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 8.0 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 02 03 04 05 05 2001 2001

The political scene

The new cabinet is sworn in The May elections returned Laisenia Qarase of the incumbent Soqosoqo Duavata ni Lewenivanua (SDL) party to power as prime minister. The newly appointed 71-member parliament was sworn in at the beginning of June. In his second term as prime minister Mr Qarase has taken the unprecedented step of creating Fiji!s first multiracial cabinet, appointing nine ethnic Indians from the Fiji Labour Party (FLP) to cabinet minister positions. The size of the cabinet has recently been called into question: it comprises 24 full ministers and 12 junior ministers, or almost one-half of the lower house of parliament. The leader of the FLP, Mahendra Chaudhry, has called on the government to consider the swollen ranks of its cabinet ministers before undertaking proposed cost-cutting measures that will affect the civil service. Mr Chaudhry suggested that in appointing such a large number of cabinet ministers, Mr Qarase had been "buying loyalty at the taxpayers! expense". Government finances are in a precarious state, and the civil service looks likely to bear the brunt of remedial measures, having been identified as being overstaffed and overpaid.

New cabinet ground rules are Despite some initial frictions in the multi-party cabinet, a resolution was made

promised in July by the leaders of the three parties concerned"Mr Qarase, Mr Chaudhry and the leader of the opposition United Peoples!s Party (UPP), Mick Beddoes"to set a September deadline for reaching an agreement on the ground rules for cabinet operations. Mr Qarase has submitted a 17-page set of suggested operating guidelines, which Mr Chaudhry and Mr Beddoes have considered, and both men say they will have cleared any issues that arise with their respective parties by the time the September deadline arrives.

FLP suffers an internal rift Mr Chaudhry is now in his sixth term in Fiji!s parliament, and has become a stalwart, if controversial, figure at the head of the FLP. Following the May elections, he was forced to step down as the official leader of the opposition because of Mr Qarase!s decision to include the FLP in the cabinet, making the position untenable for him. At the time, there was no indication that he would

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not continue as leader of the FLP, but ructions within the party began to emerge when Mr Chaudhry travelled overseas for a week at the end of June. As leader of the FLP, it had been Mr Chaudhry!s duty to draw up a list of proposed FLP senators for submission to the president, Ratu Josefa Iloilo. He duly did this shortly before departing on his trip by handing his list to Mr Beddoes for conveyance to the president!s office. In his absence, the FLP deputy leader, Poseci Bune, presented Mr Beddoes with a letter signed by 17 of the 31 FLP members of parliament (MPs), supporting the withdrawal of Mr Chaudhry!s nominations on the grounds that he had failed to select candidates agreed upon by the FLP board. It was also implied that given that Mr Chaudhry had not been "officially endorsed" as leader of the party, it was not his right to have submitted the list in the first place. Mr Chaudhry returned from abroad a week later, and immediately summoned five senior members of the FLP to face disciplinary action over the matter. One of the characters inadvertently central to the schism is the former parlia- mentarian, Vijay Singh, who is understood to have stepped aside to allow Felix Anthony to run for office in the May elections in return for the promise of a nomination to the senate. However, he failed to make Mr Chaudhry!s list, and this has riled many members of the FLP. The five FLP members facing disciplinary action are Mr Bune, Krishna Datt, Atu Bain, Agni Deo Singh and Mr Anthony.

Mr Qarase seizes the The affair gave Mr Qarase, a bitter rival of Mr Chaudhry!s, the opportunity to

advantage take the moral high ground, and he wasted no time in offering FLP cabinet members the chance to switch their allegiance to the SDL, in spite of any disciplinary action they might have faced at the hands of their former party. He also suggested that the FLP rift might cause the new multi-party cabinet to fail in its governmental duties, in which case the nation would be obliged to return to an SDL-dominated government. Mr Chaudhry subsequently dismissed these notions, saying that the issues were purely internal to the party.

The Unity bill is re-introduced The controversial Reconciliation, Tolerance and Unity bill, which would see amnesty granted to those involved in the attempted coup of 2000, and which has been hotly contested by the Fijian military, has been reintroduced by the government in modified form. Mr Qarase confirmed in July that a new bill would be submitted to parliament at the end of that month, which would include significant amendments to amnesty provisions, the aspect of the bill that has generated the most public upset. Mr Qarase insisted that there would be no general amnesty offered, and reiterated that one of the bill!s most vital elements involved the appointment of a new Reconciliation, Tolerance and Unity council, complete with its own legislation, to replace the existing council on a permanent basis.

Military tensions could Tensions between the government and the military have long been a feature of

reappear political life in Fiji, which has suffered three military coups since the 1980s, and the issue of proposed army cutbacks"one of the matters from which much of the tension arises"was discussed in parliament almost immediately following the May elections. Central to the discussions was a white paper submitted to

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Mr Qarase in 2004, which recommended that army staff numbers should be reduced from 3,300 to 1,700, and that not only should it be made impossible for the military to meddle in domestic politics, but also that its primary role should be as an overseas peacekeeping force. In turn, Fiji!s police force would need bolstering in order to assume full responsibility for maintaining law and order in the country. Little has emerged regarding the result of the discussions, but what was widely considered to be a breakthrough meeting took place between the SDL cabinet member, Josefa Vosanibola, who Mr Qarase charged with mediating between the government and the military forces earlier in the year, and the military head, Commodore Bainimarama, at the end of July. The two parties discussed a number of issues ranging from soldier allowances to overseas deployment schemes, and Mr Bainimarama came out in praise of Mr Vosanibola, thanking him for the opportunity to exchange ideas. It would appear that the issue of military cutbacks was not brought to the table, but Mr Bainimarama took the unusual step of admitting that the manpower and resources of the army are sorely underutilised.

A corruption scandal The minister for youth and sport, Rajesh Singh, has claimed to have received

resurfaces death threats since announcing that he would be pushing for a review of the accounts for the 2003 South Pacific Games in parliament. Mr Singh also says he has also been warned by senior cabinet ministers not to have anything to do with the issue. It is widely believed that a number of senior government officials pocketed part of the US$17m raised for the staging of the games. Mr Singh says that he feels it is his duty to ensure that the public are able to see where their money was spent, and believes that the prime minister will support him accordingly.

Affirmative action is One of the few divisive issues to have openly marred the otherwise relatively

condemned smooth proceedings of the new multi-party cabinet has been that of the SDL- backed affirmative action programmes. In June Fiji!s Human Rights Commission pronounced the programmes to be unconstitutional and discriminatory in light of the government!s Social Justice Act, offering an unfair advantage to ethnic Fijians and Rotumans on the basis of race. Towards the end of June the FLP leader, Mr Chaudhry, threatened to withdraw his party!s MPs from the cabinet in protest, and demanded that Mr Qarase take immediate steps to bring the programmes in line with the constitution. Despite saying that he felt the Human Rights Commission report was unfair, Mr Qarase responded to Mr Chaudhry!s threats by saying that the SDL had already agreed to review the programmes, although no timetable was given.

Economic policy

A new five-year plan will be The minister of state for national planning, Ratu Jone Navakamocea, has

drawn up announced plans to draw up a five-year national plan that will underpin the country!s development from 2007 to 2011. A committee will be formed to oversee its formulation, and it will draw on material from the both the World Bank and the Asian Development Bank as well as from a variety of consultants.

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A national economic summit will be held in September. The central targets of the plan are: annual GDP growth of 5%; maintenance of annual inflation between 2% and 3%; foreign-exchange reserves equivalent to between four and five months of import cover; a budget deficit of less than 3% of GDP; and an increase in investment to a level equivalent to 25% of GDP.

Devaluation suggestion causes Controversy erupted at the end of July when the president of the chamber of

controversy commerce, Taito Waradi, announced that he felt the Ministry of Finance would have no option but to devalue the Fiji dollar, given a supposedly untenable level of national debt, and the Reserve Bank!s decision to raise interest rates twice in six months. However, Mr Kubuabola dismissed the suggestion as unfortunate, and maintained that devaluation would only make matters worse. He pointed out that such speculation would also serve to damage investor confidence, and sought to assure the public that a number of plans were under way that would ease some of the pressure on the ailing economy.

Fiscal tightening policy is Disagreement has arisen over government plans to curtail expenditure in the

questioned country!s public sector. Threatened cuts to the civil service have been met with anger by both the FLP leader, Mahendra Chaudhry, and the opposition leader, Mick Beddoes. Mr Chaudhry pointed out that appointing a 36-member cabinet hardly set a good example on containing public spending, and Mr Beddoes highlighted the spendthrift tendencies of many of the government ministries, calling upon the ministers in charge to be held accountable. Mr Beddoes also reiterated a well-used (if unproven) statistic illustrating the scale of the public spending issue, namely that for every dollar put towards a public project, 75% goes towards the administration and organisation of that project. At the end of July the Reserve Bank of Fiji admitted that it would take a minimum of two years to rescue the economy from what are currently unsustainable levels of debt, and that this would only be possible if the government adhered to a strict fiscal policy and discouraged import consumption, would this be possible. The Reserve Bank governor, Savenaca Narube, expressed concern that traditional export commodities such as sugar and fish had been underperforming, and said that economic recovery would require an export recovery.

Water privatisation proves Indications that the government intends to privatise the national water supply

unpopular have been met with disapproval by many of those invited to tender for the management contract. The overwhelming sentiment was that privatising the water supply was not in the best interests of the country, and that it was the government!s duty to rise to the task of improving both supply and distribution across the islands. The Charter Preparation Committee for Water and Sewerage, the Centre for Research, Education and Advocacy and the Fiji Nursing Association, all invited to advise or apply for the contract, appear unenthusiastic.

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The domestic economy

Debt levels cause concern Despite spiralling levels of national debt, the Reserve Bank of Fiji (RBF, the central bank) has said that the government will be obliged to continue borrowing in order to cover capital expenses which will in turn generate income. The finance minister, Ratu Jone Kubuabola, has confirmed that the government currently has debts of approximately US$1.5bn, around 52% of GDP. Furthermore, there are concerns that much of the borrowing has been funded by the National Provident Fund, Fiji!s workers! savings pool. In June Mr Kubuabola revealed to parliament that the government owed the fund US$938m, more than one-half of its total assets.

Telecoms reforms are planned Reforms are under way in Fiji!s telecommunications industry, according to the minister for information and communication, Isireli Lewenigila. Planned developments for the sector centre on increased competition, to be achieved via the introduction of more operators and the abolition of exclusive rights. Particular thought is being given to the problem of telecommunications services in rural areas, and how to avoid passing on the high infrastructure costs to the low-income populations that tend to live in the more remote areas. Telecom Fiji recently lowered local call charges and high-speed Internet charges, eliciting praise from the country!s consumer council, which encouraged other companies to follow suit.

Vodafone experiences growing The UK-based telecoms company, Vodafone, has been experiencing some

pains growing pains in Fiji, as higher-than-expected take-up on a special calling offer saw its network jammed on a daily basis in July. The company responded by appealing to users not to make calls at certain times, and announced that it was implementing a capital expenditure programme worth US$21.8m to upgrade its facilities and improve coverage. The company recently launched a new network in the Lau group of islands, via a base station at Vanuabalavu, prompting speculative comments from Mr Qarase as to the positive impact that increased mobile communications would have for those living in outlying areas.

Reviving the rice industry is a The agriculture minister, Gyani Nand, said in July that reviving Fiji!s rice priority industry is one of the top priorities for his ministry in the coming years. The ministry has added extra funds to its budget for rice production and is focusing not only on the concentration of rice farmers in Vanua Levu, which constitute the majority, but also those in Navua. Rice import figures have been on the rise since 2000, contributing to the weakening economy, and Mr Nand is keen to see net imports become net exports in the next three years.

Vehicle emissions are a The minister for tourism and transport, Tomasi Vuetilovoni, has highlighted the

problem dangers posed by exhaust fumes emitted by vehicles, saying that more people die every year as a result of fume inhalation than in road accidents, and outlining measures designed to address the problem. The government is apparently looking to introduce liquefied petroleum gas (LPG) fuel for use by taxis, and has established a cabinet subcommittee to look into biofuel options. However, when the commerce minister, Adi Sivia Qoro, confirmed in August

that the cabinet had approved the introduction of mandatory standards for fuel, the Fiji Taxi Union was quick to condemn what it felt was a rushed decision. The standards particularly apply to sulphur content.

Foreign trade and payments

China trade is in the spotlight While accompanying the Chinese ambassador, Cai Jinbiao, on a tour to his home village in Vanuabalavu, the prime minister, Laisenia Qarase, recently announced that if trade with China was to continue to accelerate at the current rate, the country would soon surpass Australia and New Zealand as Fiji!s primary trading partner. (The statistics suggest, however, that this could take some time.) Following the China-Pacific forum held in Suva in April, attended by China!s premier, Wen Jiabao, Fiji recently received a second high-level visitor, China!s foreign minister, Li Zhaoxing. Mr Li arrived in the first week of August and signed a grant worth US$1.26m to further economic and technical co-operation with Fiji.

As is widely understood, China is flexing its diplomatic muscle in the South Pacific region partly with a view to undermining Taiwan!s efforts to garner international recognition as an independent state, which to date it has done relatively successfully in the region. Pacific island nations that still formally recognise Taiwan are Nauru, Tuvalu, the Solomon Islands, the Marshall Islands, Palau and Kiribati, and it would appear that Taiwan still plans to continue offering assistance and aid across the region. Organised by Taiwan!s trade mission, a delegation of health workers spent three days in Fiji in July, offering free clinic and health seminars as they travelled around the country.

South Korea donates hospital The government of South Korea recently donated US$70,000 worth of eye equipment treatment equipment to the CWM Hospital in Suva, adding to what amounts to around US$700,000 in donations to the health sector by South Korea since 1995. A number of South Korean doctors and nurses work in Fiji!s health sector via the Korea International Co-operation Agency (KOICA).

The region September 2006 Summary

Outlook for 2006-07 The political situation will remain fragile in many countries in the region. Fiji!s multi-party cabinet could experience increased friction with the military, and New Caledonia!s government will have to deal with large-scale environmental protests. Tonga must manage a difficult transition to democracy, and the Solomon Islands administration will need to deal with the aftermath of years of violence. Samoa!s government must face up to some difficult social issues, whereas Vanuatu!s will struggle simply to keep functioning. Continued Chinese interest in the region suggests that it may have a new agenda. Increased inflows of aid could create problems, both in relation to more allegations of corruption and to increased internal tensions through uneven distribution of aid. Increased aid could also lead to an unfortunate loosening of already poor controls over government spending. Merchandise export growth is likely to remain disappointing this year and next, although some relief is likely to be provided through increased services receipts from tourism. Despite this, GDP growth in 2006 could be better than some governments predict.

The political scene Fiji!s multi-party cabinet has so far worked reasonably well, and some ground rules on its operation are due to be agreed on in September. The Samoan prime minister, Tuila!epa Sa!ilele Malielegaoi, has dropped law suits against opposition leaders. The Solomon Islands government survived its first major internal crisis in August, but talk of outer islands seceding has continued. In New Caledonia, protests against new mining developments have been used to vent public dissatisfaction with other issues. In Tonga, the death of a leading royal reformer is unlikely to derail the move towards democratic government, and could indeed precipitate change. In Vanuatu, the prime minister, Ham Lini, has made some bold policy statements, but continues to struggle with the day-to-day business of government.

Economic policy and the A number of policy reforms have been implemented across the region. Samoa domestic economy is to increase its rate of value-added tax, Tonga is reducing the size of its civil service, the Solomon Islands has introduced a new investment law, and New Caledonia says its will put a greater focus on inflation control. But major problems with economic policy remain, highlighted by recent disappointing merchandise trade performances, and the distinctly shaky state of public finances in many countries. Trade problems will take some time to fix. Tourism growth, thanks to budget airlines, has provided some relief. Inflation rates are currently low, but demand management remains a problem in many countries. Editors: Graham Richardson (editor); Gerard Walsh (consulting editor) Editorial closing date: August 18th 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

The political situation will The political situation will remain fragile in most countries in the region. The remain fragile multi-party cabinet in Fiji has survived well so far, but could be vulnerable to renewed tensions between the government and the military. New Caledonia!s politics will be complicated not just by disputes over the future relationship with France, but also by escalating rows over the environmental impact of planned mining projects. Tonga will continue to suffer from political growing pains, as the monarchy slowly metamorphoses into democratic government. Samoa!s autocratic regime will find it difficult to deal with worsening social problems and criminality. The Solomon Islands government must deal with the aftermath of years of violence, and Vanuatu!s leaders will continue to struggle to hold together an artificially created country, beset by ethnic divides. Many of these political problems have deep roots, and can often be traced back to colonial decisions on national boundaries, or other errors. But blaming the past cannot conceal a general lack of current progress. Hopes of "good governance" seem as remote as ever for a large number of countries in the region, and although Fiji!s cabinet currently shows one way forward, most governments in the region remain beset by ethnic wrangling, and are frequently paralysed by incompetence or corruption. The regional political situation appears to be in a state of transition. Until recently, there were great hopes that increased regional political co-operation" as manifest through the Pacific Plan, approved at the October 2005 summit meeting of the Pacific Islands Forum (PIF, the main regional political body) in Papua New Guinea"could solve the region!s woes. Debate on how to implement many aspects of the Pacific Plan continues, but any mood of optimism has been replaced by cynicism, as individual countries struggle to get to grips with their own political or economic problems.

China may have a new agenda China has responded to this lack of unity by sharply increasing its presence in the region in recent months, with the visit of the its premier, Wen Jiabao, to the Pacific Islands Forum in April followed up by the visit of the Chinese foreign minister, Li Zhaoxing, to a number of regional capitals in late July and early August. China has long been interested in the region, and in recent decades this interest has been focused on ensuring that more countries do not extend diplomatic recognition to Taiwan. The recent Chinese trips have been accompanied by a number of funding initiatives, but their high-profile nature suggests that Chinese diplomacy may now be following other objectives. If China is seeking to counterbalance the role of Australia in the region, it may have picked an opportune time to do so. With its extensive foreign military commitments elsewhere, Australia may be distracted, and must anyway not relish the prospect of being sucked into another Pacific Island contretemps, as it was with the Solomon Islands. New Zealand, whose resources are even more limited, will continue to play quite a canny game, focusing on improving trade links, while still playing a supporting role to Australian security interests.

Increased aid could create Increased inflows of aid, be they from China, Australia, New Zealand, Japan or difficulties elsewhere, may cause as many problems as they solve. Most national institutions remain incapable of handling these large amounts of money, and some aid will be siphoned off, at central government, local government or contractor level. It will be interesting to see how much China gets involved with the disbursement of its aid at a local level. Accusations of corruption will continue to dog political leaders in the region, and an uneven distribution of the benefits of aid within countries could exacerbate internal tensions.

Exports will disappoint Increased aid will also only paper over economic problems, not resolve them. Although some countries may see higher GDP growth this year, as aid and a reviving tourism sector push up construction and other sectors, the underlying economic situation of most countries will remain uncertain. The essential problem for most countries will remain that while their merchandise export growth is poor, economic growth is rapidly increasing their demand for consumer and investment goods. Export problems with certain commodities (such as coconut products) this year have served only to highlight a secular trend towards increased merchandise trade deficits, something that can only be partially offset by increasing services receipts from tourism. Increased transfers (private or through aid) are needed to make up the gap, if increased borrowing or payments crises are to be avoided. These can not be guaranteed, and are likely to have strings attached"making a nonsense of Pacific Islands states! long- held wish for economic self-determination. Increased aid could also allow a further loosening of control over public finances, already poorly monitored in many countries. Public spending is likely to increase sharply in Samoa this year, and Vanuatu!s public finances are already creaky. Returning recurrent spending to more normal levels could prove difficult.

Growth could prove better Recent official growth forecasts have varied widely across the region, although

than expected most tend to be on the low side. For example, Fiji!s Reserve Bank currently forecasts GDP growth of 2.7% in 2006, and the Tongan government is predicting an expansion of just 0.9%, owing to that country!s civil-service restructuring. Growth may turn out to be better than expected, however, thanks to a sustained revival in tourism, expectations of further aid inflows, and continued (if unsustainable) consumer confidence across the region. But growth and confidence could take a tumble in 2007 if simmering problems in many countries! public finances finally come to a head.

The political scene

Post-elections stresses continue A number of countries in the region are still coming to terms with the results of elections held earlier this year. Fiji!s general election was held in May, without the predicted unrest, and 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 surprised many by

creating a multiracial cabinet, with nine members of the Indian-based Fijian Labour Party (FLP) being sworn into office at the end of May. This cabinet has functioned reasonably well, despite being overly large (it contains 24 full ministers and 12 junior ministers). The country!s three major political parties have pledged themselves to establish ground rules for the cabinet!s operations by September, and there have been few major rifts so far within the body (one of these, predictably, surrounded the government!s affirmative action programme for native Fijians). However, tensions lurk beneath the surface: the FJP looks unstable, with major divisions in its leadership, and the military could yet try to reassert itself, particularly if it is threatened by spending cuts. The government in Samoa has trod fairly carefully since its unexpectedly easy victory in its general election in March. The ruling Human Rights Protection Party (HRPP) co-opted a few notionally "independent" members of parliament (MPs) with indecent haste and there was criticism about other aspects of the election. But the prime minister and leader of the HRPP, Tuila!epa Sa!ilele Malielegaoi, has subsequently dropped legal suits against opposition leaders, and a more subtle approach towards dissent is likely. The Samoan government needs to focus on getting to grips with a range of social issues, including increased drug abuse and juvenile crime. Violence remains closer to the surface in the Solomon Islands: here, the result of elections in March led to violent clashes, the intervention of Australian and New Zealand security forces, and a replacement government, composed of parties in opposition to the previous government and led by Manasseh Sogovare of the Social Credit Party (Socred). This government survived its first major internal crisis in August, centred on the government!s diplomatic recognition of Taiwan, and Mr Sogavare has grand plans for constitutional change. But the outer islands are again talking of secession, and the exact role of the Australian-led intervention force is being questioned. Major political issues remain unresolved elsewhere in the region. In New Caledonia, protests against massive new mining developments have intensified, and these have been used to vent public dissatisfaction about a number of other issues (for example, the increased cost of living). France has continued to urge its overseas territory to integrate itself better with its Pacific Islands neighbours, but independence is still a long way off. In Tonga, the slow march towards democracy continues. The Princess Regent, Pilolevu Tuita, has spoken of the inevitability of political reform, and the death of a leading royal reformer, Prince Tu!ipelehake, could intensify pressures for change. The death of the elderly King Taufa!ahau Tupou IV, who is presumed to be very ill, would be a likely catalyst. The government in Vanuatu staggers on, with the prime minister, Ham Lini, forced into yet another change in policy over kava exports. Mr Lini has seen off a number of threatened no-confidence votes, and has made some increasingly bold policy statements, but fulfilling these will prove difficult.

China commits more funds As noted above, China!s foreign minister, Li Zhaoxing, visited a number of Pacific island countries at the end of July and early August. China remains keen to ratchet up the pressure on those countries that currently recognise Taiwan

(Tuvalu, Kiribati, Palau, the Solomon Islands, Nauru, Palau and the Marshall Islands) to switch allegiance, but the scale of the largesse being dished out suggests that there is another policy agenda. The visits are already having a number of perhaps unintended side-effects, notably the undermining of the status of the Pacific Islands Forum (PIF, the main political organisation in the region), which includes the Taiwan-supporters as well as the China-supporters among its membership. China!s aid contributions, although high profile, are likely to have less impact on development than those from the more established aid donors. Japan has recently decided to increase aid substantially, and Australia and New Zealand continue to work on more complex economic agreements (New Zealand recently unveiled a deal with Vanuatu, for example). The US is also emerging as an important player, with the arrival of significant Millennium Challenge Compact (MCC) funds in Vanuatu.

Economic policy and the domestic economy

Some policy reforms are The immediate policy problems for most Pacific island countries are how to implemented deal with worsening merchandise trade deficits and distinctly shaky public finances. As ever, the temptation is to ignore the complexities of fixing immediate problems and set out grand visions for future improvements. Thus, Fiji has recently announced a five-year government plan to run from 2007 until 2011, and will convene a national economic development conference in September; Vanuatu has unveiled plans for preparing the 2007 budget, and for rejuvenating its agricultural sector. But there has been progress on some issues elsewhere. Samoa is to increase the rate of its controversial value-added tax (VAT) later this year, civil-service redundancies have gone ahead in Tonga, New Caledonia is putting a greater focus on inflation control, and the Solomon Islands has implemented a new investment law.

Trade-related problems may Trade-related problems may take longer to fix, however. High international oil

take time to fix prices have jacked up import bills, and hopes of local substitutes (eg coconut biofuels) remain distant"although one benefit has been that high oil prices have helped to push up the price of palm oil. At the same time, exports of many agricultural products have faltered, either due to long-term underinvestment in agriculture, or changes in trade regimes. The most obvious being the long-running saga over the control of Vanuatu!s kava trade, but changes in EU regulations regarding Fiji!s sugar exports are likely to have a much more profound effect. It remains a concern that several years of high international commodity prices have not elicited much of a rebound in the region!s agricultural sectors, although they have led to increased mining investment, and not just in New Caledonia. One worry is that if Pacific island states become disillusioned about the benefits of international trade, they will simply decide to opt out. At the end of July, Tonga!s prime minister, Fred Sevele, reluctantly bowed to popular pressure and decided to defer his country!s accession to the World Trade Organisation (WTO). As Mr Sevele observed, the problem is that future admission to the WTO may be on much tougher terms.

The longer-term problem of climate change remains in the background. 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.

Tou ri sm ha s h elp ed GD P Growth in some countries may currently be quite strong, thanks to the impact growth of aid flows on public spending and the revival of tourism. This revival of tourism owes more to external factors than to government strategy: the catalyst has been the appearance of budget airlines such as Virgin Blue and Pacific Blue, which provide a cheaper and (in the short term) more dependable link than the national carriers with major tourism sources, notably Australia. 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. Hotel construction has responded rapidly to increased inflows of tourists.

Demand management is still a Sustained GDP growth this year looks likely to be accompanied by relatively problem low rates of consumer price inflation; inflation rates in many countries in the region are currently much lower than a year ago, largely reflecting more stable prices for agricultural goods, although they could start to pick up again. But demand-management problems will persist owing to increased public spending. Fiji tightened monetary policy in May, and Reserve Bank of Fiji!s governor, Savenaca Narube, has inferred more recently that further interest rate rises are possible. The problem in Fiji, as elsewhere in the region, is that overly strong credit growth is boosting imports, while exports and imports remain depressed. As noted before, 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 economy going. This reassurance unfortunately provides a further incentive to go easy on reform to the detriment of the countries! long-term growth prospects.