Report No. 9516-FIJ

FijiIncentive Policies for Growth

July 1, 1991Country Operations DivisionCountry Departnient"Asia Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their .icial duties. Its contents may not otherwisebe disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

Annual Averages

1981 F$1.00 = US$1.171982 F$1.00 = USS1.071983 F$1.00 = US$0.981984 F$1.00 = US$0.931985 F$1.00 = US$0.871986 F$1.00 = US$0.881987 F$1.00 = US$0.821980 F$1.00 = US$0.701989 F$1.00 = US$0.671990 F$1.00 = US$0.68

FISCAL YEAR

January 1 - December 31

ACRONYMS AND ABBREVIATIONS

APEC = Asia Pacific Economic CooperationCED = Customs and Excise DepartmentEEC European Economic CommunityERP = Effective Rates of ProtectionFDB Fiji Development BankF-NAPECO = Fiji National Petroleum CompanyFSC = Fiji Sugar CorporationFSIC = Fiji Standard Industrial ClassificationFTIB = Fiji Trade and Investment BoardGATT = General Agreement on Tariffs and TradeGSP = Generalized System of PreferencesGST = General Sales TaxICOR = Incremental Capital/Output RatioIOC = International Oil CompanyIRD = Inland Revenue DepartmentMFA = Multi Fibre AgreementNLTB = Native Land Trust BoardOSP = Official Selling PricePAFCO = Pacific Fisheries CorporationPECC = Pacific Economic Cooperation ConferencePIB = Prices and Incomes BoardTFF = Tax Free Factories

FOR OFFICIAL USE ONLY

TITLE s Fiji: Incentive Policies for Growth

COUNTRY Fiji

REGION Asia

SECTOR : Country Economic

REPORT TYPE CLASSIFICATION MM/YY LANGUAGE

ERA Official Use 07/91 English

ABSTRACT : This report addresses key economic policy issues forFiji in the decade of the 1990s. After a period ofeconomic stagnation, the Fijian economy experienced amajor disruption in 1987. Reacting promptly, theGovernment enacted a series of stabilization andadjustment measures which restored financial stabilityand stimulated a strong recovery in economic activity.To maintain the growth momentum in the 1990s, the majorchallenge is to ensure that public policies provide anenabling environment for efficient private sectordevelopment. This will necessitate continued reform ofthe policy framework, the key elements of which wouldinclude: a phased program cf tariff reduction andreform; simplification and rationalization of the incomeand corporate tax systems; replacement of existingindirect taxes with a value-added tax; comprehensivereform of the public enterprise sector; adoption offlexible wage policies; removal of external capitalcontrols; regularization of foreign investmentprocedures and a stream-lining of land accessregulations. Such measures would need to be supportedby a sustained shift in public expenditure prioritiestowards human resource development and the maintenanceof economic infrastructure.

This document has arestricted distribution and may be used by recipients only it,the petformanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FIJIINCENTIVE POLICIES FOR GROWTH

Table of Contents

Page

Executive Summary .... . . . . . . . . . . . . . . . . . . . i

I. Incentive Policies for Growth ... . . . . . . . . . . . . . . . 1

A. Introduction .... . . . . . . .. 1B. The Structure of the Economy. ........ . .. . .. 2C. Economic Performance: 1980-1986 . . . . . . . . . . . . . . . 5D. Economic Performance: the 1987 Shock . . . . . . . . . . . . . 8E. Starting the Process of Structural Adjustment: 1988 to 1990 . 9F. Economic Performance: 1988-1990 . . . . . . . . . . . . . . . 11G. Maintaining the Growth Momentum: An Agenda for the 19908 . . . 15H. Organization of the Text .. 16

II. Macro-Economic Strategy and Growth . . . . . . . . . . . . . . . 17

A. Macro-Economic Objectives .17B. Macro-Economic Projections .17C. Macro-Economic Competitiveness Policy . . . . . . . . . . . . 22D. Investment in Supportive Infrastructure . . . . . . . . . . . 23E. The Adjustment Challenge . . . . . . . . . . . . . . . . . . . 26

III. Trade Reform: Opening the Economy to World Markets . . . . . . . 29

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 29B. Objectives of Trade Policy .. 34C. Import Policy . . .. . . . . . . . . . . . . . . . . . . . 35D. Sector Adjustment Issues .. 39E. Export Promotion .. 41F. Support Services .. 43G. Public Sector Marketing .. 44H. Market Access ............. . . ......... 47

IV. Tax Policy and Investment Incentives . . . . . . . . . . . . . . 49

A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 49B. An Overview of the Tax System ..... . . . . . . . . . . . 50C. Tax Reform: Direct Taxation ..... . . . . . . . . . . . . 57D. Indirect Tax Reform ...... .. .. . .. .. .. . .. . 60E. Coordinating Indirect Tax and Tariff Reform . . . . . . . . . 64F. Coordinated Tax Reform . . . . . . . . . . . . . . . . . . . . 66

This report was prepared by a team led by Steven R. Tabor. The principal authorswere Jaber Ehdaie, Andrew Elek (consultant), Hal Hill (consultant), DonaldMitchell and Steven Tabor. Other major contributors included Andres Liebenthaland Peter Osei. Sharon E. Gustafson and Boonsri Prasertwaree provided assistancein preparing and processing the document.

V. Competitiveness Policy and Regulatory Reform . . . . . . . . . . 67

A. Regulatory Reform. Objectives . . . . . . . . . . . . . . . . . 67B. Factor Markets . . . . . . . . . . . . . . . . . . . . . . . . 68C. Product Markets . . . . . . . . . . . . . . . . . . . . . . . 77

Appendix 1. Note on Methodology Used to Derive Effective Rates of ProtectionAppendix 2. Sugar Sub-sector Incentives PolicyAppendix 3. The Indirect Tax ModelAppendix 4. Fiscal Incentive Programs

Statistical Appendix

FIJI

INCENTIVE POLICIES FOR GROWTH

Executive Summary

1. With a population of 730,000 and per capita income of $1,920,1Fiji ranks as one of the largest and most developed of the Pacific Islandeconomies. Diverse climatic conditions, combined with fertile soils and anabundant stock of forestry, minerals and fisheries resrurces provide Fiji withthe natural wealth required to support sustained growtlt and economicdevelopment. Like the smaller Pacific Island nations, Fiji is constrained byboth external and internal remoteness, small domestic markets and high costscf public administration. However, such constraints are not as severe in thecase of Fiji because of its relatively well developed transportinfrastructure, its historical role as a transhipment hub for the smallerPacific economies and its notable accomplishments in human resourcedevelopment.

2. During the 1960s and first half of the 1970s, Fiji achieved highrates of growth based on a narrow range of primary product exports (sugar,copra), a modest inflow of tourists and expanding public investment. Thegrowth momentum decelerated in the second half of the 1970s before coming to ahalt in the first half of the 1980s. During the decade ending in 1985, theeconomy grew by slightly more than 2 percent per annum, a rate that wasinsufficient to keep pace with population growth (2.2 percent) and moreimportantly, to expand employment opportunities in the formal sector forFiji's growing stock of secondary-school graduates.

3. Slow growth and stagnant employment can be traced, in part, toadverse external events. For much of the 1980s. Fiji's primary productexports suffered from declining prices in the world markets while 5m9ortprices of petroleum products, manufactures and capital goods, reg -ed sharpincreases. In addition, a spate of hurricanes damaged economic in-.astructureand hampered Fiji's ability to export primary products and attract tourists.

4. In the face of an adverse external environment, the FijianGovernment managed to maintain macroeconomic stability, but did not undertakethe structural reforms necessary to enhance competitiveness and diversify intomore promising sources of growth and development. The lack of a timelyadjustment response can be traced to: (i) a public policy favoring direct,protected involvement of the public sector in the commercial spheres of theeconomy; (ii) an inward-oriented trade regime, providing protection frominternational competition in the form of widespread import monopolies andhigh, protective tariffs; and (iii) a highly regulatory approach to privateinvestment; and (iv) unresponsive real wage and exchange rate policies thatresulted in a gradual erosion of competitiveness. The response of the privatesector to deteriorating external conditions and a difficult domestic policyenvironment was predictable; private investment (including foreign directinvestment) declined and shifted to the sheltered sectors of the economy.

1/ Note that $ refers to US dollars.

- li -

5. In 1987, the economy was disrupted severely by political upheavalswhen two coups caused a loss of business confidence, increased emigration andcapital flight. The sugar harvest was interrupted and tourist arrivalsdropped by 26 percent. The emphasis of macro-economic policy was forced toshift to stabilization of the short term situation. Sharp cuts in publicexpenditures, particularly in capital spending (which dropped by 40 percent),were accompanied by two substantial devaluations, wage restraint and atightening of monetary policy. GDP shrank by more than 6 percent in 1987 andstagnated in 1988.

6. On the positive side, the shocks of 1987 were followed by asignificant shift in economic strategy to a more outward-looking, export-oriented approach. To restore investor confidence, the Government embarked onan ambitious program of stabilization and structural adjustment centered onenhancing competitiveness by providing an incentives environment conducive toprivate sector investment anC growth. The key elements of this programincluded:

(a) macro-economic stabilization: The fiscal deficit was reduced from5.1 percent of GDP in 1987 to 1.1 percent of GDP in 1988, 2.7percent of GDP In 1989 and 0.4 percent of GDP in 1990. Publicsector wage restraint was the key instrument used to achievefiscal balance.

(b) trade rerorm: Quantitative restrictions on manufactured goodswere abolished in 1989 followed by a lifting of licensingrequirements on a broad range of primary products in 1991. Tariffceilings were progressively reduced during 1989-1991.

*c) foreign investmentlexport promotion: An export promotion package,including duty-free imports and a business advisory service wasput into place.

(d) public enterprise reform: Steps were aken to reduce publicsupport to state enterprises by cutting budgetary transfers andconverting the companies tc a corporate legal status.

(e) tax re5orm: High top marginal tax rates were rolled back and dualtax treaties signed with key trading nations.

7. The response to the stab'lization and adjustment measures washeartening. Tourism, which had been operating well below capacity,experienced record-breaking increases in tourist arrivals, and sizableinvestments in rehabilitating and refurbishing hotels was initiated. As aresult of greatly increased competitiveness and normalization of domesticpolitical conditions, traditional primary product exports rebounded to surpasspre-1987 conditions. In manufacturing, excess capacity created by departingIndian businessman were filled quickly by foreign investors who in the span of2-3 years built a buoyant export-oriented garments industry. As a result,prices stabilized and the economy recovered by an impressive 12.5 percentgrowth in 1989 followed by sound GDP growth (of close to 5 percent) for 1990.Furthermore, employment in the formal sector surpassed pre-1987 levels, duelargely to new jobs created in the manufacturing sector.

- iii -

8. The external environment that Fiji will face in the 19909 is notexpected to be unlike that of the 1980s. Primary product prices are forecastto continue to remain depressed while demand for manufactures and recreationalservices (e.g. tourism) is expected to remain strong. The challenge for Fijiwill be to position itself to take advantage of emerging opportunities in theworld markets. As capac.ity utilization continut., the recovery that began in1988, new investment will be needed, particularly in manufacturing, tourism,and non-sugar agribusiness (forestry, fisheries).

9. If growth is to be sustained at 5-6 percent per annum, then theinvestment to GDP ratio must be increased from 19 percent to 24 percent of GDPto provide essential (private and public) physical and social infrastructure.While domestic savings would be sufficient to finance two-thirds of grossdomestic investment, foreign savings, largely in the form of direct foreigninvestment and borrowing within the bounds of creditworthiness, would berequired to finance nearly one-third of the expected public and privateinvestment requirement.

10. Attracting investment, and ensuring that investment is allocatedin an efficient manner will require a credible policy regime that providesboth political stability and the appropriate set of incentives to encourageprivate sector development. This will also require outward-orientation toensure that, economy-wide, the cost structure of prodacing goods and servicesin Fiji is competitive in world markets. While the reforms initiated since1987 have established the broad direction of policy reform, much more isrequired to establish the stability and enabling incentives regime requiredfor sustained economic development and growth.

11. The lessons of international experience suggest that key elementsof an incentives policy conducive to establishing credibility and attractingefficient private investment include: (i) financial stability and economy-widecompetitiveness; (ii) a relative price structure which provides a meaningfulreflection of world market opportunities; and (iii) a regulatory stance whichencourages competition. In the Fijian context, a combination of judiciousmacroeconomic management and further policy reforms in the areas of trade,taxation and enterprise regulation are the key elements of such an incentivespolicy. Coord'nated and comprehensive action In all three of the above-mentioned areas is required.

Macro-Economic Management in Support of Structural Adjustment

12. Sound macro-economic management is essential to support a private-sector led growth strategy by providing a stable financial environment,competitive economy-wide prices and the requisite public expenditures neededto complement private sector growth. ,he Government of Fiji has established agood track record of macro-economic management and creditworthiness sinceIndependence. Maintaining this good record will be essential to ensure thatthe Fijian economy remains competitive in the world market and underpins aprogram of structural adjustment by a stable financial enwironment.

13. Financial Stability. Medium-term forecasts indicate that GDPgrowth on the order of 6 percent per annum can be achieved if both non-traditional exports and tourism grow at approximately 8-9 percent per annum.This, in turn, will require equally rapid growth in imports of capital goods

- iv -

and raw materials to finance expansion ia both the traditional and the newexport-oriented sectors. In an environment of rapidly expanding exports.imports and domestic investment, it will be important for the Government tot(i) &void inflationary finance and the preempting of private savings bymaintaining the fiscal deficit at a prudent level (1-2 percent of GDP); and(ii) to use fiscal and monetary policy, together with flexible exchange ratemanagement, to adjust aggregate demand to imbalances in the balance ofpayments that may arise.

14. Economy-wide Competitiveness. The 1987 devaluations have resultedin a sustained decline in Fiji's real effective exchange rate. In the future,flexible management of the exchange rate has the advantage of: (i) assistingFiji to remain competitive in world markets; (ii) replacing sector-specificdistortions and protection by economy-wide adjustment; and (iii) providing,through expenditure switching and substitution effects, a strong incentive totradable goods sectors, which in turn will act to offset the short-term costsassociated with structural adjustment. Of th-e macro-economic policies, wagepolicies will be the most critical for maintaining competitiveness. Averagewage rates in Fiji are high ($12/day) relative to countries at a similar levelof income. Wages will need to be restrained in line with productivityimprovement and public sector wages reduced to bring them more in line withthe private sector. For the skilled segments of the labor force, which haveseen their ranks rapidly depleted by the post-1987 out-migration, skillupgrading through an intensive effort in technical training will be requiredto maintain productivity levels.

15. Public Sector Expenditures to Support Private Initiative. Thereare some signs that Fiji's recent economic growth is leading to shortages oftrained personnel and infrastructure, such as telecommunications facilitiesand computer technicians, which could impede future growth. While publicexpenditures in Fiji have generally been at an appropriate level for a low-middle income economy (24-26 percent of GDP), the share of public expendituresallocated to investment (4-6 percent of GDP), and the share of currentexpenditures allocated to operations and mairntenance of the capital stock havebeen far too low. Improving the balance in public spending as between currentand capital expenditures is essential if the infrastructural and humanresource requirements associated with rapid growth are to be provided. At thesame time, investment in additional infrastructure and operations andmaintenance will have high economic rates of return during a period of rapidgrowth in private investment. In the near-term, the highest priorities fornew investment would be in telecommunications, transport and education. Interms of operations and maintenance, practically all areas requireimprovement, but health and education systems may merit special treatment toarrest declining quality standards.

Trade Policy to Compete on World Markets

16. The essential objective of Fiji's trade policy reform is topromote a more efficient allocation of resources. As a small economy, theprices of Fiji's exports and imports are determined on world markets andefficient resource allocation would require that relative prices facing Fiji'sproducers and consumers reflect international prices. Currently, this is notthe case due to the considerable variation in protection provided to variousactivities and the different tax treatment of sectors or products. It is

important, therefore, to continue the process of reform commenced in 1988 tomove towards a more neutral set of incentives for the full rdnge of economicactivities. Furthermore, if Fiji's i.xchange rate is set at a competitivelevel, there is no reason to provide high protection for import substitutionor large subsidies to export activities.

17. Structure of Protection. Trade protection is provided primarilythrough import tariffs. Average tariff rates are moderately high and there isconsiderable variation across activities and within groups of closely relatedgoods. Tariff rates on final products are very high, while thnse on rawmaterial are low. As a result, effective rates of protection on bothprocessed agricultural and domestically produced manufactured goods are higherstill, with effective protection levels in excess of 100 percent in severalcases. The high rate of effective protection serves to penalize efficientproducers and contributes to an environment in which rent-seeking behavior isencouraged and inefficient import substitution rewarded.

18. The high and uneven tariff rates also encourage investors to seekreduced rates of duties through exemptions and concessionary rates. The totalrevenue lost through the provision of duty exemptions and concessionary ratesamounted to some 75 percent of tariff collections in 1989. As a result,effective tariff rates vary widely for the same product, depending very muchon access to one of several fiscal incentive schemes.

19. Most quantitative restrictions on imports have been removed. Afew restrictions remain on agricultural products such as irrigated rice anddairy, where domestic production costs greatly exceed international prices.In these cases, licensing should be replaced with tariffs, even if the tariffsneed to be set at a high rate initially. Reducing protection in these sectorswould help lower wage costs, as both classes of goods are important staplefoods. In addition, shifting to tariffs would put an upper limit on thedegree of inefficiency of those sectors, and also ensure that the "quotarents6 to licensed importers are shifted to government tariff revenues,thereby increasing the scope for lower tariffs elsewhere.

20. Tariff Reform. In trade reform, the foremost priority should beaccorded to a shift towards a more uniform and lower set of tariff rates. Inthe near-term, the Government could act to simplify the tariff schedule bymoving in the next Budget to no more than 3 rates of import duty (10 percent,20 percent and 30 percent), with specific rates being replaced by ad valoremrates. The top rate of protective fiscal duty, now 45 percent, should belowered by ,0 percent (as indicated in the 1991 Budget Speech) and a minimumduty of 10 percent should be charged on all imported goods. By 1994, the topfiscal duty rate should be no more than a uniform 10 percent. To offset therevenue losses associated with tariff reform and to shift the indirect taxburden from imports to domestic consumption, a 10 percent value added taxshould be levied on all imports (replacing the existing customs charge). Atthe same time, import duty exemptions and provision of concessionary ratesshould be replaced by a broadening of the duty drawback provisions to includecoverage for the import share of all exporter' goods.

21. Phasing of Reforms. To date, there have been little adverseadjustment costs due to the liberalization measures that have taken place.This, however, is expected to change. As maximum tariff rates are reduced,

- vi -

previously sheltered activities will become progressively more exposed tocompetition and several industries (for example, cement, domestic buildingsupplies) will no longer be competitive. The phasing of tariff reductionswill allow these sectors to adjust, either by improved efficiency or bywinding down of some operations. International experience suggests that 5-7Jears is a reasonable transition period; this would allow sufficien- time foradjustment by those enterprises which can meet internationally competitivestandards. During the transition period, political pressures will emergeagainst reform as some producers will seek either continued high tariffs orexemption from tariff charges in order to retain their protected status.These pressures will need to be resisted. There are, however, likely to becases where the Government may consider it necessary to retain resources inrelatively inefficient uses (e.g. cement production) for social reasons, suchas avoiding unemployment in particular locations. In such cases, activitiesshould be assisted by direct and time-bound subsidies, preferably in the formof re-training programs and unemployment offsets, so that the cost of specialassistance to the rest of the economy is visible and eases the adjustmentburden of the most needy.

22. Export Promotion. Progressive reduction of import duties willimprove the competitiveness of exports and reduce the currently greaterincentive to produee for domestic rather than export markets. However, duringthe transition period, it is important to provide mechanisms--such as the dutydrawback provision for exporters--to offset the penalties imposed by importtariffs on exporters. At present, firms exporting 95 percent or more of theiroutput receive generous incentives in the form of duty-free imports and a13-year tax holiday. The duty exemption provisions should be retained but the13-year tax exemption should be eliminated, bringing Fiji's incentivestructure more in line with those prevailing elsewhere and safeguarding Fiji'srevenue base.

23. Sugar. Sugar remains an important export commodity, withapproximately half of all exports sold under preferential agreements at priceswell in excess of the world market prices. The difference between the worldmarket price and the preferential price paid for sugar constitutes a form ofeconomic rent, or trade-tied aid, which now accrues solely to the sugarcanesector rather than to the economy as a whole. The aid portion of thepreferential sugar price should augment overall Government revenue, ratherthan accrue specifically to the sugarcane sector. Consideration may be givento an appropriate phased increase in the export tax on sugar to offset theresource transfer from preferential prices; this would serve to address boththe potential resource allocation distortions and distributional concernsstemming from the preferential price agreements. Such an adjustment wouldhave relatively little effect on the existing levels of sugarcane productionbut would discourage expansion of sugarcane production into marginal lands(for expanding byproduct sales). The adjustment should, however, take placein advance of the renegotiation of long-term leases on the sugarcane lands,slated for the mid-1990s.

24. Broadening Export Facilities. At present, duty drawbacks areavailable for exporters, but only for narrowly defined inputs, requiringconsiderable paperwork and involving lengthy delays. The duty drawback systemshould be reformed in order to facilitate export expansion. Duty exemptionsfor exporters should be based on an annual presumptory estimation of the

- vii -

import content of exports (by the exporters), with ex-post auditing to assessactual performance.

25. Export performance will also be facilitated by the adequase,efficient and timely provisior of support services. Sustained exportperfotmance needs to be backed by adequate transport, telecommunications,power, water and sewerage facilities. There are signs of emergingbottlenecks, particularly in telecommunications, which may hamper time-sensitive export activities.

26. It will be particularly important to avoid the growing i.nortage ofskills from becoming a barrier to growth, including export growth. In thenear-term, political stability is ne?ded to arrest further outflow of humancapital. In the longer-term, the solution depends on effective domesticeaucation and training efforts. In the short-term, most skills can beimported. Accordingly, quantitative restrictions on imports or licensingrequirements should not be placed on expatriate employment. Administrativedelays in issuing work permits ahould be overcome by streamlined procedures.

27. Public Sector Marketing. The public sector provides marketingservices, particularly for a number of agricultlural commodities. Whila aradical reform of public sector marketing is not proposled, the practice ofawarding monopoly export rights to sole distributors should tL- abolis;hed andthe public sector marketing agencies should be run on commercial grotmds; theyshould not be responsible for aupporting rural inLomes.

28. The recent decision to establish the Fiji National PetroleumCompany (FINAPECO) with the sole right to import petroleum products stands insharp contrast to the rest of the Government's program of deregulation andpromotion of private sector activity. Preliminary estimates indicate thatthis arrangement will impose high costs on Fijian consumers and producers.Once the current contracts aiv completed, consideration should be given towinding up the operations of FINAPECO and replacing it with a capacity tomonitor the landed price of imported petroleum products with an eye toensuring competitive prices.

Tax Policy and Investment Incentives

29. Improvement in relative prices will r.-quire a combination ofexternal trade reforms and domestic tax reforms. The former would bringborder prices in line with world market conditions while the latter wouldensure that there is an efficient level and pattern of domestic consumptionand production. Further tax reform efforts should be focused principally onimproving efficiency while maintaining aggregate revenues at about theircurrent level in relation to national product.

30. At p-esent, the tax system in Fiji is laudable in a number ofrespects; the revenue mobilization effort is strong; revenues are buoyant toincome growth; income and corporate tax bases are broad; and taxadministration highly efficient at a low-cost. The principal deficiencies inthe tax system include: (i) high marginal rates (and a complex rate structure)of personal income tax and high rates of corporate tax; (ii) excessive use oftax expenditures to influence enterprise activity; (iii) a narrow domestik

- viii -

indirect tax base; and (iv) a high degree of reliance on indirect taxation ofinternational trade.

31. Personal Income Tax. The personal income tax is characterized bya complex rate structure and a wide array of exemptions. The averageeffective rate of taxation is low, at 19 percent of taxable income in 1989,and marginal effective tax rates are high, particularly for middle and upperincome groups. A personal income tax system should strive to have a highaverage rate of taxation (for revenue raising purposes) and low marginaleffective tax rates (for incentive purposes). This can be accomplished by anJncome tax simplification effort which would (i) reduce the number of ratebands from 10 to 4 or 5; (ii) eliminate exemptions from self-employed incomearising from tax-holidays; (iii) lower the top marginal rate to 35 percent and(iv) combine the basic and normal tax schedules. A simplified rate structureis constructed (Section 4.14) which improves vertical equity while enhancingcompetitiveness, lessening the cascading of marginal effective rates andreducing administrative costs.

32. Corporate Profit Tax. The corporate income (profit) tax has a lowaverage rate of effective taxation and a high degree of variation in marginaleffective tax rates (and hence cost of capital to the enterprise) dependingupon the ability of enterprices to take advantage of tax holidays, exemptionsor concessionary rates. Also, the liberal use of tax expenditures toencourage enterprise. activity leads to an erosion of the tax base, encouragesrent seeking behavior by the enterprises, and introduces administrativedistortions in the cost of capital, choice of technique and allocation ofinvestment. Furthermore, tax expenditures have been biased in favor of largerand more urban-based activities, despite the benefits associated with lesscapital-intensive, rural based activities. Over time, there is littleevidence to suggest that tax expenditures have been effective in attractingprivate investment; at times they may even inhibit investment or lead to atransfer of the tax burden from Fiji to the nation of origin of the investor.The corporate income tax system could be improved by: (i) charging a singlerate of tax (at 30-35 percent); and (ii) replacing existing tax holidays by aninitial depreciation allowance, indexed for inflation.

33. Trade Taxes. As discussed in paragraph 20 above, import dutiesare the principal form of indirect tax in Fiji. Import duties, which are highand uneven, eroded by exemptiorss and concessionary rates are applied on bothan ad valorem and specific tate basis. In line with efforts to reduce inwardorientation, tariffs should be reduced. A reduction in tariffs to a uniformrate of 10-15 percent is estimated to lead to a revenue loss of approximately4-6 percent of GDP. This loss could be offset by broadening indirect taxationof domestic goods and services and eliminating a number of the exemptions andconcessionary rates of import taxes. Such exemptions and concessionary importduty rates lead to a revenue loss of 75 percent of total import duties, andexacerbate distortions introduced by a high and uneven tariff srhedule. Iftariffs were reoiced to no more than 10 percent, then there would be littlereason to provide such concessions (with the exception of duty drawbacks forexporters) on either equity or efficiency grounds.

34. The design of import taxes can also be improved. Specific rates,which currently apply to goods which generate 34 percent of total importduties, should be replaced by ad-valorem rates to improve the responsiveness

- ix -

of import duties to inflation. The distinction between fiscal duties andcustoms duties should be abolished, and replaced by a single rate of importduty, simplifying the administration of import taxes.

35. Excises and Turnover Taxes. Taxes on domestic transactionspresently generate little revenue and are levied on a narrow base. A10 percent ad valorem turnover tax is applied on fifteen services andcontributes only 7 percent to domestic indirect taxes. Of this, the hotelturnover tax accounts for 65 percent of all turnover tax revenues. Exciseduties are applied to 47 domestically manufactured products (but not toimports), of which 87 percent of the revenues accrue from the manufacture ofalcoholic beverages and cigarettes. By exempting imports from excise duties,the difference between the import duty rate and excise rate determines thenominal degree of protection. Uniform application of excise duties todomestic products and competing imports is advised, in order to eliminate theprotective function played by excises.

36. In tax reform, the highest priority should be accorded to theshift from a narrowly based domestic indirect tax sys m to a more broadlybased tax on domestic consumption. Such a shift will nelp improve theneutrality of the tax system with respect to the place of origin ofproduction. In this respect, the Government's decision to implement a broadbased General Sales Tax (a value-added type of tax) starting in mid-1992, isvery important. The GST will replace turnover taxes and excises, except forselected excises on luxury goods. The GST is expected to be broadly based andexclade financial services, essential foodstuffs and the proceeds of verysmall businesses. Central to the success of the GST will be theimplementation of a timely, low-cost, tax crediting system in which GSTpayments for inputs would be offset against GST obligations on the sale ofproducts.

37. Tax Policy Simulations. A tax policy model was developed toanalyze the simultaneous reduction of import tariffs and the application of avalue added tax (see Section 4.28). The simulation results !ndicate that areduction of tariffs to 10 percent, imposition of a GST (at a 10 percentrate), elimination of a number of import duty concessions and the applicationof selected excise duties would lead to a net increase in indirect taxrevenues of 17 percent. If capital goods were excluded from both import taxesand the GST, hence lowering the cost of capital economy-wide, then totalindirect tax revenues would still be slightly above baseline revenues. Whiletariff reform must be carefully coordinated with reform of the indirect taxsystem, the simulation model results suggest that a reduction of tariff ratesto a level of 10 percent can be accomplished without jeopardizing fiscalstability.

38. A Tax Reform Package. Tax reform efforts to date have beenundertaken in a gradual ad hoc fashion. The credibility of the reform effortwould be enhanced, and the probability of policy slippage reduced, if taxreform efforts were introduced as part of a coordinated package, with a periodof 4-6 yeats provided for implementation. This would provide investors with aclear view of the Government's tax policy stance, while reducing opportunitiesfor policy reversal.

Enterprise Regulation

39. Trade and tax policy reforms described above would help toestablish a structure of relative prices that reflects the costs to Fiji ofundertaking activities that substitute for imports or provide exports to therest of the world. If such price signals are to be translated into economicactivity, then resources must be free to exit from non-competitive sectors andenter and operate efficiently in the more competitive sectors. This willrequire a program of domestic market regulatory reform which focuses onimproving competition, by strengthening pronerty rights, reducingdiscriminatory administrative authority '.7:4 providing uniform treatment of allclasses of investors. Simultaneous prc,r in trade, tax and regulatoryreform is needed to ensure a speedy inve. nr response and to avoid macro-economic destabilization.

(i) Factor Markets

40. Land. Of all of the regulatory issues confronting the Government,land and the operation of the land market is the most complex. Land use andregulat3on is a sensitive issue, since some 83 percent of the country's landis to be retained by ethnic Fijians (as native land) in perpetuity, with theremainder allocated to freehold and crown land. The regulation of nativelands suffers from: (i) highly complex and time-consuming administrativesystems; (ii) severe under-pricing in establishing the rent for native landholdings; (iii) lack of adequate tenure security for lease holders and (iv)weak institutional support. The land issue may very well lead to substantialeconomic dislocation in 1996, when some 60 percent of the sugarcane landleaseholdings are due for renewal. Underpricing native lands, combined withabove-market pricing of sugarcane to the tenants has resulted in a situationin which native land owners would be reluctant to renew leases on sugarcanelands. In the long-run, a shift of land ownership from native trust to anindividualized system of private property would improve the operation of theland market. In the meantime, a reform program can be mounted within theframework of the native trust framework. High priority should be accorded to:(i) preparation of a single, non-conflicting set of land and land useregulations; (ii) pricing lease values based on comparable freehold prices,with a decentralization of authority to local government to implement therenewal of land leases; (iii) provision of at least 30 year leases to tenants;and (iv) shifting the role of the Native Land Trust Board from that of aproperty manager to an arbitrator of native land disputes.

41. Labor. The continuing loss of skilled labor is of serious concernboth because of its effect on long-run capacity for growth and because of theshort-run effects on production costs and competitiveness. Efforts to haltthe outflow of skilled laborers would yield considerable benefit to theeconomy in terms of both lower costs of production and savings in trainingoutlays. The importance of stemming the flight of human capital underscoresthe importance to growth of achieving a stable political environment.

42. Fiji requires a mix of economic and labor market policies thatdelivers wage levels that correspond closely to productivity levels, a wagestructure that facilitates the allocation of labor from low to highproductivity uses, a public sector wage structure that resembles that of theprivate sector and wage employment growth in excess of labor force growth.

- xi -

The labor market has been unable to meet these important objectives. Comparedto other small, middle-income economies, Fiji's wage rates are high; publicsector wages are well in excess of private wages; Government plays an activerole in setting both minimum wages and wage increases; and, due toinstitutional rigidities, labor costs vary widely across sectors. As aresult, growth in formal sector employment has been slow and the labor markethas been unable to meet the demand for a skilled, commercially oriented workforce.

43. There are three key priorities for labor market reform: (i) tomaintain a level of real wages competitive with countries of a similar levelof income and productivity; (ii) to increase the flexibility and allocativeefficiency of the labor market; and (iii) to increase labor productivity,particularly in the skilled and semi-skilled segments of the work force.Macroeconomic policy will be the most effective means of adjusting the wagelevel; in the traded goods sector, a reduction in protectionism should resultin a more competitive wage structure. The Government can reinforce this byestablishing a level of wages for unskilled public sector employees that ismore on par with private sector wage rates. Flexibility will be enhanced byeliminating the issuance of Wage Council decrees (minimum wage decrees), byreviewing Fiji's labor laws to eliminate opportunities for predatoryindustrial actions and by abolishing the labor quotas which provide rigidguidelines for the ethnic composition of the civil service (and whichspillover into the private sector). To upgrade labor productivity, immediateaction is required to rationalize primary and secondary education services,increase the supply of high quality vocational training institutes and promoteapprentice scaemes in the firms. In light of the shortages of skilledlaborers, the Government should (as mentioned above) provide work permits toskilled expatriates (for a period of up to 3 years) on a near automatic basis.

44. Capital. An efficiently functioning financial market is essentialto mobilize savings and allocate resources to the private sector. Bycontrast, capital controls (particularly those put in place to discouragecapital flight after the events of 1987) discourage investment, reducemonetary discipline and raise transaction costs. These should be replaced byindirect monetary controls which would also serve to encourage real interestrates at levels that are positive in real terms. A second source of financialmarket distortion is administrative under-pricing of term finance. As aresult of a legacy of subsidized and targeted term-lending and investmentprograms, real interest rates for term loans are low or negative in realterms; commercial financial institutions are crowded out of this marketsegment; and access remains poor. Most importantly, the discretionary natureof directed credits exacerbate the distortions which result from unequallevels of trade and tax protection. Capital market prospects can be improvedby: (i) divestiture of the Stock Market by the Fiji Development Bank (FDB);(ii) abolition of FDB subsidies and sectoral allocation guidelines; (iii)liberalizing Provident Fund guidelines to allow for offshore deposits; and(iv) bringing the FDB within the supervisory domain of the Reserve Bank.

(ii) Product Markets

45. Entry and Operation of Foreign Firms. Foreign direct investmentwill be crucial in the 1990s to mobilize the savings needed to financeinvestment, access new markets and provide an important source of managerial

- xii -

and technical skills. At present, the foreign direct investment regime is nottransparent. The emphasis is on 'flexibility' in regulating foreigninvestors, which, while eliminating much red-tape, introduces uncertainty forpotential investors and places too much discretionary authority in the handsof officials. Certain sectors, most notably trade and small tourism projects,are closed to foreign investors; local equity is required to access FDBfinance; and, minimum capitalization requirements are in force. The firststep would be to clarify the foreign investment regulations in an investmentcode that would carry the force of law. In addition, sectoral accessrestrictions should be lifted; minimum size requirements eased and localparticipation requirements reduced in scope.

46. Price Controls. The Government maintains a battery of price andwage controls, the coverage of which extends far beyond that prevailing inmost market economies. Price controls, particularly those under the authorityof the Prices and Incomes Board (PIB), serve only to hamper the economicfunction of markets and run contrary to the aeregulation of external trade.The most appropriate course of action is the abolition of the PIB and thenullification of the existing price control legislation.

47. Public Enterprise Management. Fiji's public enterprise sector islarge, accounting for approximately 45 percent of GDP and about one-third ofwage employment. Many of these are providing commercial functions, but haverequired considerable budgetary support to remain in operation. The publicenterprises operate under a regulatory regime that is quite different fromthat of the private sectors exemptions are provided from taxation, importrestrictions, environmental and occupational standards; certain enterprisesare provided sole authority to engage in production while others enjoy anatural monopoly because of economies of scale. Historically, the Governmenthas underwritten the losses of the public enterprises, through subsidies andpreferential access to low-cost credit.

48. The Government has attempted to induce greater competition bytransforming Government owned enterprises into Government owned joint-stockenterprises ('corporatization'). This change in ownership status has,however, had relatively little effect on either operating efficiency ormanagement autonomy. Reforming the public enterprise sector is important toinstill greater domestic competition, to reduce the crowding out of theprivate sector from commercial activities, to reduce the fiscal drain and tofacilitate a refocusing of public sector management on the provision ofessential infrastructure and human resource development. The highestpriorities in public enterprise reform would include: (i) equal regulatorytreatment (in taxation, pricing, market access) of parastatal and privatecompanies; and (ii) encouragement of greater managerial autonomy within theparastatals by shifting ownership from line Ministries to the Ministry ofFinance. Both of the above sets of actions should be accorded a high priorityin near-term reform programs. In addition, efforts should be made to developa timetable for broad-ranging privatization of the parastatal companies,starting with the more commercial export-oriented firms such as Air Pacific,IKA, the Fisheries Corporation and the Pine Commission.

49. Environmental Sustainability. Without proper guidance, an outwardoriented growth strategy, sparked by an increase in private investment, willimpact upon the preservation and sustainable use of natural resources. While

- xiii -

the private sector should be encouraged to exploit commercial opportunities,the Government must ensure that the distinction between social and privatevaluation in the use of natural resources are taken into account in investmentand allocation decisions. At present, environmental problems are not severein Fiji. However, greater attention is required to developing better plansfor coastal management, to improve the structure of fees charges for usingtimber and coastal resources, instituting mandatory environmental appraisalrequirements for selected classe- of manufacturers and upgrading institutionalcapacity to monitor conformity with environmental guidelines and regulations.

FIJI

INCENTIVE POLICIES FOR GROWTH

A. Introduction

1.1 With a population of 730,000, over 330 islands, a total land areaof 18,272 km2 and per capita income of $1,900, Fiji ranks as one of thelargest and most developed of the Pacific Island economies. A wide range ofclimatic conditions, combined with fertile soils and an abundant stock offorestry, minerals and fisheries resources provide Fiji with the naturalwealth required to support sustained growth and economic development. Likethe smaller Pacific Island nations, Fiji is constrained by both external andinternal remoteness, small domestic markets and high costs of publicadministration. However, such constraints are not as severe in the c& . ofFiji because of it's relatively well developed transport infrastructure, it'shistorical role as a transhipment hub for the smaller Pacific economies andit's notable accomplishments it. human resource development.

1.2 After a decade of near stagnation in growth and inward orientation,the Fijian economy was rocked by two political coups in 1987. The Governmentacted promptly to stabilize the economy and put in place an adjustment programdesigned to restare investor confidence, increase outward orientation andplace the economy on a higher growth path. Key elements of the stabilizationand adjustment program included a series of currency devaluations, fiscalrestraint, trade deregulation and tariff reform packages, a foreigninvestment/export promotion program and a tax reform package. The initialresults of the Government's reform efforts have been impressive in terms offinancial stability, investment, employment and growth; in three year's time,considerable progress has been made in increasing growth, raising employment,expanding exports and diversifying the economic base. Nonetheless, publicpolicies continue to dampen Fiji's growth and development prospects. Theprinciple challenge for Fiji in the 19908 will be to maintain the post-1987growth momentum by expanding non-traditional exports and services in a fashionwhich provides for increasing employment and broad-based participation in thedevelopment process. This will require a sustained increase in domesticinvestment and in the efficiency with which domestic resources are used. Togenerate the investment response required, the Government will need toencourage structural reforms by continued emphasis on the provision of apolicy framework conducive to private-sector led growth and development.

1.3 This report discusses the key elements of the policy frameworkconducive to medium-term growth and development, which are: (i) a stable andcompetitive macro- and financial environment; (ii) an outward oriented traderegime; (iii) an efficiency oriented tax system; and (iv) a regulatory regimethat encourages competitive private initiative. To maintain t.th thecredibility and momentum of the policy reform process, a detailed, pre-announced package of reforms would be of considerable benefit. This report isan attempt to chart out a consolidated and consistent set of near and medium-term recommendations for policy reform to underpin the process of efficientand sustained growth and development.

B. The Structure of the Economy

1.4 The structure of the Fijian economy exerts an important influenceover the pattern of growth and the opportunities for productive investment.In addition to small domestic markets, geographic span and remotenesstypically associated with the South Pacific, notable structuralcharacLeristics of the Fijian economy include: (i) a sharp division alongethnic lines; (ii) dependence on a narrow range of primary products andservices in production; (iii) narrowness of paid employment; (iv) dependenceon foreign markets for trade and service flows; (v) relatively modest externaldebt exposure; and (vi) the important role of the public sector in many facetsof the economy. These structural features are discussed in more detail below.

1.5 Population Mix. The Fijian population is comprised of nativeFijians (47 percent), Fijians of Indian ethnic origin (47 percent) and a smallgroup of Melanesians, Polynesians, Chinese and Europeans. The Indianpopulation was brought to Fiji by the British as indentured laborers todevelop the sugarcane industry in the mid- to late 1800's. As of 1901,Indians comprised 14 percent of the total population and Fijians 78 percent;by 1986, the ethnic balance had shifted with Indians comprising 49 percent ofthe total population and ethnic Fijians 46 percent. The changing ethnicbalance has been a source of political and economic tension. Besidesdominating the smallholder sugar sector, the Indian community holds aprominent position in commerce, industry and the professions. Through nativetrust legislation, the Fijians own close to 83 percent of all land and play adominant role in commercial agriculture and tourism.

1.6 Production. The largest sector of the Fijian economy is services,accounting for 59 percent of GDP. Of services, tourism and distributionaccount for 21 percent of GDP; transport and communications for 13 percent ofGDP and public administration and other social services for 16 percent of GDP.

FlgLre 1: ECONOIC S IC'WU, IBES T ;Il GDP *t 1977. 190-)(X of GOP at current plees) change at 1977 prices)

Shares1980 1985 1990 in GDPlEurtct t 9 n . Eat. (1990) I/

hgtulc lUxe 30. D_ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _

Sugar Cone -16.2 -29.1 0.0 9.2Nonsugir agriculture 3 2 -0 7 4.6 18 .Kanufacturing -7.9 -12.9 6.1 11.4Services -0.8a 0. 2 6.3 65.7

it/ At constant 1977 prices.

Source: Current Economic Statistics andstaff estimates.

Bft?1C5S a9.n

The second largest sector is agriculture, accounting for about one-fifth ofGDP. Within agriculture, sugar production accounts for 9 percent of GDP whilecrushing and refining accounts for 3 percent of GDP or approximately half ofmanufacturing output. outside of sugarcane, the agricultural sector is

dominated by subsistence foodcrop production, coastal fisheries, plywoodproduction and import substitution activities. In manufacturing, whichaccounts for 12 percent of GDP, aside from sugarcane processing, otherimportant sub-sectors include textiles and agro-processing.

1.7 Employment. Out of a total adult labor force of 250,000, nearlytwo-thirds are involved in self-employed activities, principally in theagricultural sector and in small-scale trade and distribution. Paidemployment accounts for approximately 90,000 persons, of which the Governmentis the single largest source of paid employment, accounting for 35,000workers, either hired directly for public administration or indirectly throughthe public enterprises. The second largest source of paid employment is inmanufacturing, with approximately 21,000 paid employees, concentrated in thetextiles industry. Other important sources of paid employment include thehotel industry, transport, finance and construction. Urban unemployment is

principally a problem of secondary school leavers and is estimated at 6percent of the total labor force.

Table t PAID UtLOET St 111tMM, 1lW01990

1980 1986 1987 1988 19809 1990

A rlculture, forestry A fiaheries 2.6 2.2 2.0 2.0 2.1 2.8M nino and quarrying 1.1 1.2 1.4 1.4 1.5 1.4Menufacturing 1i.4 14.0 1S.9 14.0 19.7 21.1Electricity, gas and water 2.3 2.1 2.1 2.5 2.8 2.6Building and construction 9.0 7.0 5.4 5.3 5.2 5.7Distribution (including tour) 18.4 14.1 12.0 11.6 13.7 14.9Transport and co cauni rtiens 8.1 7.7 7.7 8.0 9.9 9.5Finnc and insurance 4.4 4.9 5.2 6.1 5.4 5.6Other service 2A 23 2LA 2L 23 212

Total 80.4 80.0 78.8 77.7 88.2 89.0

Source: Current Economic Statistics and staff stimates.

1.8 Balance of Payments. As is characteristic of small islandeconomies, Fiji depends heavily on external trade and non-factor serviceflows. Together, merchandise trade and non-factor service receipts would beequivalent to 65 percent of GDP. Fiji typically runs a deficit on themerchandise trade account which is offset by net non-factor service receiptsand capital inflows. For example, in 1990, Fiji ran a trade deficit of F$170million that was offset by a surplus in net factor service receipts of F$121million and net private capital inflows of F$94.8 million. By value, sugar,

1/ Open unemployment in Fiji is defined as those individuals who have beenregistered as seeking employment but have been unable to find work.Because of frequent travel between rural and urban areas, it is difficultto assess whether those registering as unemployed continue to search forurban employment or have returned to employment in the countryside. Inurban areas, there is relatively little evidence of non-frictional openunemployment yet. There is, however, evidence of peri-urbanunderemployment, particularly of the female labor force, judging from therapid growth in low-wage, female employment in the textiles industry.

- 4 -

textiles, gold and forestry products account for 80 percent of totalmerchandise exports while capital goods, manufactures, petroleum andfoodstuffs would be the largest imports. Tourism accounts for the largestshare of non-factor service receipts, and private investment tends to dominatecapital transfers.

Tbli Si W fMCE Or PAUMP. 1hI90(UN millII on)

198iS lq9 1990

1380.7 140.3 171.70. 5~~~~~~7.0 81.4 49.4

Fish products 83.7 80.0 88.2Forestry products 18.6 21.7 25.0Othor 63.8 115.8 154.2

Import;tf.o.b. 383.2 4t0.1 608.6

Petroleum products. c.i.f. 81.6 40.8 82.4Manufactured good.. if 101.4 15.7 166.S5Machinery and transport. c.i.f. 67.8 142.0 238.0

Trado balance -4k.4 -100.9 -170.2Factor Services (net) -32.2 -86.6 -31.0Nonfactor services (net) 82.8 116.0 152.5Prilvt. tranefers (net) -3.6 -1S.0 -26.6Off;icil trcnsfera (net) 83.7 84. 41.1Current acunt balance 88.8 0.1 -34.8Officirl capital (net) -18.4 -41.4 -29.1Private capital (net) 40.7 Be.9 94 .Short-term capital (nct) 14.6 8.3 -8.5Capital account balane 42.0 0.8 87.2Errors and omissions 17.8 -12.2 23.5Overall bclance 98.3 -11.8 48.4

Source: Remerve Bank of Fiji Quarterly Reviewand staff stiat"s.

1.9 External Debt. As a result of relatively cautious fiscal policyand a strong tax effort, the Fijian economy has a only modest foreign debtexposure. Total external debt (DOD) is equivalent to 25 percent of GDP andexternal debt service payments average 13 percent of net (of re-exports)export earnings. The Government has, however, financed a substantial share ofpublic expenditures from domestic savings. Total public sector domestic debtobligations are equivalent to 27 percent of GDP and domestic debt servicepayments are equivalent to 15 percent of domestic revenues.

Table : BI ASM rSE s 1965-90

1988 1989 1990

External debt/ODP J/ 37.0 30.1 28.2Public 28.2 21.4 16.6Pivate 8.8 8.8 8.6

Eaterncl debt service ratio JI 15.1 14.1 12.7Public 10.8 tO.4 8.6Private 4.3 3.7 4.1

Dometic debt/ODP / 36.0 31.2 28.9Domeatic debt service ratio S/ 29.1 16.4 18.4

jt/ Debt outetanding and disbursed.k/ In percent of exports of goods and services.

/ Central government debt only.In percent of domestic revenues.

Source: Budget Speech, 1991 and staff estimates.

1.10 Role of the Public Sector. The public sector (includes 52parastatal enterprises and financial institutions) play an important role in

the Fijian economy. Although precise estimates are unavailable, the public

sector would account for approximately 45 percent of gross domestic product.2

Besides being the largest single source of paid employment, the Governmentplays a leading role in agro-processing, forestry production, agriculturalmarketing and storage, inter-island shipping, air transport, communications,power generation and financial intermediation. Productive sectors in which

the Government does not directly participate are few, most notably tourism,textile manufacture and field crop production.

C. Econonmic Performance: 1980 to 1986

1.11 The economic performance of the Fijian economy has been heavilyinfluenced by the interplay of external events and public policy. Between1965-1970, GDP grew by an average of 7.2 percent per annum. This slowed to

5.1 percent between 1971-1975 and 4.0 percent between 1976-1980. Thereafter,gtowth slowed to a near halt. The per-;d 1980 to 1986 was marked by economic

stagnation, attributable to structural weaknesses, adverse externaldevelopments and an inward orietnted approach to economic management.

Figure 2: REAL GDP AND GOP PER CAPITA, 1980-86 F

GDP (011S) GDP per capita (r Flgue 3: TRED N EPRTS OF DSAND NONFACTOR SERVICES, 1980-86

U58 mlllon350

/ eal GDP per capita s.o3

__ /~~~~~~~~~~&o100 -o// \\ oS'\s / ~~~~~~~~~~~~~~300 \,,,,,,...........,....."""""'"'"

.................

7 / 7 1 t,DC0 250 \ Nonfactor service

7EO _ \ { \ / / 2C0 s \ ~~~~~~~receipts/200

MD~~~~~~~~~~~~~~~o M1{O 19e1 191S 19821 1984 1983 n98s*9W liat t9oZ $953 Li" 19qi5 t9ed

2I The parastatal enterprises had a net worth of approximately F$l billion in

1988.

- 6 -

1.12 Growth Performance. From 1980 to 1986, real GDP increased by 1.9percent per annum, while population increased by about 2 percent per annum,resulting in a slight fall in per capita incomes. Paid employment stagnatedat 80,000 positions while the total labor force grew by nearly 40,000 persons..'he primary cause of stagnant growth was a decline in export earnings, from$_43 million in 1980 to $254 million in 1986; non-factor services continued togrow by 3.7 percent per annum, which partly compensated for the decline inmercha.2dise exports. Throughout this period Fiji continued to rely heavily onsugarcane as the largest--albeit declining--source of foreign exchangeearnings; export earnings from sugarcane fell from $228 million in 1980 to$125 million in 1986.

1.13 External Environment. As noted above, an adverse externalenvironment contributed to the lack of sustained growth and employmentgeneration. Fiji's net barter terms of trade fell steadily, by 25 percentbetween 1980 and 1985 (see Figure 4). In addition, the nation was struck bysevere cyclones in 1983 and 1985. These negative external developments wereoffset by two positive factors. First, the bulk of Fiji's sugar exports werepurchased by the EEC at support prices well in excess of world market prices,under the commodity assistance provisions of the Lome Agreement. Second, theupsurge in economic growth in the Pacific Rim nations fueled particularlystrong growth in tourism and in the extractive sectors. Despite anunfavorable external environment, Fiji allowed it's currency to appreciatestrongly through 1985 (see Figure 5), further reducing prospects for growth inexports and enhanced domestic competitiveness.

Figure 4: NET BARTER TERMS OF TRADE, 1980-85

(160=00) I~Figure 5: REAL EFFECTIVE EXcHNGE RATE, 1980-85(1980=100)

103

Lao 0

so ~~~~~~~~~~~~~~~~~~~~~~~102

'U~~~~~~~~~~~~~~~~~9

1110 111 1S2 1693 1t54 1 70 I I , I I I

190 1D 901 1982 1699 1604 1968 1986

- 7 -

1.14 Public Policy. The Fijian economy was unable to adjust to anadverse external environment, during the early 1980s, due to2 (i) a policyframework wbtch accorded the public sector a dominant and sheltered role inthe more commercial sub-sectors; (ii) an inward oriented trade policy; and(iii) a regulatory approach to private investment. A five-year planningframework was used to set growth and investment priorities. Plan objectiveswere to be fulfilled by a combination of direct public sector involvement inthe commercial sectors and extensive controls on external trade, domesticpricing and investment allocation. At the same time, an extensive system oflicenses, trade controls and high protective tariffs were used to regulateimports. High rates of duties on traded goods and high marginal rates oftaxation were used to restrict imports and channel resources to the publicsector. An extensive system of internal price controls, investmentregistration requirements, interest rate, credit allocation and foreignexchange controls were used to affect private resource flows. In agriculture,self-sufficiency campaigns were mounted for rice and dairy products, supportedby import restrictions and high rates of public infrastructure investment.

1.15 The private sector response to the policy framework waspredictable. Private investment fell in real terms from FS134 million in 1980to F$106 in 1986. To encourage greater private savings and investment, theGovernment decontrolled interest rates in 1985. While this did have theeffect of encouraging an expansion of financial assets, the lack of anincentives f.amework conducive to private initiative inhibited recovery inprivate investment outlays.

lukiti: EcIRAL UWIU1T IuS, 19614

11901 1982 198l 1984 198 18

fF3uLlIe.rB *t currant piicre)

Current Receipts 268 268 298 888 848 S4TaX Rovenue 214 211 287 278 279 276Nontex Revenue 41 44 St 81 8e 61Orents 8 10 10 10 11 10

Current Expenditure 212 247 286 824 820 881Capital Expendlturo 79 79 48 49 8S 88Nt Lending l 12 7 8 8 82Total Expenditure &

Not Lending 807 889 841 877 888 418

(In Pereent of (P)

Current Recoipt. 24.9 28.0 26.1 26.8 26.8 28.8Tel Revenue 20.8 10.9 20. 1 21.4 21.2 18.8NonteX Revenue 8.9 4.0 4.8 4.0 4.8 4.1Orentn 0.8 0.9 0.9 0.6 0.8 0.6

Current Evpendituro 20.0 22.2 28.1 28.4 24.8 22.8Cepitel expenditure 7.8 7.1 4.2 8.9 4.0 8.6Net Lendin. 1.5 1.1 0.6 0.2 0.8 2.1Overall 8onlnce (Dofeiit -) -4.1 -6.( -8.7 -8.1 -2.8 -4.7

Source: Date provided by FPji I uthoritle.o

1.16 In addition to the decline in private investment, there was asteady erosion in the level of public investment. Public investment fell, inreal terms from 13 percent of GDP in 1980 to 5 percent of GDP in 1986. At thesame time, public expenditures remained steady at approximately 27 percent of

-8 a

GDP. Two factors explain the falloff in public investments (i) the completionof major infrastructure projects in the late 1970s; and (ii) tncreasing demandon public expenditures to finance losses incurred by public enterprises. From1985 to 1987, there was a net outflow of F$20 million per annum from thecentral government budget to the public enterprises to finance enterpriselosses.

D. Economic Performance: the 1987 Shock

1.17 The Political Shock of 1987. 1987 marked an important turningpoint for the Fijian economy. Following the elections of 1987, two militarycoups occurred, on the 14th of May and again on the 25th of September, 1987.Thereafter, an 'interim' government was appointed, initially for a period oftwo years, and Parliament was dismissed.

1.18 Private Sector Pesponse. The private sector response to thesepolitical actions was swift. Economic activities in the productive sectorsslowed, due to disruption in sugarcane harvesting and a halt to investment.Tourism and transport experienced a precipitious drop as alarm over securityconcerns led to widespread cancellations of visitors' holiday plans. GDP fellby an estimated 6.3 percent in 1987, accompanied by a decline in paidemployment from 80,000 in 1986 to 77,000 by the fourth quarter of 1987. Asinvestors attempted to liquidate assets, the outflow of private capitalir.creased substantially and gross official reserves fell to less than 5 monthsof annual import requirements. Emigration, predominantly of skilled personnelof Indian ethnic origin, averaged nearly 6,000 persons per year resulting insevere shortages in key areas such as health services, sngineering, publicadministration, accountancy and finance. Inflationary pressures began tomount due to monetary expansion in late 1987 and early 1988, itself areflection of rapid growth in private liquidity in the banking system.Inflation, which averaged 3.6 percent in the first half of the 1980s and 1.8percent in 1986, increased to 5.7 percent in 1987 and to 11.9 percent in 1988.Reflecting the fall in economic activity, tax collections on imports fell andreceipts from individual and corporate income tax declined.

1.19 The Stabilization Program. The Government reacted promptly to thiseconomic crisis by enacting a series of policy measures designed to restorefinancial stability, protect official international reserves and restoreexternal balance. Key stabilization policies included: (i) currencydevaluation, by 18 percent in June and by another 15 percent in October; (ii)active intervention in the domestic treasury bond market, on the order ofF$53 million in 1988 to absorb excess liquidity; and (iii) a reduction infiscal expenditures, in real terms, by 7.2 percent in 1988 to match theexpected downturn in tax collection. Expenditure restraint was achieved by a15 percent reduction in civil service wages and salaries, together with a 25percent reduction in military wages; grants and transfers to publicenterprises were reduced by 50 percent and major capital outlays weredeferred.

1.20 Expenditure Restraint. Through careful fiscal management, theGovernment managed to maintain fiscal balance and avoid the inflationarypressures associated with the two currency devaluations in 1987. In constantterms, public expenditures and net lending fell by 7 percent in 1988 beforeincreasing by 22 percent in 1989 and falling again by 0.4 percent in 1990.

- 9 -

After recording a fiscal deficit of 5.1 percent of GDP in 1987, the Governmentwas able to reduce net lending and bring the deficit to 1.1 percent of GDP in1988. In 1989, the fiscal deficit widened to 2.7 percent of GDP due to anincrease in public investment and a sharp rise in domestic borrowing to absorbexcess private liquidity. In 1990, the overall deficit was reduced to 0.8percent of GDP, and in 1991, the Budget calls for a modest surplus to beachieved through contraction in real erpenditures. Throughout this period,restraint in public sector wage awards have been the principle instrument usedto manage current expenditures. After the 197 wage cuts, public sectorsalaries were increased by 6 percent and then again by 11 percent in January1989. An additional 6 percent wage increase was granted in July 1989 andanother 6 percent in January 1990.

E. Starting the Process of Structural Adjustment: 1988 to 1990

1.21 The seriousness of the economic downturn associated with the eventsof 1987 engendered a reappraisal of public policy and development strategy.To restore investor confidence, the Government embarked on an ambitiousprogram of structural adjustment centered on enhancing competitiveness byproviding an incentives environment conducive to private sector investment andgrowth. The Government's willingness to shift from a public- to a private-Eector led growth strategy was signalled by a shift away from a highlyinterventionist five year plans to an emphasis on policy-based strategyformulation developed in a National Economic Summit in June 1989.8Subsequently, the Government enacted an adjustment program, the key elementsof which include: (i) a trade reform program; (ii) a foreign investment/exportpromotion program; (iii) a direct tax reform program; and (iv) corporatizationof key parastatal enterprises.

1.22 Trade Reform. The trade reform program fe.cused initially on theremoval of quantitative restraints to international trade in the manufacturingsector. In mid-1989, the Government enacted a ser.ies of trade reformmeasures, the most important of which was the replac'ment of import licenserequirements for 34 manufactured products with tarifft, ranging from 50 to 70percent. In the 1990 Budget, tariffs were reduct:d fU' textiles, motorvehicles and selected imports required by the tourism industry. Fiscal tradeduties were lowered from a ceiling of 50 to 30 percent in fruits, vegetableand juices and from 30 to 10 percent on key industrial mports (computers,communication and transportation equipment). In the 119. Budget, licensingco-rrols were removed from a numbec of livestock and piocessed food products,the top rate of protective tariff (fiscal duty plus customs duty) was loweredfrom 60 to 50 percent and duties were reduced proportionately for the majorityof goods in the tariff schedule. At the same time, export duties on sugar,molasses, gold and silver were reduced from 5 to 2 percent. The Governmentalso announced it's intention to implement a broad-based value-added tax inmid-1992 as part of a drive to shift the locus of indirect tax collectionsfrom external trade to domestic consumption.

3/ Republic of Fiji, 1989. Policies and Strategies for the Short and MediumTerm. Suva, Fiji. This framework was endorsed by the Bank in Fiji: ATransition to Manufacturing, 1987.

- 10 -

Tabl.e' E11MAL aO_VU mii. 1,7401

1987 186 1989 1990 1991eudgot

(Ft miliIon at current prices)

Current Receipts 842.2 894.8 44.7 816.2 524.5Tom Revenue 266.7 292.9 381.4 427.2 426.1Nontaa Revenue 64.1 79.7 71.8 78.5 78.0Oranta 11.4 22.2 12.0 13.5 18.4

Current Expenditure 85.4 842.2 400.0 429.0 488.4Capitol Expenditure 48.7 68.8 91.6 96.8 90.8Not Lending 12.0 6.7 21.6 6.4 -9.1Total Expenditure A

Net Lending 416.1 412.4 518.4 582.2 819.6

Real total expenditureA net lending / 281.2 215.4 261.6 262.4 229.9

(In Percent of CP)

Current Receipt. 28.7 25.7 26.9 25.8 28.6Tax Revenue 18.5 19.0 21.3 20.9 19.2Nontex Revenue 4.4 8.2 4.0 8.7 8.5Grants 0.8 1.4 0.7 0.7 0.8

Current Expenditure 24.6 22.2 22.8 21.0 19.7Capital Expendlture 8.4 4.1 5.1 4.7 4.1Not Lending 0.8 0.4 1.2 0.8 -0.4Overall ea lonce (Deficit -) -5.1 -1.1 -2.7 -0.8 0.2

i/ At conetant 1977 prices using implicit ODP deflator.

Source: Budget Speech. 1991.

1.23 Foreign Investment/Export Promotion. To spur growth, an exportpromotion program was put into place, chief elements of which included:(i) development of the Fiji Trade Board as a one-stop foreign investmentadvisory and promotion body; (ii) provision of a 13-year corporate tax holidayfor new export-oriented investors; (iii) provision of duty free imports ofcapital goods and raw materials for export production; (iv) easy access tolabor permits for expatriate staff; and (v) guaranteed access to foreignexchange for working capital needs and for profit and dividends remittance.

1.24 Tax Reform. Despite relatively wide tax bases, top marginal rateson corporate and personal tax had been increased appreciably in the early19809 to finance rising public sector wage settlements and increesed debtservice requirements. In the 1990 budget, a 20 percent reduction inindividual tax rates was enacted and the tax threshold was increased to exemptlower income households from individual taxation. In the 1991 budget, reformwas continued by broadening the income tax base to include agriculturalproducers and public enterprises. Corporate tax rates were reduced to 40percent for foreign owned corporations and to 35 percent for domesticcompanies. The main effect of these reforms was to bring about greateruniformity between Flii's individual and corporete tax rates and to bringFiji's top marginal tax rates into closer alignment with it's Austronesianneighbors. In addition, to improve the treatment of foreign investors, dualtax treaties were entered into with Australia and Japan.

1.25 Public Enterprise Reform. To provide greater opportunities forprivate investment, the Government embarked on a program of public enterprisereform. The main focus of this effort since 1988 has been corporatization, or

- 11 -

the conversion of public enterprises or departments, into Government ownedlimited liability corporations. Since 1988, public enterprises which havebeen corporatized include the Fiji Pine Corporation, the IKA Corporation (TunaProducer) and the Department of Post and Telecommunicat'.ons. The 1991 Budgetidentified several parastatal enterprises and Government Departments to becandidates for corporatization, including the National Bank of Fiji, the FijiBroadcasting Corporation, the National Marketing Authority and the Fiji MeatIndustry Board. Restructuring programs were also initiated for parastatalenterprises with negative net worth, the Fiji Energy Authority, Air Pacific,the Housing Authority and, prior to its corporatization, the Fiji PineCorporation.

F. Economic Performance 1988-1990

1.26 The response to the stabilization/adjustment program has beenencouraging. The main accomplishments of the program include: (i) arestoration of growth and exports in sectors with excess capacity (tourism andsugar); (ii) diversification of the economic base in manufacturing; (iii)strong growth in paid employment; (iv) price stability; (v) enhancedcompetitiveness; (vi) sharply increased export performance; and (vii) anincrease in the volume and efficiency of domestic investment.

Flgu-e 6: AGGREGATE PAID ELVLONWNT, 1986-90(thousand)

Tab Io : BCONOMIC OMWBY UeT . 1907-90(percent)

1987 1988 1989 1990

Agriculture, Forestry & Fishing -6.9 -2.3 11.9 2.7M ning £ Quarrying 0 0 46.2 0.0 -S 3Msanufcturing -11. -0.8 11.7 5 .2Electricity, a *wator -2.2 9.1 5.2 3.0Constructon -17.8 -20.4 33.6 5.8 S Whol0eale * Retil I Trade., Restaurants A Hotels -13.8 10.8 28.9 11.6

Transport & Conmunications -2.2 8.7 10.5 5.1Finance,,Insurance, RealFest ate* Su*;e:s Services -3.5 0.9 2.9 1.6

Comun; ty, Soc ial Personal Services 4.4 -1.2 2.5 1.0CDP et Factor Cost -6.3 1.3 12.6 4.7

Source: Current Economic Statiatics and ataff estimates.

761984 19817 18 89 8

1.27 Economic Growth. Devaluation, in addition to the trade policyreforms, had an immediate effect on the competitiveness of the traditionalexport-oriented sectors (tourism and sugar). These sectors were operatingwell below capacity due to a combination of high costs (tourism) and naturaldisasters (sugarcane). The improvement in competitiveness led to an upsurgein tourist arrivals to surpass pre-1987 peak levels of 275,000 per annum

- 12 -

(1989) and an increase in sugar exports by 11 percent in 1988. In addition,the improvement in competitiveness, combined with structural reforms designedto promote foreign investment led to a rapid expansion in the textilesindustry. Between 1986 and 1990, the textiles industry increased output (forexport) by 330 percent and accounted for approximately 16,000 new paidemployment opportunities, resulting in a recovery of paid employment to about90,000 persons (see Figure 5). As a result of an export-led expansion in thetraditional sectors with excess capacity, and by an upsurge in export-orientedmanufacturing, economic growth experienced a sharp rebound. After a declineof 6 percent of GDP in 1987 and an increase of only 1.3 percent in 1988, GDPgrew by 12.6 percent in 1989 followed by 4.7 percent in 1990.

1.28 Price Stability and Competitiveness. A remarkable accomplishmentof the early stages of the stabilization/ adjustment program in Fiji is theabsence of signs of a marked increase in inflation, associated withdevaluation and trade reform. Prices rose sharply towards the end of 1987 andinto early 1988, but inflationary pressures have been well-contained sincethen; consumer prices increased by 6 percent in 1989 and 8 percent in 1990.The ability to restrain inflationary pressures has enabled Fiji to maintainvirtually all the competitive gains arising from the two devaluations in 1987(see Figure 8). The most important cause of stable domestic prices andsustained improvement in the real effective exchange rate was cautious fiscalmanagement which served to sustain public sector demand in the face of higherimport cost pressures.

Flgure 7: CONSLvMER PRICE DEVELOPhlENT, 1986-90 Flg.e 9: REAL EFFECTIVE EXCHANGE RATE, 1996-90

1985=100) 198c5=10i)

140 l

60

zo _s

Iz/

110?0

go0 -

1960 19_7 /910 \959

- 13 -

1.29 external Performance. The stabilization/adjustment program hasresulted in an expansion of exports and service flows, which has provided Fijiwith the resources required to increase capital good imports to increaseproductive capacity. In US dollar terms, export earnings increased by 15percent in 1989 and by 21 percent in 1990; reflecting growth in tourism, netnon-factor service receipts increased considerably while merchandise importsincreased in line with income growth (see Figures 9 and 10).

Figure ir: IMPORT DEVELOPMENT, 1986-90 eJFigure 9: EXPORT DEVELOPMENT, 1986-90 a/ U5$ 3111i1o, c.l.f.

US$ million Go600

400 i~~lerchandise e,cportsi 7X0-

1onfactor service /0_

Ireceilpts, I

300

200 _. ,, 300

,__ . __ see _ I_- .,, 'i Osptal sold Laogt I

I Sugar exports ,IOther exports .ex-rt

0 too -

1886 1907 lose 1098 ±98 --

1988 190? it" 1889 i±0a/ Excludes reexports.

a/ Excludes reexports.

1.30 Savings and Investment. Investment has been slow to respond to theGovernment's adjustment efforts. Fixed investment has continued to remaindepressed since the 1987 disturbances, with private investment at levels onlyabout half of that achieved in 1986 and 1987. Public investment has,likewise, continued to remain depressed at approximately 5 percent of GDP.4

The lack of buoyancy in aggregate investment levels is a result of th,Government's inability to improve the balance between current and capit.expenditures and reluctance on the part of domestic private investors to makenew long-term investments in an uncertain political environment.

4/ The sharp rise in investment in 1990 by the public enterprises can beattributed to the lease-purchase of a new jet for Air Pacific, thenational carrier. Were this lumpy purchase excluded, investment rateswould be more similar to 1989 levels.

- 14 -

Trb I M SAVDaS AM VrWuIW, 9111-90 Figure 11: TRENDS IN INVESTMENr, 1986-90USS1 mllion

1986 1987 1988 199 19 90

(FP mil l ion et current rics) Public ihvestment

Orosa Domestic Inveatmant 266 215 200 280 882 it/Gross Notionsl Savings 274 209 288 230 81 I33

(In Percent of aDP) Prte invstment

Gross Domestic Investment 18.2 14.9 18.0 12.8 18.7 ..

Fi;ld Investment 14.7 14.6 12.2 12.5 17.8Pritet 9.9 9.3 4.9 8.2 5.2

Oovernment 2.9 2.8 2.6 3.1 8.8Public Ent*rtrieso 1.8 2.9 4.7 4.1 9.0

Change in Stoc a 3.5 0.3 0.8 0.4 1.2

Oros National Sevin?& 16.7 14.4 16.6 12.9 16.2 Orosa Domeatic Svy nga 20.9 16.8 16.8 14.1 17.4 N,Net Factor Income -2.9 -3.2 -8.0 -8.0 -2.8Not Current Trenefor- 0.7 -0.7 2.8 1.8 1X1

10_

L/ Includes F81OS million for th. lease-purchese of anow Air Pecific Jet.

Source: Current Economic Statiatice and staff estimates. Direct foreign investment0 I I

sue aw0 tue i.e 199

1.31 Although aggregate investment has remained depressed, this mar.s

two important changes. First, the role of foreign direct investment has

become increasingly important, particularly in export-oriented manufacturing

and tourism. Foreign direct investment increased from $23 million in 1984 to

$43 million in 1988 and (excluding the lease-purchase of a new jet airliner)

to $65 million in 1990; as a share of GDP, foreign direct investment has

increased from 2-3 percent in the early 1980's to 4-5 percent by the end of

the decade. Second, the efficiency of investment has improved considerably

since 1987. Incremental capital output ratio's for Fiji in the early 1980's

tended to be negative or very high, a characteristic of low-return investment.

Since 1987, ICOR's have been on the order of 2 to 4, extremely strong by world

standards although this can be attributted more to transitory than structural

changes in investment behavior. The improvement in the efficiency of

investment, post-1987, can be accredited to an improved policy environment

generally, but more specifically to: (i) a greater outward orientation and

encouragement of export-oriented ventures; (ii) more efficient use of existing

capital stock and (iii) the high returns to rehabilitation investment in the

hotel industry thanks to a rapid recovery in tourism.

1.32 Increasing the efficiency of investment will be a key challenge for

Fiji in the 1990s. To maintain the growth momentum, Fiji will therefore need

to raise investment levels as well as to maintain a level of investment

efficiency commensurate with the standards of rapidly-growing small

economies.6

5/ ICORs on the order of 4-6 have been sustained by rapid growth small

economies in the 19809 (Singapore, Maldives, Mauritius). Export-oriented,

private sector investment would typically be quick-gestating and, if

successful, would yield returns consistent with ICORs in this range.

- 15 -

G. Maintaining the Growth Momentum: An Agenda for the 19909

1.33 Challenges for the 1990s. The principal challenge for the Fijianeconomy is to maintain the growth and employment generation momentum of 1988to 1990. All indications are that the external outlook for Fiji in the 1990swill be similar to that of the 1980s: primary commodity prices are expected toremain depressed while prices of manufactures rise; at the same time, there iswide scope for growth in tourism and an expansion in non-traditional exports(high value primary products, manufactures). To take advantage of tleseopportunities, in a fashion consistent with rapid growth in employment andbroad-based participation in the development process, wi7.l require politicalstability and continued structural reforms to forge an incentives environmentconducive to private sector initiative. Achieving sustained growth ratbs onthe order of 5 to 7 percent per annum in the 19909 will require an increase inexport earnings and non-factor service receipts to raise incomes and tofinance the required increase in the imp,rts of capital goods and rawmaterials. The achievement of high rates of growth of non-traditional exportsand non-factor service receipts will require:

(a) an increase in the rate and efficiency of investment, both publicand private; and

(b) an outward-oriented, politically stable policy regime whichprovides efficient signals to the private sector and enables themto take advantage of emerging opportunities in domestic and worldmarkets.

Achieving competitiveness through outward orientation and higher rates ofinvestment is very much dependant on the evolving nature of the policy regime.A stable policy regime which efficiently stimulates growth will provideadditional resources, to both the public sector and to the private sector,which can be used to finance additional investment. Putting into place such apolicy regime is essential to sustained economic growth and development.

1.34 In the 19809, those developing economies which followed an outwardoriented approach and encouraged private sector development achieved strongrates of growth. The ability to maintain a competitive domestic coststructure and to nurture private investment are important for all sectors ofthe economy, not only those leading the growth process. The experience ofSingapore illustrates the advantages of maintaining political stability in amulti-ethnic environment together with economy-wide competitiveness forsustained growth and development. Key elements in the early stages ofSingapore's economic transformation included: (i) macro-economic stabilitythat underpinned structural reforms; (ii) outward orientation that provided ameaningful guide to resource allocation stimulated exports and brought to bearpositive technological externalities associated with efficient trade; (iii) atax system that did not penalize economic effort; (iv) a regulatoryenvironment that facilitated rapid realization of private investment plans;and (v) a public sector which provided modern infrastructure and ensured thathuman resource development efforts were accorded a high priority in gublicspending. Fiji has the potential to emerge as a modern, thriving entrepoteconomy, much as Singapore did two decades ago. Realizing this potential willrequire political stability and continued adjustment efforts supported by apolicy framework conducive to private sector development.

- 16 -

1.35 Framework for Private Sector Incentives. The policy framework forprivate sector led growth and development will build upon the progressregistered in the adjustment program since 1988. Continued efforts will berequired to ensure thats (i) the trade regime provides an outward orientationof the economy; (ii) the regulatory regime continues to attract new investors,particularly in export-oriented activities; (iii) the domestic tax system isefficiency oriented while providing sufficient revenues for essential publicservices; (is) the domestic regulatory system facilitates private initiativeand (v) that the public sector reduces it's commercial activities and focusesit's efforts on macro-economic management and provision of essential publicservices. To achieve these objectives, further reforms will be required inthe areas of macro-economic management, trade policy, tax policy andenterprise regulation.

1.36 Emerging Barriers to Reform. Maintaining the policy reformmomentum may prove to be more difficult in the 19909 than it was in theimmediate aftermath of the 1987 disturbances because of emerging constraintsto reform. Five key factors are likely to combine to constrain progress ineconomic policy reform. First, the very success of the 1988-1990 reforms hasreduced the sense of urgency following the 1987 economic shock. Second, thedomestic political situation remains uncertain and this, perhaps more thandomestic economic policy, contiL:ues to restrain long-term investment byestablished private investors of Indian ethnic origin. Third, the next phaseof reform will require resource shifts from non-competitive to morecompetitive sectors of the economy; such adjustments will be costly to non-competitive enterprises (including public enterprises) who, in view ofimpending adjustments, have already begun to lobby in opposition to reform.rourth, the next phase in economic policy reform will require carefulcoordination to ensure that policy reforms which improve competitiveness areconsistent with macro-economic balance, particularly in terms of the domesticrevenue effort. Finally, the upsurge in emigration post-1987 has weakenedFiji's ability to compete in skill-intensive activities, has reducedadministrative abilities and has placed upward pressure on domestic production

costs.

H. Organization of the Text

1.37 The organization of the report is as follows: Chapter 2 reviewsmacro-economic management strategy and discusses the role of macro-policy inthe adjustment process. Chapter 3 reviews trade policy and the linkagesbetween the trade regime and the growth process; chapter 4 discusses taxpolicy, in particular the efficiency aspects of the tax system and chapter 5examines key aspects of domestic competition stemming from enterpriseregulation. Each chapter will identify the main policy-based constraints toimproving the private sector incentives environment and, taking into accountemerging constraints and international experience, will set out a medium termpolicy reform program.

- 17 -

II. Macro-Economic Strategy and Growth

A. Macro-Economic Objectives

2.1 From the foregoing, it is evident that Fiji has generally pursuedsound macro-economic policies since Independence. The most importantprecondition for sustained investment and growth will be to maintain the goodrecord of macro-economic management which, in turn, will require:

(a) coordinated use of monetary and fiscal policy to maintain financialstability, consistent with a satisfactory and sustainable pattern ofinvestment and growth;

(b) continued use of macroeconomic policy to attain a level of economy-wide competitiveness, consistent with the pattern of investment andexport growth desired; and,

(c) public provision of infrastructure and human resources investmentsupportive to private investment, at a level consistent with macro-economic stability and creditworthiness.

B. Macro-Economic Projections

2.2 A stable financial environment is a prerequisite to sustained privatesector investment and growth. Only under low rates of inflation do relativeprices serve as a meaningful guide to investment. Furthermore, in the absenceof a stable financial environment, the credibility of the Government'sincentives policy stance may be undermined, capital outflows may occur and as aresult, the investment required to stimulate growth and adjustment may be long-delayed or not forthcoming at all. To maintain financial stability, publicexpenditures should be managed in a fashion consistent with the resourcesavailable to the Government, so as to avoid both inflationary finance and acrowding-out of private investors from domestic financial markets. Monetaryand fiscal policy should also be used to maintain external balance, at asustainable level of reserves and with unimpaired access to world capitalmarkets.

2.3 Tables 2.1 to 2.5 set out a projected growth scenario for the Fijieconomy consistent with a stable financial environment. The scenario suggeststhat a sustained growth rate on the order of 6 percent per annum would beconsistent with fiscal and external balance during the decade to 2000, based onrealistic assumptions about the potential growth of exports and the importrequirements associated with economic growth.

2.4 Non-traditional merchandise exports and tourism are expected torecord strong growth during the coming decade. Strong A:owth in resource-basedgoods (fish, fish products and forestry products) and non-traditionalmanufactures (predominately garments) would be partly offset by very modestexpansion of traditional exports (sugar, minerals). Due to slow growth insugar, merchandise exports as a whole, are forecast to increase moderatelyduring the coming decade by some 4 percent per annum. Over the next decade,the composition of merchandise exports would increasingly be dominated by

- 18 -

manufactures, fish and forestry products, wP h a continued decline in thecontribution of sugar and othe'7 primary products (Table 2.2).

2.5 Prospects for growth, however, remain bright. In non-traditionalagriculture, strong growth in domestic production and exports is expected tocontinue from ginger, cocoa, kava, squash and other vegetable products. Infisheries, demand for tuna is expected to remain buoyant and the recent entryof Fiji into the Japanese market for fresh fish holds the prospect for rapidexpansion. In the resource-based sector, strong growth is anticipated inforestry products, as the pine plar.tations reach peak production levels.Further movement into furniture processing for the domestic market and forexport is exp"cted as quality standards in the industry improve. Inmanufacturing, Lextiles continue to exhibit considerable potential forexpansion, particularly as exports diversify into the high quality segment ofthe market in the Western Pacific and into the large U.S. market. Otherpromising sources of manufacturing growth include ship building and repair,agro-processing and shoe manufacture. Sparked by high rates of capacityutilization and rocketing prices of residential and commercial propertr,prospects are bright for an upsurge in domestic construction activity.

Table 2.1: PROJECTED GOP IROWTH BY ScCTOR, 1001-2000

Estimate Proiected1090 1092 1994 19906 190 2000

(X annual growth ot 1900 prlces)

Gross Domestic Product 4.0 5.6 5.7 5.0 5.1 6.1Agriculture 2.7 2.7 2.7 2.6 2.9 2.9Industry 4.9 6.9 8.9 6.8 6.8 6.9Manufacturing 6.2 7.1 7. 1 7.1 7. 1 7.1Mining -5.8 5.0 6.0 4.0 4.0 4.0Other 4.9 7.8 7.8 4.0 4.8 4.8

Services 5.4 6.2 6.2 5.4 6.4 6.4

(shares of CDP)

Gross Do mestic Product 100.0 100.0 100.0 100.0 100.0 100.0Agriculture 20.2 19.4 18.8 17.6 16.8 16.1Industry 20.5 20.8 21.8 21.8 22.1 22.4Manufacturing 9.9 10.0 10.8 10.7 11.1 11.5Mining 2.8 2.7 2.7 2.6 2.6 2.6Other 7.7 8.0 8.8 8.4 8.4 e8.

Services 659. 69.8 60.4 60.7 61.1 61.6

Source: Oats provided by FIJi authorities and staff estimates.

1/ There are early indications that domestic construction, which hasstagnated since 1987, has begun to recover. Such indications include anincrease in rehabilitation activities and a rise in orders placed withlocal architects. The recovery of domestic construction activity would bea key indicator of the health of the Fijian economy, signalling both anincrease in fixed capital formation and a resumption of more normalpatterns of investment behavior on the part of the domestic businesscommunity.

19 -

2.6 Over the next decade, earnings from tourism are projected to increaseby 9 percent per annum, largely accounting for the projected improvement inservice receipts (Table 2.4). Tourism growth will hinge on expansion of hoteland air transport capacity, together with market promotion and diversificationof customer sources. For tourism to make a meaningful contribution toemployment, growth and the balance of payments, efforts should be made toencourage broad-scale participation in the industry.2

2.7 With an increase in visitor arrivals to more than 300,000 expected in1991, hotel room capacity has begun to be a constraint to growth. Two majorprojects, both financed by private Japanese investors, are expected to addsufficient additional capacity in the high-end of the hotel market, to meetdemand for the next five years. Additional investment, principally fromdomestic sources, will be reqt4red to upgrade existing medium-standard hotelsand to broaden the range of doListic attractions available for tourists.

Table 2.2: PROJECTED EXPORTS, 1991-2000(at 1990 USt million)

Estimate Prolected1990 1992 1994 196 1998 2000

Sugar and Molssess 179 188 190 196 200 204Cold 49 42 48 50 50 50Fish & Fish Products 85 89 48 48 62 56Coconut Oil 4 5 6 6 6 6Forestry Products 26 29 84 89 48 47Garments and other 148 162 179 212 245 282

Totel 48B 449 497 660 694 646

Memo Item:Total Exports at current prices 486 478 548 657 779 926

Sourco: Data provided by Fiji authorities and statf estimates.

2.8 The projected shift in the composition of exports is reflected inchanges in the composition of GDP. The shares of agriculture and mining areexpected to continue to decline, offset by a relative increase in theimportance of manufacturing and services. Despite projected vigorous growth,manufacturing will still be a small part of the overall economy in 2000 andmost employment will arise from agriculture.8

2/ The degree to which there is secondary (down-stream) tourism developmentand a broad range of hotel accommodations can be provided will haveimportant effects on the employment and balance of payments consequencesof tourism development.

3/ In these projections, domestic demand is estimated to rise by 5 percentper annum to 1995 and by 5.1 percent per annum thereafter, consistent withgrowth in output and external activity. For the GDP growth projections,an average ICOR of 4.8 is applied to domestic investment plus net foreigndirect investment.

- 20 -

2.9 This strong growth would be reflected in imports which would rise atan average of 5.7 percent in real terms through the coming decade. Thecomposition of imports would shift from a heavy weighting of final goods andconsumer products, to manufactures and capital goods, as investment levelsincreased.

Table 2.8: PROJECTED IMPORTS, 1991-2000(at 1990 USI millon)

Estimate Prolected1990 1992 1994 1i99 1998 2000

Food 96 108 119 ll 144 169Other Consumer Goods 2a8 268 295 326 362 881Petroleum 62 69 77 85 94 108Intermediate Goods 69 74 90 107 126 144

(of which Primary Goods) 5 a 8 9 11 18(of which Manuf. Goods) 54 68 62 97 114 180

Capital Ooods 288 220 261 810 8S2 410Total Merch. Imports CIF 68a 788 841 958 1077 1197

Memo item:

Total Imports at current prices 688 618 987 1161 1422 1751

Source: Data provided by Fiji authorities and staff estimates.

2.10 Table 2.4 indicates that these projections are consistent with arelatively comfortable balance of paymcnts outlook. Since the growth ofmerchandise imports is projected to increase faster than exports, the tradedeficit is projected to deteriorate from the equivalent of 12.5 percent of GDPto over 20 percent during the decade. However, a sustained improvement it netservice receipts (associated with the projected growth of tourism) would holdthe current account deficit to a more moderate proportion of GDP throughout thedecade, despite negligible growth in official transfers. A substantial inflowof direct foreign investment at around 3 percent of GDP is projected, whichmore than covers the projected current account deficits. Accordingly, the debtservice ratio is projected to decline marginally throughout the projectionperiod, reflecting present policy of prudent demand management.

2.11 An important teature of the medium-term outlook is the necessity forhigher rates of investment that will be needed to sustain GDP growth of around6 percent per annum. During the upcoming decade, gross domestic investmentwill be required to rise by 5.3 percent annually in real terms, and to beefficiently allocated within those sectors (manufacturing, tourism, high-valueagro-exports) which are expected to make a major contribution to growth,employment generation and the balance of payments. Sound demand managementrequires that the gap between investment and domestic savings be restricted, inthe medium-term, to Fiji's ability to draw on foreign savings.

- 21 -

Table 2.4: PROJECTED BALANCE OF PAYMENTS, 1991-2000(US$ million)

Estimate Prolected1990 1 1994 1996 19m 2000

Exports, f.o.b. (domestic) 486 478 548 657 779 926Imports, f.o.b. (retained) 606 708 816 1012 1242 1585Trade Balance -170 -285 -268 -855 -464 -610Services (net) 121 162 192 267 844 456of which nonfector roctlpto 406 605 584 719 887 1094

Private Transfers (not) -27 -27 -29 -81 -81 -81Official Transfers (not) 41 89 48 46 46 46Current Account Balance -84 -71 -62 -84 -104 -140Official Capital (net) -29 8 21 28 2a 17Private Capital (net) 96 118 127 164 171 190of which DFI 112 128 147 107 184 202

Short-term capital (net) -9 0 0 0 0 0Capital Account Balance 67 126 147 176 194 206Errors A Omissions 24 0 0 0 0 0Change In Reserves (- increase) -40 -64 -86 -98 -90 .4

Memo Item:

Current Account/COP (1) -2.5 -4.8 -8.4 -4.0 -4.6 -6.4Debt Service/Exports (X) 12.6 7.8 6.5 6.7 5.2 4.6DFI/GDP (X) 8.1 7.7 8.0 8.1 7.9 7.8Gross Reserve. 265 814 477 601 844 1006Months of retained imports 6.1 4.6 6.1 6.8 7.1 6.9

Source: Data provided by Fiji authorities and staff estlmtes.

2.12 The importance of foreign investment is also reflected in Table 2.5which sets out the implications of growth for savings and investment. Anaverage incremental capital/output ratio (ICOR) or between 4 and 5 has beenassumed for the next decade. This is a relatively modest ratio in view of theprojected composition of growth (e.g. high degree of reliance on primaryproduction) but is in line with international comparisons.

2.13 As shown in Table 2.5, it is assumed that there will be a gradualincrease in the rate of gross national savings during the projection period,However, a sharp increase in investment necessitates a greater reliance onforeign savings. This can be obtained, consistent with a manageable debtservicing scenario, provided that direct foreign investment in the order of 8percent of GDP contirLues to be attracted to Fiji during the l990s.4

4/ Thanks to the deepening of domestic financial markets and pre-payment offoreign debt, the adequacy of savings (both domestic and foreign) shouldnot constrain domestic investment. Fiji may wish to increase its externaldebt exposure to meet public investment requirements should growth exceedthese estimates.

- 22 -

Table 2.6: PROJECTED INVESTMENT AND SAVINGS, 1991-2000(percent of GOP)

Estimate Prolected1990 1992 1994 1996 19 m 2000

Gross Domestic Investment 18.7 165. 17.8 19.7 21.9 24.0

Gross Notional Savings 16.2 11.8 18.9 16.6 17.4 16.7Gross Domestic Savings 17.4 12.8 16.1 16.5 18.2 19.6Gross Foreign Savings 2.6 4.8 8.4 4.0 4.6 5.4

Gross DOI 8.1 7.7 8.0 8.1 7.9 7.8

Sources Data provided by Fiji authorities and staff estimates.

C. Macro-economic Competitiveness Policy

2.14 In addition to maintaining financial stability, macro-economic policyhas an important role to play in determining the overall competitiveness of theeconomy, vis-a-vis world markets. In a small open economy, the key toefficient resource allocation is ta allow relative prices in domestic marketsto reflect prices set in the world markets. In addition, these prices shouldbe allowed to determine input and output prices to producers, rather thanselective subsidization of particular sectors at the expense of tho rest of theeconomy. This does not imply, however, that wages and exchange rates should beset at a level con;.istent with financial stability, but at an inadequate levelof investment and growth. When combined with an accommodating fiscal andmonetary stance, exchange rate and wage policies have an important effect oninteznational competitiveness.

2.15 Exchange Rate Management. Retaining a stable and freely convertiblecurrency and a competitive real exchange rate are essential for trade orientedgrowth and to attract external investment needed to sustain rapid expansion ofproduction. A convertible currency allows free access to foreign exchange forcurrent and capital transactions, including repatriation of profits. At thesame time, flexible exchange rate management (when combined with appropriatefiscal and monetary policy) may be a powerful tool for enhancing investmentincentives. As discussed in Chapter 1, the 1987 devaluations facilitated theintroduction of structural reforms by: (i) reducing the import premium todomestic production; (ii) eliciting a rapid supply response in sectors withmnderutilized capacity (tourism); and (iii) expanding export production fromtraditional sectors (sugar, copra, forest products). As a result, balance ofpayments pressures eased during 19&8 and, as a result of increased output andexport in the tradeables sector, opposition to trade reform by protectedindustries was diluted.

2.16 The lessons of the 1987 devaluation episode are important inevaluating exchange rate policies for the 1990s. In the long-term, maintaininga competitive real effective exchange rate requires, in turn, flexibility insetting nominal rates. This becomes increasingly important as the pricesensitive, export-oriented manufacturing and tourism sectors play a greaterrole in the economy. In the medium-term, given Fiji's high domestic wages andshortages of skilled laborers, further improcement in competitiveness may be

- 23 -

needed to call forth the investment required to increase output, exports andemployment. Beyond that, there is a need to adopt a flexible exchange ratemanagement stance in order to offset any increase in the domestic coststructure relative to that of Fiji's major trading partners.

2.17 Wages. Unskilled wages rates in Fiji are well above those prevailingin Asian economies with comparable par capita incomes (Table 2.6). Moreover,as discussed in Chapter 5, in view of the relatively comfortable standard ofliving of the majority of the labor force not in formal wage employment, asignificant fall in Fiji's unskilled wages is not anticipated. Moreover, thereduction in real wages following the 1987 devaluation was in an atmosphere ofpolitical and economic crisis and seems unlikely to be readily repeated.However, to avoid wage outcomes which would render some industries inviable,anJ which would hinder growth in formal sector employment, it is important thatany increases in real wages not exceed improvements in productivity.6 To someextent, sustainable setting of unskilled wages can be assisted by deregulationof the labor market, as discussed in Chapter 5. As the largest employer, theGovernment can also help ensure sensible wage outcomes by public sector wagerestraint. This would involve measures to bring public sector wage awards morein line with those prevailing in the private sector.

2.18 In contrast to unskilled wages, the cost of skilled labor has tendedto increase sharply since 1987. The emigration of substantial numbers ofskilled and professional employees has created serious skill shortagesthroughout the economy. These shortages are either reducing efficiency orrequiring the temporary import of expatriates skills; both contributing to ahigher cost structure in Fiji. Accordingly, an accelerated skill developmentprogram will be needed to underpin appropriate wage outcomes from a macro-economic perspective.

D. Investment in Supportive Infrastructure

2.19 The public sector has an important role to play in providingsupporting infrastructure and investing in the development of a labor forceskilled to meet the changing demands of a rapidly growing economy. Rapidgrowth in private sector development will increase the demand for power, iirter,transport, telecommunications services and skilled laborers. In addition toshortages of trained personnel, there are some signs of physical infrastructurebottlenecks emerging in Fiji, for example in telecommunications facilities fornew exporters. In these circumstances, investment in additional infrastructurewould have high economic rates of return, provided that sound appraisal of newcapital spending, either by economic rate of return analysis, or by referenceto clear sector policies and proven methods of fulfilling those policies, isconducted. Given its comf'rtable debt-servicing ratios and good credit-worthiness, Fiji should be able to borrow externally to finance growth ininfrastructure capacity and to service this debt within the bounds of fiscalbalance and sustained creditworthiness.

5/ Real wages should increase as productivity rises. Broad-based growth inreal wages, employment and productivity are central elements of Fiji'soutward oriented growth process.

- 24 -

2.20 There are three key challenges for the public sector in providingsupportive infrastructure for private investment. The first is to shift thefocus of public sector outlays away from commercial activities and underwritinglosses of parastatal corporations to provision of essential infrastructure andhuman resource development. Strategies for reforming the public enterprises,and thereby shifting the focus of fiscal policy to provision of essentialinfrastructure and himan resources development, are discussed in more detail inChapter 5.

Table 2.6: UNSKILLED WAGE RATES IN MANUFACTURINGA Comparative Perspective, 1990

Country Wage Rate GDP/Capita($/day) ($)

Fiji, organized /a 12.6 1,910Fiji, non-organized 5.2 1,910Mauritius lb 8.0 1,900Papua New Guinea jC 11.5 830Indonesia /d 2.3 440Thailand /e 3.8 1,050Grenada If 7.9 1,370St. Kitts/Nevis /g 8.6 2,790Korea /h 15.8 4,943Australia /i 36.4 13,290

.a Ministry of Labor, Government of Fiji estimate./b Based on 1990 estimates of average monthly earnings of

unskilled workers in the textiles industry. CentralStatistics Office, "Biannual Survey of Employment andEarnings'.

/c Based on the 1990 urban-sector minimum wage./d Wages refer to 1989 average compensation for a West Java

textile cutter./e Wages refer to 1989 average compensation for employees

throughout the economy./f Wage figures are 1986 values for an average unskilled

laborer in the private sector, Government of Grenada./g Wage figures are 1988 values for an unskilled worker in

the electronics and textiles sectors./h Based on 1986 earnings reported in Mazumdar, "Korea's

Labor Markets Under Structural Adjustment"./i Per capita GDP figures are for 1989; wage rates refer to

1989 median manufacturing earnings for female employees,Australian Bureau of Statistics, Labor Force Australia.

- 25 -

2.21 The second challenge is to increase the share of public investment inpublic expenditures as a whole. Despite public expenditures on the order of24-26 percent of GDP, public investment has tended to stagnate at between4-6 percent of GDP (Table 2.7). Public expenditures on the order of 25 percentof GDP would represent an appropriate fiscal effort for the upcoming decade.Within this reaource envelope however, the rate of investment should beincreased to 8-10 percent of GDP. This increase would be financed by savingsresulting from a down-sizing and rationalization of the civil service, publicsector wage restraint and an increase in public enterprise savings. Over thenext five years, human resource development should be the key priority area forpublic investment and operations and maintenance outlays. Expenditures shouldbe focused primarily on expanding the supply of technical training institutesfor secondary school leavers and upgrading the quality of primary and secondaryeducation.7 Thereafter, bottlenecks in power, transport, communications andurban services will require substantial new investment. Forward planning offuture infrastructure requirements will be essential both to ensure that theinvestment plans are within the resource constraint dictated by financialstability and to ensure that appropriate sources of external finance can beidentified. Preparation of a medium-term framework for capital expendituresshould be constructed to aid in the planning of public investment.

2.22 The third fiscal challenge is to provide greater emphasis withi.lcurrent outlays to operations and maintenance (O&M), as opposed to the wagebill. Both the increase in the share of capital spending and the shifttowards social programs raises the issue of incremental recurrent costs. Ineducation, for example, increased outlays are required for textbooks and in-service teacher training; in health, inadequate availability of basic drugsand medical supplies is a concern. The Government has demonstrated itsawareness of this issue and has, for example, increased O&M outlays forroadways as part of an overall program of upgrading and improving inlandtransport systems. Outside of education and health, other areas where theadequacy of recurrent spending is of particular concern include urbansanitation and pox.3r. It is important that, in the process of reordering

6/ A potentially important source of savings would be a down-sizing andrationalization of the civil service, in line with the changing role andresponsibilities of the public sector. Options for civil service reformmerit further review.

7/ In primary education, more attention to the teaching of core subjects,such as mathematics, languages and science is needed. Improvement in thesupply of complementary training materials to schools, consolidation ofunder-utilized schools and multi-ethnic schooling should be encouraged.Vocational training should be better linked to manpower planning andexisting vocational institutes should be upgraded to provide betterquality service to key sub-sectors. This process would also requiregreater flexibility in the vocational school salary structure andencouragement of the development of private vocational traininginstitutes. Those vocational institutes which are too small, severelyunder-staffed or poorly utilized should be closed. Better planningcapability and implementation-authority within the Ministry of Educationis needed to oversee reforms in the education sector.

- 26 -

public expenditures, that recurrent implications are carefully costed andfactored into the decision making process. In each of these key sub-sectors,a strategy for improving O&M service delivery should be developed andinstitutional mechanisms devised for supplying the goods and services neededto raise the efficiency of existing investments.

Table 2.7: GOVERNMENT REVENUE, EXPENOTURE AND FINANCING, 1976-90(Percent of GDP)

1976 1980 1985 196" 1987 1986 1989 1990(e)

Revenue and Grants 19.9 22.4 26.8 28.7 28.7 25.7 26.9 26.8Tax rovenue 16.6 18.2 21.2 10.9 18.5 19.0 21.8 17.6Non-tax revenue 8.9 8.4 4.8 4.1 4.4 6.2 4.0 8.8Grants 0.4 0.8 0.8 0.7 0.8 1.5 0.6 0.7

Expenditure /a 20.8 25.8 29.1 28.4 28.8 26.8 26.7 26.3Current expenditure 16.6 18.7 24.8 22.6 24.6 22.4 22.8 21.2Capital expenditure 6.8 6.6 4.8 6.8 4.2 4.6 6.3 6.1

Overall balance -0.9 -2.8 -2.8 -4.7 -5.1 -1.1 -2.7 -0.8Financing 0.9 2.8 2.8 4.7 6.1 1.1 2.7 0.8

External 1.4 2.4 0.0 -0.2 -1.0 -1.1 1.6 0.0Banking system -1.6 -0.8 0.2 2.1 2.8 -1.1 2.9 0.8Other 1.1 1.2 2.6 2.8 8.9 8.8 -1.4 0.6

/a Includes not lending.

Sources: World Sank, FiJI: Challenge for Development, Report No. 7724-FIJ,May 4, 1990 and Staff esti mates.

E. The Adiustment Challenge

2.23 Maintaining financial stability, improving macro-competitivenessand providing supportive infrastructure (and human resources) are the keymacro-economic underpinnings to a private-sector led strategy of growth inemployment and incomes. Macro-stability and competitiveness are necessary,but not sufficient to ensure sustained growth and development. A great numberof regulatory, structural and administrative distortions hinder the efficientoperation of Fiji's economy. Structural adjustment is required to complementmacro-policy and ensure efficient allocation of resources. In this regard,the three key adjustment objectives are; (i) to provide an incentivesenvironment which is neutral with respect to class of investor, sector an%Aorigin of production; (ii) to provide a regulatory framework that encouragescompetition, innovation and private enterprise; and (iii) to undertakestructural reforms in a manner consistent with macro-economic stability andcompetitiveness.

2.24 A reduction in administrative influence in the setting of relativeprices and costs will enhance the neutrality of Government policy with respectto the pricing system. This may require adjustment in both the external tradeand the domestic tax regime. At the same time, reforms which may reducepublic revenues (e.g. tariff reform) will need to be carefully coordinated andsequenced with reforms designed to broaden and improve the efficiencyorientation of the tax effort. The priorities for reform of external tradepolicy and of the tax system are discussed in Chapters 3 and 4 respectively.

- 27 -

2.25 As relative prices adjust to changing macro-economic, trade and taxpolicies, the magnitude and composition of the investment response will dependon the level of competition in the economy. In the Fijian context,competition will be enhanced by regulatory reform in factor and productmarkets, together with a public enterprise reform strategy based on reducingpublic sector intervention in the commercial areas of the economy.Competitiveness policy, and regulatory adjustments required to increasecompetition, are discussed in Chapter 5.

2.26 It is important that trade, tax and regulatory reforms areundertaken simultaneously to ensure that resources do shift to their mostefficient use and that macro-economic imbalances do not result from, forexample, an upsurge in import demand in advance of growth in output andexports. In the absence of a coordinated approach to price and regulatoryreforms, there would be the very real danger of a sluggish investmentresponse, or worse, fiscal imbalance. A comprehensive program, based on apolicy framework that ensures sound macro-economic management together withprogressive advance in structural reform will maximize the benefits associatedwith economic reform.

- 29 -

III. Trade Reforms Opening the Economy to World Markets

A. Introduction

3.1 As a small island state with a fairly diversified natural resourcebase, trade--which has become increasingly diversified in recent years--isvery important to Fiji. Together, merchandise trade and net non-factorservice receipts (primarily tourism earnings) are equivalent to 78 percent ofGDP. Sugar remains by far the most important commodity export, but its sharehas fallen from over 80 percent of total merchandise exports in 1975 to justover 40 percent in recent years. In the post-Independence period, there havebeen notable increases in exports of fish and fish-based products, timberproducts as well as gold and there is further scope for growth in otherresource-based exports.

3.2 Manufactured exports (other than processed raw materials) have beenvery limited until recently. The rapid increase in exports of garments, from$8 million in 1986 to $85 million by 1990 has been a very importantdevelopment in recent years. Exports of services, dominated by tourism, havealso grown considerably since Independence. After netting out import costs,tourism is now the single largest source of foreign exchange earnings. Table3.1 and Figure 3.1 set out the growth of travel receipts and source of touristarrivals in recent years. Taken together, these developments represent asignificant and welcome broadening of Fiji's base of exports.

TOMl &.1: lTRAVEL IIS AM -U OF VwR AIZALSflge 3.1 M 168I1O 1 WLS, 4

1986 1987 1988 1989 1990

Trovel Receipt. 168.8 117. 127.7 179.9 214.6(US") IL

Visitor Arrivals MM 6. . 4.1 A SI(in thousands) kiAuctrali 88.8 68.4 78.8 97 a8.1 (81.2 - _ e.$N Ze aland 22.7 16.2 21.8 28.1 8.7 (7. US..A. aaU.S.A. 69.7 47 42.1 84.4 14.1 (18.8 _ 'Coned* 28.7 16.8 16.9 16.8 8.2 (1.6 _ifiC ::_ U.K. 10 8.5 80. 11.4 6.5 (4.9J.p.n 11.8 8.s 8.4 18.8 7.5 (8.7 1.8Othr Europe 18.1 14.7 20.8 23.9 11.2 (10.8Pacific Islands 12.8 11.2 14.2 18.1 6.2 (7.2oth*er- 8.7 4.8 a.8 7.9 8.4 aY.a 1n.a aTotal 287.6 189.9 208.2 280.6 1.9 (891

iEatimte -for 1990.S 1990 dota aro for those from January to May.

1989 dat. for the asoe period in parentheses,

Source. D4 docu_ent. Jan. 1991.Reserve Bank of Fiji, Quartarly Review, AMIB2

Septoboer 1990.

3.3 Merchandise Exports. Figure 3.2 presents the destinations of somemajor exports in 1990. Exports to the United Kingdom are dominated by sugar,reflecting the volume of sugar sold to the EEC at favorable prices under the

- 30 -

Lome IV convention.1 The relative importance of the United Kingdom as an

export destination has declined with the relative dominance of sugar exports.

Australia and New Zealand have grown in importance, helped by the duty-free

access to these markets from Fiji and the Pacific Island countries under the

SPARTECA agreement. The importance of exports to the US has increased as

garment producers have begun to diversify beyond the regional markets of

Australia and New Zealand.

Figure 3.2: EXPORT DESTINATIONS FOR SELECTEDPRODUCTS, 1990

Sugar Fish & Fish Products

Japan 5.035 M_ isl*12.5711 Nh wlea 34.95X

U.S.A.4,24% Jqmn 11.e 1Austrl e N.ZO.82

Other 1.4051

U.K. 98.93% U.K. & Othwr EaP*51.64U

Tifmber Garments

acltfc 1Ia1e 10. 39 Othe a2.3a2

Oth, e AaIa wsre1.205 ~PI1Th.,... mlea22.1 -S IAla 20.645

N. Z. , 34 .. .

Other 2.513

Jmfn 5s. so N4.Z. 46. 935

3. As noted in Chapter 1, there has been little change in the pattern

or source of imports, apart fromb a gradual rise in the share of intermediategoods. However, the pattern of imports has been influenced considerably by

the protectionist import-replacement policies pursued by the Fiji governmentfrom Independence to the mid-1980s. Protection was provided by a combination

of high tariffs and a wide range of quantitative restrictions on imports of

intermediate and consumer goods. Since domestic producers were generally

exempted from duties on raw materials and mac.hinery imports, the effective

rates of protection reached very high levels in some cases.

1/ In 1989, the average unit price for sugar exports ranged from F$680 per

MT to the United Kingdom (under Lome) to F$344 per MT to Malaysia.

- 31 -

3.5 By the mid-1980s, it was becoming increaEingly recognized that adevelopment strategy based on import-substitution behind highly protectivebarriers could not provide the basis for sustained growth and diversificationof the economy. In particular, diversification of the export base would beunattainable in a situation where it was much more profitable to produce fordomestic than export markets. Accordingly, since 1987, Fiji has embarked on astrategy of trade policy liberalization. This has involved the reduction ofvery high tariffs to a maximum of 50 percent and the removal of the bulk ofquantitative restrictions on imports to be replaced by duties of 50-60 percent(comprising a 10 percent customs duty plus a variable fiscal duty). In 1988,more than 50 percent of imports were under license, compared to less than 20percent in 1991. Table 3.2 sets out the dramatic reduction in the incidenceof quantitative restrictions in recent years.

Table 3. SCOPE OF IMPORT LIC4I1NO

Pro 1989 1q89 Mini Budget 1991

Btked been. canned Brown rice ButterJeindin compound for u incong tick,e Butter Conned filhBrown ree Conned fih CoffeeButt hinges end bsrrel bolts Cheese and other dairy

pr.Jut Corned meet (laheep/lemb)Butter Chiii wsuce and paste Lubricente and hy 5rulic fluidsCanned fioh Coffee Milk and creamCement and clinker Corned moat of bovine Petroloum producteEnsrimele (esheep/lamb)

Choese and other dairy product* Eag RiceChili sauce and pste Llve poultry Seed potatooCoffee Meet end edible offelCorned most of bovine animals

(.!heep/ slam) Orange and orengo product.Crown cork Pineapplo product.Dried leguminous vegetables Poultry productsEggs Powdered milkelectric cables and wiring clips PramnFlour and aharpe Tometo productsKnitted f bricsLamb and muttonLi ve poultryLouvre window frwmesMargarineMatch..Meat and edible offelIMiId ateel bare & rodeMulti-wall pper baosNoodle.On i onsOrange and orange productsPineapple produet.Petroleum productsPolypropylene begs and fabricsPoultry productsPowdored milkPr:*nPrepared incense stickePVC pipes and sheetingRopes of manmade fiberShirts of all kindsShirts and liqueursSteelI Shelvi "no*d reck ingsSweetened forageTeoTomato productaTube nd pipes of iron or steelVegetable ghsaWet CellI BatteriesWick-type kerosene stovesWood screws

3.6 This reduction in import licenses represents commendable progresstowards trade policy reform. However, more remains to be done. Tariffsremain high on many products, with a great deal of variation in rates withinsimilar product groups. Essentials, such as prepared foodstuffs, facerelatively high tariffs while luxury goods, such as jewelry, are taxed at afar lower rate (see Table 3.3). Tariffs on raw materials and capital goodstend to be low while tariffs on final products (which are domesticallyproduced) are high. As a result, for many goods (see Table 3.4), theeffective rates of protection far exceed the nominal rates. The ERP's formost products dropped appreciably following the tariff reductions announced in

- 32 -

the 1991 Budget. However, there is still negative value added at world pricesin many sectors, implying that the very production of many manufacturesimposes a heavy resource cost on the economy. In the other cases ERP's areoften very high with a wide dispersion among sectors.2 The highlydifferentiated structure of tariffs and effective protection now prevailing inFiji is directly the result of sustained efforts to promote specificindustries. The vast majority of these industries, after more than a decadeof heavy trade protection, provide negative value added to the economy and area drain on public resources. By comparison, other activities (such astourism) in which the Government has not deliberately protected domesticproducers are competitive in the world market. In fact, the existing patternof protection illustrates the difficulty, even in small economies, of usingtrade policy or targeted subsidies to identify industries or sub-sectorsworthy of support.

Table 8.8: DESCRIPTION OF FIJI TARIFF RATES, 1990

Ronne of Tariffs StandardNo. of Fiscal Custom Total Av-rag Tarlff Error

Section Headings Items Max Min Max Min Max Min Fiscal Custom Total Total

Live animals Aanimal products 182 50 0 5 0 65 0 21.02 4.41 26.48 15.40

Vegetable products 222 S0 0 5 0 66 0 14.84 4.80 19.84 18.10Animal or vegetablefats and oils S8 S0 6 6 0 56 6 28.46 4.81 27.76 21.81

Prepared foodstuffs 161 50 6 6 0 56 6 32.82 4.67 86.89 18.66Mineral products 98 70 6 7.6 0 77.6 6 18.04 2.88 16.66 14.65Products of chemicalor ellied industries 319 200 0 7.6 0 607.6 0 15.78 2.88 18.61 28.12

Plastics A rubber 81 56 7.6 7.6 0 62.6 7.6 27.47 7.18 84.60 16.50Leather, fur, andtravel goods 34 S0 0 7.6 0 57.5 0 21.82 8.40 27.72 16.77

Wood and cork 70 60 7.6 7.6 7.6 67.5 15 20.89 7.60 27.89 14.67Pulp and paper 81 50 0 7.6 0 57.6 0 82.28 6.11 88.40 21.88Textiles 288 50 0 7.6 0 57.6 0 27.08 7.24 84.82 20.68Footwear and headgear S8 50 25 7.5 7.6 67.6 82.6 41.84 7.60 49.84 9.76Ceramic, cement, Aglass products 82 50 7.5 7.6 0 67.5 10 17.68 7.82 26.00 12.28

Jewelry 87 26 0 7.5 0 82.6 0 12.43 0.61 18.04 8.88Metal products 267 60 7.6 7.6 0 67.6 7.6 17.79 6.19 28.98 16.08Machinery A electricalequipment 827 so 0 7.6 0 57.6 0 18.72 6.69 20.40 11.80

Transport equipment 146 80 0 7.6 0 87.6 0 28.62 6.41 84.98 24.86Optical, medical, &musical instrumonts 164 50 0 7.6 0 67.6 0 18.77 5.21 19.98 12.92

Arms A ammunition 9 25 0 7.6 0 82.6 0 19.44 6.83 26.28 14.88Miscellaneous manufac-tured articles 100 50 0 7.6 0 67.6 0 67.46 6.00 38.46 19.06

Art works A antiques 7 so 0 7.6 0 67.6 0 15.71 6.86 21.07 19.26

Note: The fiscal duty is a variable rate Import duty levied for protection and revenue-raising purposes.The customs duty is a flat-rate import duty, levied in addition to the fiscal duty, and used forrevenue-raising purposes. For full section headings, see Customs Tariff Decree,' The Republic ofFiji.

2/ The effective rate of protection (ERP) refers to value added at domesticprices compared to value added at efficiency or border prices. Adiscussion of the methodology used to calculate ERP's can be found inAppendix 1.

- 33 -

3.7 A word of caution is in order regard the ERP's presented inTable 3.4. The calculations use industry structures data from the 1985 Censusof Industries and the duties paid can differ considerably from nominal ratesdue to a range of exemptions; therefore, the ERP's in Table 3.4 should betaken only as an indication of orders of magnitude rather than preciseestimates. Nevertheless, the calculations are helpful in showing how thelowering of maximum rates of tariff can reduce the range and magnitude ofERP's.

Table 8.4: EFFECTIVE RATES OF PROTECTION IN MANUFACTURING, 1991

Value ValueDuty on Added Added Effectivo

Nominal Raw With Without ProtectionProtec- Materials Protec- Protection Rate

Industry (1) Output (2) tion (8) (4) tion(FS '000) (FS '000)

Butchering A Meat Packing 986 86.0 O.OX 698 492 42XDairy Products 16,899 40.0 O.OX 6,289 -20 n.v.a. (6)Fruit A Fish 16,236 a6.01 O.Ox 5,128 4,840 181Edible & Coconut Oils 26,188 40.01 0.0% 6,881 -68a n.v.a.Rice & Flour Milling 38,416 20.0X O.O 8,a88 1,764 8781Bakery products 12,876 50.0X 8o.ox 4,898 25 above 6ooxSugar 104,768 40.0X O.OX 27,696 27,676 ox (6)Confectionery 4,841 40.0X OOX 2,619 1,265 1071XMiscellaneous Food Products 4,600 40.01 O.OX 876 -946 n.v.a.Animal foed 6,688 40.0X O.OX 1,721 -926 n.v.a.Non-alcoholic Drinks 4,690 40.0X OOX 2,877 1,009 1s5xTextiles A Clothes 16,798 50.0X 7.51 6,044 -1,084 n.v.a.Footwear 8s8 60.0X 7.51 125 -50 n.v.a.Sawmilling 19,204 17.6X O.OX 10,788 8,708 24XFurniture A Upholstering 10,082 60.0X 7.6X 4,186 -672 n.vy..Paper products 7,658 30.0X OOX .,466 1,428 142XPrinting £ Publishing 18,677 50.0X 7.5X 7,508 1,821 4e8xPaint 6,178 40.0X O.OX 1,410 -898 n.v.a.Soap, Toletrioes A Chem. Prod. 18,996 40.0X O.Ox 4,218 -980 n.v.a.Miscellaneous Chem. Prod. 2,864 40.0X O.Ox 1,938 1,048 851Retreading 8,885 60.0X OOX 1,428 -268 n.v.a.Plastics 7,292 40.0X O.Ox 4,117 1,811 214XCement & Conc. Prods. A Basic

Metal Ind. 26,498 SO.Ox O.OX 14,496 1,948 above 6OOXMetal Furniture A Fixtures 747 40.0X O OX 818 21 above 6ooxStructural Metal Products 15,840 40.0X O.OX 4,629 -1,497 n.v.a.Fabricated metal prods ox.Machinery A Equipment 7,088 40.0X O.Ox 2,663 -127 n.v.a.

Agricultural March A Equip. 1,189 O.OX 10.0X 624 657 -sxRopsirs A Maint. of Ind. Machinery 2,641 O.OX 10.0X 778 986 -17XBoat A Ship Building A Repairing 6,956 60.0X 10.0X 1,627 -968 n.y.v.Bus Building 791 80.01 10.0X 419 -180 n.vya.Jeweller A Related Articles 1,061 O.OX O.OX 188 188 1o

(1) Industry groups are based on FSIC the Fiji Standards Industrial Classification. Productionand cost data are based on the 1986 Census of Industries by the Fiji Bureau of statistics.Duty rates are actual for 1991.

(2) Gross output loss own capital construction and mise-llaneous income.(a) Fiscal and Customs duties payable on imports, less exclse duty payable by domestic producers.(4) Duty rate on tradeabl- raw materials other than fuel, where a 10 percent duty rate is applied.(6) Negative value added.(6) Sugar milling only.

- 34 -

3.8 It would be useful to have corresponding estimates of ERP's forother sectors, particularly agriculture. However, due to the dispersion ofcost structures by region and the limited, available information, it is notpossible to estimate ERP's with any degree of confidence. However, based onvery rough cost estimates, some broad observations can be made. Using 1989cost and distribution data, the ERP's for selected agricultural goods (seeAppendix 1 for methodology) are:

traditional rices 22?irrigated modern (rewa) rices 492cocoa: 22copra: 66Z

The ERP for traditional rice allows for a very high producer margin forsmallholders, made possible by the high price at which imported rice is madeavailable locally. With a more modest profit margin, traditional rice couldbe competitive with imports. Similarly, cocoa and copra both require pricesubsidies to allow them to be exported at prevailing international prices; butthis does not provide a useful estimate of medium-term effective protectionsince the world prices of these commodities are currently very low .nhistorical terms. However, such low prices are expected to continue over thenext decade. Taken together with the high level of protection afforded todairy goods through quantitative restrictions on imports and the high pricesreceived for sugar due to preferential trade agreements, this would imply thatthe agriculture sector is protected to about the same degree as themanufacturing sector. Hence, the bias of the trade regime is against exports,in general, and in favor of specific, import-substituting activities withinboth agriculture and manufacturing.

3.9 On the basis of available evidence, the high and variable dutiesand ERP's continue to impose high costs on the economy and skew incentivesaway from exporting towards production for a small and still considerably-protected domestic market. The Government is well aware of the cost ofcontinuing protection and has set in motion the reforms necessary to providefor neutral treatment of domestic and imported goods. The following sectionsdiscuss the policy considerations involved in making further progress towardstrade policy liberalization and set out some recommended medium-termstrategies.

B. Objectives of Trade Policy

3.10 The medium-term objective of further trade policy reform is topromote more efficient allocation of scarce resources. As a small economy,the prices of Fiji's exports and imports are determined on world markets.Therefore, efficient resource allocation will be promoted if relative pricesof tradeables facing Fiji's producers and consumers reflect relativeinternational prices, so that the composition of investment and the structureof production can develop in line with Fiji's comparative advantage. Movingtowards this medium-term objective requires reducing the currentlyconsiderable variation in protection accorded to selected activities throughtariffs and subsidies and reducing the differential tax treatment of sectorsand products. By continuing the process of reform commenced in 1988, Fiji canmove towards a uniform or neutral set of incentives across all activities.

- 35 -

3.11 Against this background, if Fiji is to make further substantialprogress towards a neutral trade policy, then tariffs will have to beharmonized and reduced. This will lead to substantial re,renue losses (seeChapter 4) and should be coordinated with indirect tax reform. To this end,it will also be necessary to shift the basis of revenue-raising away from thecurrently substantial degree of reliance on import duties which account foralmost 30 percent of total revenue. In pursuit of this objective, theGovernment of Fiji has announced its intention to introduce a general salef,tax (GST) from mid-1992, which is expected to offset revenue losses fromtariff reform.

C. Import Policy

3.12 As noted above, the Government of Fiji has already made commendableprogress in removing quantitative limits on imports through licensing (SeeTable 3.4), replacing them by tariffs. By this means, the authorities haveplaced an upper limit on the extent of inefficiency of the import replacementactivities concerned and allowing changes in international prices to bereflected in domestic price signals. However, these tariffs continue todistort the incentive structure and impose costs to other sectors or consumersthrough higher prices.

3.13 Quantitative Restrictions. It is well recognized that the fewremaiiing quantitative restrictions (especially rice and dairy products), areunderpinned by strongly held objectives of improving self-sufficiency and ofprotecting the livelihood of those who entered these sectors in line with selfsufficiency objectives. Nevertheless, it would be preferable to replace suchimport licensing restrictions with tariffs that are in line with maximum ratesapplying to other sectors where licensing has been abolished. The near-termpriority would be to eliminate quantitative restrictions on dairy products,rice and petroleum. Both dairy and rice are important staples whose highprices drive up wages for unskilled laborers. Petroleum, similarly, is anessential input into all forms of manufacturing, and a major import categoryin its own right.

3.14 If these agricultural sectors cannot function adequately at maximumprevailing tariff levels, it would be preferable to provide direct budgetarysubsidies (as a temporary measure) to allow them to be internationallycompetitive at the prevailing tariff rate, rather than to retain licensing.Such reform of the means of protection would make it possible to identify thevery small segments of the population (e.g. about 96 dairy/cream farmers whosebutter is non-competitive and about 500 rice farmers) which benefit from theabove average protection required to achieve particular degrees ofself-sufficiency in products such as rice or dairy products. It would a>solower the cost structure of the rest of the economy and bring the cost ofsubsidies within the discipline of the annual budget review.

3.15 Tariff Reform. Turning to tariffs, the objective of reducingdistortions in the structure of incentives argues for a reduction indifferentials in tariffs among various imports and for reducing the averagelevel of tariffs. The first would reduce disparities in incentives fordifferent import-replacement industries. The seLond would lower thedifferential incentive between import-replacement and other activities and

- 36 -

improve the competitiveness of existing or potential export industries byreducing the cost of inputs.

3.16 In addition to lower tariff rates, the effective cost of importedinputs to iocal producers can also be reduced by minimizing the time requiredfor customs clearance. This can be promoted by simplification of the tariffschedule to reduce the number of rates applicable (especially between productswith similar characteristics or uses), in order to help speed customsprocessing.

3.17 As emphasized in the 1991 Budget Address, the Government hasalready made it clear that there will be further reductions in protection;this was emphasized in the 1991 Budget Address. Recognizing that decisions toinvest in new activities or to improve the efficiency of current activitiescan take several years to implement, it would be desirable for the Governmentto foreshadow the path of tariff reform for several years ahead, rather thanone year at a time, and to firmly implement the indicated course of action.

3.18 The starting point for the next phase of tariff reform is a tariffstructure consisting of two additive sets of duties. One is a basic customsduty of say, 10 percent, to which a variable rate of fiscal duty would beadded. At present, most fiscal duties are between 0 and 40 percent, althougha rate of 50-80 percent applies in some cases such as portland cement andpassenger cars. The separation of the two components of import duties has noeconomic relevance, since both duties afford a protective as well as A revenueeffect that corresponds to their sum. However, if the recommendations set outin the report were adopted, it would be appropriate to maintain the two-ratesystem for administrative convenience, for reasons set out below.

3.19 A desirable program of tariff reform would announce, at the time ofthe 1992 budget, a program of tariff reduction and simplification over aperiod of 2-3 years, which took into account the expected revenue effect ofthe introduction of a GST from mid-1992. The basic nature of the recommendedreform process would be a progressive lowering of the fiscal duty (as noted inpara 3.18) by means of an announced time-table of reductions. The customsduty would be eliminated.3

3.20 The tariff reform would reduce the top rate of fiscal duty (whichis currently 40 percent in most cases) to 10 percent, in steps of 10 percentas follows:

MaximumBudget fiscalYear duty rate

1992 30?1993 20?1994 10o

3/ A sales tax (GST) would be levied on all imports and domestically produceditems (see Chapter 4).

- 37 -

The speed with which tariffs could be reduced would depend very much onprogress registered in implementing the GST.4 Furthermore, the GST rate forthe last two years may need to deviate from 10 percent, which is the currentlyexpected rate, in the light of experience dith the new tax. However, therecommended tariff reform process should allow for an essentially uniform rateof reduction of tariff protection from all imports. For the few products(such as portland cement) having a rate of fiscal duty of 50 percent theinitial reduction (in 1992/1993) would be greater.5

3.21 Tariff Harmonization. In order to achieve a uniform tariffstructure, the number of tariff rates should be reduced to a small number, eayno more than three in the 1992 Budget. If the maximum rate is to be 30percent then, for simplicity, the other two rates for 1992 would be set at 20percent and 10 percent. Current rates which are different from these could be'rounded' to multiples of 10 percent or to zero. The 'cut off points' forrounding up or down could be adjusted so as to help match the net revenuereduction from the tariff changes to rever.ue raised from the new GST.8 Atthe same time, the remaining specific rates of duty should be converted to advalorem rates.

Import Duty Concessions and Rebates

3.22 A further component of tariff reform would be to remove thecurrently widespread system of concessions and rebates from tariffs. Atpresent, there are concessions and rebates from duties for consumption goodsto selected groups and for inputs such as machinery and raw materials forcertain types of activities. In cases where the output is subject to exciseall duties are waived. In most other cases, inputs to production are subjectonly to the customs duty, with the fiscal duty waived. As set out in moredetail in Chapter 4, considerable amounts of revenue are foregone due to theseconcessions and rebates: the actual revenue collected from customs and fiscalduties is only a small fraction of what would be collected if the nominalduties were levied.

4/ Chapter 4 provides a framework for analyzing the coordinated reform oftariffs and indirect domestic taxes. In light of the buoyant revenueoutcome associated with the forthcoming VAT, tariff reduction couldpotentially be accomplished in under three years.

5/ There are a few products such as fireworks for which very high rates offiscal duty are charged (in this case 190 percent), presumably sincethey are regarded as luxury consumer goods or have important externaleffects. In those cases, the fiscal duty should be replacee immediatelyby a broadly equivalent excise tax to make it clear it is not designedto encourage high-cost import-substitution. The excise tax on importswould, however, be collected by the same means by the Customs and ExciseDepartment.

6/ For example, rates of 5 percent could be reduced to zero, bu-. rates of25 percent could be raised to the maximum rate of 30 percent for 1992(then lowered along with the maximum rate in subsequent years) dependingon the desired net revenue effect.

- 38 -

3.23 It is also recommended that, from 1992, all imports be subject toa minimum tariff of 10 percent. During the period before the GST isintroduced, this move would have a positive revenue effect, helping to offsetthe cost of the initial reduction in the generally applicable maximum fiscalduty from 40 percent. It would also reduce the very high rates of effectiveprotection for import replacement activities where high tariffs apply tooutputs while inputs enter duty free. To reduce further the anti-export bias,duty-free imports should be provided to exporters.

3.24 Revenue Implications. Such a package of tariff reforms, combinedwith the removal of licensing for all imports would have important tax revenueeffects. Firstly, the progressive reduction of the maximum fiscal duty ratewould reduce the government revenue base. However, revenues would beincreased simultaneously by the removal of import duty concessions and rebatesfrom customs duties and by the introduction of the GST by the replacement ofremaining import licenses by tariffs and by a switch from specific to advalorem duties. The implementation period (during which it is recommendedthat fiscal duties be reduced) corresponds with the period when the GST wouldbe yielding extra revenues, moving from a 6-month application in 1992 to afull year in 1993. In addition, the revenue yield from the GST would continueto increase in subsequent years with experience in administration. Asdiscussed in Chapter 4, it would be difficult to guarantee an exact matchbetween the expected lower revenue from tariffs and increased revenue from theGST and other sources during the period through 1995. However, a considerablenumber of other policy options are available to the Government to urintain adesired fiscal balar-e during this period. These include increasingcost-recovery from Government services, improving the performance of publicenterprises leading to enhanced dividends, adjustment in selected expendituresand/or minor adjustments in net borrowings.

3.25 Efficiency Aspects. The most important long-term economic effectof further reform will stem from changes induced in the relative profitabilityof activities. Once the current differentials in nominal and effective ratesof protection are removed, there will no longer be an artificially higherincentive for investing in import-replacement as against other activities.Resources will be steered towards activities, including export activities, inline with Fiji's comparative advantage, leading to improved resourceallocation and higher growth prospects. There is an increasing body ofexperience, based on the relative economic performance of developing countries(including the Newly Industrialized Economies of East Asia) that trade reformin the direction of a more neutral set of economy-wide incentives isassociated with substantial improvements in growth performance.7

7/ The adjustment experience of a large number of developing countries inrecent years is discussed in:

- Strengthening Trade Policy Reform, World Bank Report No. Sec. M89-1454, November 1989, Two Volumes.

- Liberalizing Foreign Trade in Developing Countries: The Lessons ofExperience; Papageorgiou, D., Choksi, A. and Michaely, M.; The WorldBank, Washington DC, 1990.

- 39 -

D. Sector Adjustment Issues

3.26 There will be transitional frictions associated with theredeployment of resources from lower to higher productivity uses. As maximumtariff rates are reduced, previously sheltered activities become progressivelymore exposed to competition. The reason for phasing tariff reductions is toallow these sectors to adjust, either by improving the efficiency of all orsome aspects of their operations, or by winding down some or all of theiroperations. International experience suggests that 5-7 years is a reasonabletransition period; this would allow sufficient time for adjustment by thoseactivities which can meet internationally competitive standards.8 Furtherextension of the period of adjustment merely prolongs the period during whichinefficient activities impose costs on the rest of the economy. Since theGovernment of Fiji embarked on its course of trade liberalization in 1988, theperiod from now to 1994 provides a 5-6 year total transition period in linewith experience elsewhere.

3.27 Liberalization of import policy by abolishing licensing andreducing import duties will cause a loss of profitability and employment inthose activities which cannot improve their efficiency to internationalstandards. In cases where certain import-replacement activities arediscontinued, there will be a corresponding increase in imports of thoseproducts. Once again, international experience has shown that the net lossesin employment and the net negative impact on the balance of trade are notsignificant; in some cases the short-term costs have been offset immedia.ely,rather than after several years, due to the improvement in profitability ofother activities zelieved of the direct or indirect costs of protection topreviously inefficient activities. The transfer of labor from previouslysheltered activities to alternatives can be assisted by training or retrainingprograms.

3.28 In Fiji, there has been very little dislocation so far due toliberalization to date. This is not surprising, given that the process todate has consisted of replacing quantitative restrictions with quite highrates of tariffs. However, if the maximum rates of fiscal duty are reduced asrecommended above, many existing activities will come under considerablestrain and some of them would be likely to go out of operation as they find itimpossible to raise their productivity to a sufficient extent. For example,it is not likely that Fiji's very small-scale cement plant could match theprices of output from plants up to 20 times its size that realize importanteconomies of scale.

3.29 Therefore, when the bulk of the economy begins to benefit from theremoval of costs imposed by protection, there will be pressure from previouslysheltered activities for a halt or even a reversal of the refor-m process. Theeconomically optimal policy course in the face of such pressure would be tocontinue firm implementation of recommended tariff reforms, knowing thatlong-term benefits will outweigh substantially the short-term costs. It willalso be important to provide training programs and temporary unemploymentassistance to those segments of the workforce made redundant by the reforms.

8/ See the report on Strengthening Trade Policy Reform cited above,paragraph 16, page 9.

- 40 -

At the same time, it is important to anticipate that political pressure forselected exemptions from reform, will, at times, be intensr. If exemptionsfrom tariffs were granted to any sectors, there would be a serious risk ofderailing the entire tariff reform process.

3.30 Offsetting Adjustment Costs. If any relief is to be granted, thena contingency plan for selective budgetary relief would have several importantadvantages over granting any exemptions from tariff reductions. At the timethat the timetable for reduction of maximum tariffs was announced, it shouldbe made clear that there are to be no exemptions from the maximum tariffs;requests by any firm for special budgetary assistance would be considered on acase-by-case basis, if a sufficiently compelling case were made. Even inthese cases, special assistance, in the form of retooling loans, retraininggrants and unemployment support, would only be granted for a limited period(e.g. not more than 2 to 3 years) and the real value of budgetary assistancewould decline to zero at a steady rate during that period.

3.31 Such a contingency plan for selective budgetary relief from importliberalization would have several advantages:

(a) It would focus attention on the cost of granting relief. The costof allowing any special higher tariff for a particular type ofimport replacement activity would be scattered through the economyby raising the price structure and the total cost would bedifficult to assess. On the other hand, if relief were providedthrough a direct budget subsidy all of the costs would beconcentrated in a transparent way on the budget and come under theannual scrutiny of the budgetary process. There would be noadditional distortion of the structure of prices or incentives tothe rest of the economy.

(b) There would also be considerable resistance to granting specialrelief, due to the many other competing claims for publicexpenditure; the trade-off among alternative Government objectiveswould be clarified. For example, the implications of adhering tocertain self-sufficiency objectives in products such as cementcould be compared effectively with the capacity for improving theroad network, the education system or other programs.

(c) There would be less risk of relief granted in one case leading toadditional claims by others. The cost to the budget of eachadditional request granted would be cumulative, so the resistanceto granting relief to inefficient import-replacement activity wouldincrease over time. In contrast, if relief were granted throughspecial tariff rates, successive decisions would be relatively"painless' for the Government, with higher costs and pricedistortions scattered widely among other sectors.

(d) As any special assistance would be channeled to particular firms(and unemployed workers), the responsibility would, in the firstinstance, be on firms seeking help to measure and acknowledge thecost of their inefficiency in terms of competing with imports.Firms would not be able to benefit indirectly from measures such as

- 41 -

special tariffs applying to broad sectors of activity, so"rent-seeking" behavior would be discouraged.

(e) If relief is granted only for a limited period and set to declinetowards zero in each year of the period, there would be no risk ofopen-ended support such as provided by quotas, or indefinitesupport through special tariff rates. There would be constantpressure on any firm receiving special assistance to improve itscompetitiveness over time. In theory, a firm could applysubsequently for supplementary assistance. However, this would beless likely to succeed, since the firm could no longer seekprotection on "infant-industry" grounds, but would be confirmed tobe a long-term burden on the economy.

E. Export Promotion

3.32 A liberalization of import policy will provide important benefitsto exporters. Progressive reduction of protection of import replacementactivities will lower the costs which have to be borne by the rest of theeconomy. If fiscal duties were reduced significantly and the customs dutyreplaced by a value added tax, as recommended above, there would be no furtherjustification for special incentives to exporters (excepting duty drawbacks).Just as artificial incentives to import replacement are currently biasingincentives away from other activities, special incentives to exporters biasincentives away from other sectors, including efficient import replacement.However, during a transition towards eliminating protection ofimport-replacement, it remains important to provide mechanisms that can offsetthe cost penalties to export activities provided by remaining protection.

3.33 Since 1987, the Government has provided very generous incentivesfor Tax-Free Factories (TFFs) wh ch export 95 percent or more of their output.They are exempted from im ort duties on all inputs and they are also entitledto a 13-year tax holiday. On the other hand, there are very few dutyincentives to firms which export less than 95 percent of their output;although they are entitled to drawbacks of duty or imports of most inputs usedin producing exports, the drawbacks are available with a long delay (after thetime taken for processing and exporting together with any administrative delayin receiving the drawbacks after exporting has taken place).

3.34 An important objective is to unify the export-promotion regime, toreduce the artificial distinction between an exporter and a producer for thedomestic market. For firms which export 95 percent or more of their output,exemptions from fiscal duty will continue to be appropriate. Exemptions fromthe customs duty or GST will remain relevant only to the end of the tax-freeperiod after which any taxes paid on inputs will be rebateable against othertax liabilities. For firms which produce a mix of domestically sold andexported goods, improvement in the duty drawback system is required (seeparagraph 3.38).

91 Such factories can be located anywhere in Fiji, rather than confined toa special zone. The Government is also planning to developinfrastructure for a new special Tax Free Zone restricted to firmsexporting 95 percent or more of their production.

- 42 -

3.35 The key policy question with respect the TFFs is whether a13-year tax holiday can continue to be offere' future investors. If therelative share of export-oriented firms in the conomy grows, as it is hoped,then it would become increasingly difficult to finance the physicalintrastructure or to assure an adequate supply of skills, without neededcontribution from the TFFs. Experience from other developing countriessuggests that the availability of physical infrastructure and a skilledworkforce is a greater incentive for investment than tax-holidays in under-developed areas. The trend in Asia is away from direct tax concessions to newinvestors and there is no precedent for a 13-year tax holiday. Tax-holidayperiods in Indonesia were abolished in 1984 as part of that country's taxreforms, and foreign investment has reached record levels since 1987. Theyhave never been a feature of Hong Kong's regime. Other countries, such asMalaysia and Thailand, are planning to either phase out tax holidays, or toreduce their scope. Moreover, since tax-free treatment cannot beeconomy-wide, such treatment cannot be extended permanently without distortingthe incentive structure. For these reasons, it is recommended that newinvestors in export industries no longer be provided corporate taxholidays.10

3.36 Sugar Exports. The sugar industry Is another example of excessiveGovernment support to an export sector. Approximately half of all sugarexports are sold under preferential agreements at prices well in excess of theworld market price."1 The difference between the market price and the pricepaid for sugarcare constitutes a form of economic rent, or trade-tied aid,

which now accrues solely to the sugarcane sector, rather than to the economyas a whole. The trade-tied aid portion of sugar export earnings is estimatedat approximately F$60-80 million per year, providing sugarcane farmers with anincome well in excess of smallholder sugar producers in other developingnations.

3.37 Sugar exports are taxed at a rate of 5 percent to offset theexclusion (until 1991) of agricultural households from the income tax.Consideration may be given to an appropriate, phased increase in the exporttax on sugar to offset the aid portion of the preferential sugarcane prices,which would then augment overall government revenues rather than accruespecifically to the sugarcane sector; this would serve to address both thepotential resource allocation distortions and distributional concerns stemmingfroit the preferential price agreements.12 Such an increase should bephased-in as soon as possible to avoid the capitalization of high, non-marketsugar prices in the land leases due for renegotiation in the mid-1990s(Chaptktr 5). Such an adjustment would have relatively little effect on theexisting levels of sugarcane production--sugar is far more profitable than

10/ As discussed in Chapter 4, tax holidays should, in general, be replaced byan initial 100 percent depreciation allowance for capital goods.

11/ See Appendix 2 for a more detailed discussion of incentives policies in thesugar sub-sector.

12/ Phasing of the sugar export tax increase would be appropriate in thelight of uncertainties in the world sugar market and in thesustainability of Lome commodity assistance.

- 43 -

readily substitutable crops--but would discourage expansion of sugarcaneproduction into marginal lands.

3.38 Broadening the Duty Drawback. The incentives for such partialexporters would be enhanced considerably if, as an alternative to the dutydrawback facility, such exporters could receive a rebate from duty whichcorresponded to the share of output exported. As is presently done inMalaysia, exporters would need to declare, before the start of each financialyear, the share of certain products they planned to export and the importrequirements for such exports. They would then be exempted from duty on thoseimports but would be required to demonstrate, at the end of the year, thatsuch exports did take place. Their tax liability for the subsequent yearwould then be adjusted in the light of their actual documented exports. Sinceexporters would not have to face any delay in receiving a refund for importduties related to exported exports, such a scheme would go considerablyfurther to offsetting the current cost penalty imposed on exporters by importduties.

3.39 The current duty drawback scheme would continue to be available forfirms which were not able to forecast their planned exports (for example firmswhich may make one-off sales to a neighboring island country). In order toimprove the effectiveness of the incentive provided by the drawback scheme,exporters should receive rebates of import duties with some interest added.For example, interest could accrue from the time the claim for duty drawbackwas lodged.

F. Support Services

3.40 Attention needs to be paid to the range of ancillary services thatare important to all exporters. Sustained strong export performance needs tobe backed by adequate transport, telecommunications, power, water and seweragefacilities. Whil2 freight facilities (air and sea) are seen as adequate atpresent, there are some signs of emerging bottlenecks, with some exporterscommenting on delays in access to international telecommunications. In fact,the very availability of such services can be more important than their costin time-sensitive export activities.

3.41 It is also very important to avoid a shortage of skills frombecoming a bottleneck to growth, including export growth. There is a seriousshortage of meny skills in Fiji following substantial out-migration of skilledand professional people during the past three years. In the longer-term, thesolution depends on effective domestic education and training efforts. In theshort-term, it must be recognized that most skills can be imported, albeit ata cost. They can be regarded as a tradeable input to production, includingexport production. Accordingly, there is no more sense in placingquantitative restrictions or licensing for the import of skilled personnelthan for any other category of inputs. Given the high transport and housingcosts of employing expatriates, there is very little risk of them beingemployed in positions which could be filled competently by local personnel.Administrative delays in issuing work permits are an unnecessary irritant andshould be overcome by abolishing restrictions on work permits, at least thoseof 3 years or less in duration.

- 44 -

3.42 The availability of pre and post shipment export finance, forwardchange cover and export insurance are also crucial to underpin export growth.These facilities appear to be adequate at present in Fiji, but their adequacyshould be monitored by the Fiji Trade and Investment Board (FTIB). As in thecase of infrastructure, their adequacy is more likely to be sustained if thefinancial sector is permitted to provide such finance on a competitive,commercial basis.

3.43 Market information is extremely important to support an export-oriented growth strategy. In a very short time, the FTIB has done anexcellent job in promoting Fiji amongst foreign investors in the region and inhelping domestic investors forge links with outside interests in new markets.The FTIB should continue to promote Fiji as an attractive location for foreigndirect investment, particularly in the markets of East Asia and Europe. TheFTIB should serve as a none-stop" point for both promoting and authorizingforeign investment. Appropriate institutional mechanisms need to beestablished towards this end.

3.44 Government regulations and delays in administrative processes canbe a serious impediment to economic growth and good export performance.Options for streamlining regulations are taken up in Chapter 5. Inparticular, the speed of customs clearance is very important for exportersfrom Fiji, given their heavy reliance on imported inputs. The Customs serviceis among those services suffering from serious skills shortages which arelikely to detract from efficiency. In these circumstances, there would be acase for increased reliance on self-assessment accompanied by systematicspot-checks. Such schemes have been introduced in economies like Mexico,where rapid growth in trade overwhelmed the capacity of previous customsprocedures.

G. Public Sector Marketing

3.45 Marketing arrangements can have an important effect on theefficiency and competitiveness of export industries. Access to marketinformation is a vital ingredient. The Fiji Trade and Investment Board canmake an important contribution by gathering market intelligence as well as inpromoting Fijian exports to a gradually broadening range of markets. Afterthere are a sufficient number of foreign investors active in Fiji, the needfor a public sector promotion body will diminish. Ultimately, the bulk of themarketing effort needs to be undertaken by the private sector. In the largerEast and South-East Asian economies, export performance has been boosted byprivately owned trading companies with widespread agency and market-intelligence gathering networks with a wide geographic and sectoral spread.There may be some advantage in encouraging commercial linkages between some ofthese trading companies and Fijian exporters.

3.46 The role of public sector marketing agencies needs to be consideredcarefully. The experience of most developing countries in recent decades wasthat publicly owned marketing bodies with sole exporting rights have, almostwithout exception, performed very poorly in terms of obtaining optimal returnsto growers or in promoting the quantity or quality of output. In Fiji, manyagriculturally based products including pineapples, ginger, other tropicalfruits, cocoa and copra are marketed solely through publicly ownedcorporations or through marketing agencies of the Ministry of PrimaryIndustry.

- 45 -

3.47 For some sectors of production, especially in agriculture, thereare substantial economies of scale either in processing or in exportmarketing. Given the major distortions in the international sugar market, itis hard to envisage an economically efficient arrangement for sugar exportsfrom Fiji which would be radically different from the present one. Inrelatively new export sectors, such as ginger, a public sector marketingarrangement can be helpful at the initial stage in order to assure smallholderproducers of a market and reduce the risk of prices to growers being depressedby the market power of relatively large private buyers. For these reasons, aradical reform of export marketing arrangements is not proposed. However,policies should be designed to reduce two major potential sources ofinefficiency.

3.48 Firstly, no marketing or processing agency or corporation should begiven exclusive rights. If the economics of particular industries leadtowards concentration of these activities, then existing arrangements shouldnot require legal backing to sustain them. The absence of sole legal rightsto marketing helps to avoid the gradual emergence of gross inefficiency. Solemarketing rights are often sought on the grounds of ensuring quality controlso as to maintain Fiji's reputation as a exporter of products which meet highquality and safety/quarantine standards. However, this can be assured by acompetent export inspection agency which does not need to be involved incommercial operations: this is the successful practice in most exportingcountries. In any case, private sector exporters will have a strongcommercial incentive to maintain adequate quality of output.

3.49 Secondly, while there may be a case for public sector involvementin the marketing of certain agricultural products, these need to be run oncommercial lines; they should not be used to provide open-ended subsidies toproducers on an ongoing basis. The marketing boards should be used as toperform a trading and quality control function and operate on commerciallines. They can only do so if they are not used as an artificial means ofsupporting rural incomes.

3.50 On the import side, the recent (November 1990) decision to set upthe Fiji National Petroleum Company (FINAPECO) with an exclusive license to'.mport petroleum products stands in contrast to the rest of the Government ofFiji's broader objectives of reducing the role of the state and increasing thelevel of competition in the economy. This wholly state-owned enterprise wouldreplace the petroleum product supply network operated by three internationaloil companies (IOCs) who are also involved in the wholesale and retaildistribution of these products in Fiji. Under the new arrangements, FINAPECO(i) has contracted to purchase 10,000 barrels/day of crude oil from Petronas(the Malaysian state-owned petroleum company), (ii) has contracted to supply10,000 barrels/day of Tapis crude and lift about 6,800 barrels/day ofpetroleum products from Esso in Singapore, which would be transported by Essoto Fiji and (iii) is negotiating to sell the petroleum products directly tothe three distribution companies (affiliates of IOCs) in Fiji. While initialplans were for FINAPECO to start operating from April, the currentexpectations is that it will begin deliveries in September, 1991.

3.51 Given the fluctuations in international petroleum markets, theadditional financial and economic costs to Fiji of the new petroleum supplyarrangements are difficult to forecast with accuracy. However, based on a

- 46 -

simulation for the pre-Gulf War year (August 1989-July 1990), the additionalcosts can be estimated at about F$4.3 million per year, equivalent to aboutF$0.02 per liter. This estimate can be broken down as follows:

(a) Incremental cost of crude oil. FINAPECO will buy and sell thecrude oil the applicable official selling price (OSP), but tofinance the purchase, it will need to raise a letter of credit andpay interest on a working capital overdraft to the extent of aboutF$0.695 million per year.

(b) Incremental FOB cost of product. FINAPECO will purchase thepetroleum products a price based on 50 percent of the Singaporespot price and 50 percent of the average of four Singaporepostings. The current formula used by the Prices and Incomes Board(PIB) uses 50 percent of the spot price and the lowest Singaporeposting. Also, FINAPECO will purchase leaded gasoline at a US$2.20per barrel discount from the price of low-lead gasoline. Thisdiscount is smaller than that obtainable under PIB's approach whichuses the greatest discount offered. The incremental cost to Fijiwould be about F$0.885 million per year.

(c) Incremental marine freight. FINAPECO will be charged a rate basedon MR AFRA Worldscale plus 58 points of Worldscale as a premium forclean vessels and/or remote trading. The current formula used bythe PIB is based on MR AFRA Worldscale plus a 15 percent premium.The additional cost can be estimated at about F$0.667 million peryear.

(d) Incremental CIF price. FINAPECO has proposed to base its saleprice to the distribution companies on the average of fourSingapore postings while, as indicated above, its purchase price isbased 50 percent on postings and 50 percent on spot prices. Thedifference amounts to about F$1.066 million per year.

(e) Incremental overhead charge. To cover its administrative costs,FINAPECO has proposed to add a US$0.50/barrel overhead charge toits CIF price as computed above. As such administrative chargesare not recognized in the PIB's price control formula, theadditional costs to Fiji would amount to about F$1.020 million peryear.

As these cost differences are incremental to the existing formula used by thePIB to determine the allowable price of fuels, they represent incrementalcosts to Fiji consumers of FINAPECO's proposed operations. In addition, asthese costs would be incurred upstream of the on-shore distribution componentof the supply system, it would not be feasible to compensate for these coststhrough an equivalent F$O.02/liter reduction in the PIB's existing allowancefor the oil companies' local distribution expenses, as has been proposed byFINAPECO.

3.52 While the costs of FINAPECO to Fiji are quantifiable, the benefitsare not evident. A comparison of the existing supply network with the newarrangement with Esso provides little grounds for expecting a difference in

- 47 -

either product quality, security of supply or extent of Fijian control overthe supply of fuel. Therefore, the Government of Fiji has taken on anadditional burden in terms of incremental costs to the consumer, diversion ofscarce managerial capacity and additional commercial responsibility withoutany clear evidence of net advantage. In addition, as in the case of an exportmonopoly, there is a long-term risk that an exclusive import license couldpermit a gradual loss of efficiency and reduced responsiveness to customerneeds. To avoid such risks, as well as the incremental costs, it isrecommended that the Government of Fiji consider winding down FINAPECO as soonas possible, before additional costs are ircurred. Such a decision would alsobenefit neighboring countries who are linked to Fiji through the existingpetroleum supply network of the IOCs and who are facing the choice of eitherpaying the incremental cost of FINAPECO or seeking alternative suppliers at acost that is likely to be higher than that of the existing supply network.

H. Market Access

3.53 As a developing country and a member of the South Pacific Forum,Fiji enjoys favorable terms of access to most industrial country markets. Forexample, under the SPARTECA agreement, Fiji has duty-free access to the nearbymarkets of Australia and New Zealand. There is also duty-free access to EECmarkets under the Lome IV convention, while Fiji benefits from the GeneralizedSystem of Preferences (GSP) access to most other industrial countries,including the USA and Japan.

3.54 The Lome Convention is particularly important for Fiji as itprovides guaranteed access for an important proportion of Fiji's sugar exportsat favorable prices. Such access is expected to continue over the next fiveyears, but any additional sugar produced by Fiji would need to be sold on theopen world market where prices are artificially depressed due to the heavysubsidization of much of the Northern Hemisphere production of sugar and sugarsubstitutes. If the Government were to tax a portion of the gains accruingfrom the high EEC and US sugarcane prices, the sugarcane industry could beginto adjust to the realities of competing on the world market. This takes onincreasing importance as the Fiji Sugar Corporation prepares to expandproduction and processing capacity in low-productivity regions of the nation(see Appendix 2).

3.55 A considerable part of the export expansion and diversification of1989-1990 can be attributed to special market access arrangements. Extensionof the coverage of the SPARTECA duty-free arrangements to include textiles,clothing and footwear in the mid-1980s was crucial in encouraging garmentproducers to locate in Fiji. Access to the US markets without quotarestrictions also provided the opportunity for investors whose expansion inother locations was blocked by quotas under the Multi Fibre Arrangements(MFA). Sales to the US market expanded rapidly in the late 1980s. As shownin Figure 3.2, the US became the second-most important destination for garmentexports in 1990. Fiji has encountered the first quota restrictions in the USmarket for nightwear in 1990. This has not been a major setback as there area very large number of other items with quota-free access. Accordingly, thereis considerable scope for further growth of garment export to the huge USmarket, although increasing amounts of scarce administrative resource arelikely to be required to negotiate quotas in additional items over time and tomonitor the volume of exports of restricted items.

- 48 -

3.56 Similarly, the benefits of duty-free access to Australian and NewZealand a.iarkets will become less significant over time as both those countriesare committed to the gradual reduction of protection against imports from allsources, thereby reducing Fiji's relative advantage. All textile and clothingimports to New Zealand are quota-free, so Fiji's advantage will depend on howfast tariffs are reduced. Protection of Australia's textile and clothingindustry will become quota free by 1994 at the latest, but tariffs of 25percent or more are expected to apply at that time, reducing towards zero,possibly by 2000. At present, Australian importers have to purchase theirright to a share of quotas, with the cost of quotas determined through abidding process. Fiji's advantage from duty free access is currently enhancedby the fact that a minor share of Fiji access to quota is free of cost underthe SPARTECA agreement.

3.57 Since Fiji's advantage over other sources for garment exports willbe eroded over time in its present major markets, it is Important to encourageexport diversification. It will be important to broaden the base ofnon-traditional exports beyond the currently high reliance on tourism andgarments in the medium-term. In the short-term, exporters should beencouraged to tap new markets for garments more vigorously, especially EECmarkets where Fiji has duty-free access under the Lome IV Agreement.

3.58 It is not suggested that special fiscal incentives should beprovided for diversification in these directions. Rather, the collection anddissemination of additional market opportunities should be given high priorityby FTIB. It would be particularly useful to monitor and learn from theexperience of other small economies which have been able to broaden the exportbase well beyond garments, for example into exports of electronic goods anddata processing services. Rather than "picking winners" for Fiji, the FTIBshould ensure that information about potential opportunities is made availableto existing and potential exporters from Fiji, and encourage the Government toprovide a neutral incentives environment that facilitates the expansion oftrade.

3.59 In the long run, Fiji's economic prospects will depend onsustaining and enhancing an open multilateral trading system. It is thereforeto Fiji's advantage to participate constructively in multilateral tradenegotiations such as the Uruguay Round; Fiji has been doing so, especially asa member of the Cairns Group which has been pressing for liberalization ofagricultural trade. Fiji can also participate, either directly or through theSouth Pacific Forum, in regional processes. These include the new AsiaPacific Economic Cooperation (APEC) process, which is emerging as a coalitionof regional interests in favor of less restricted global trade, and thePacific Economic Cooperation Conference (PECC) which is an informalassociation of regional officials, businessmen and academics engaged inidentifying common regional economic interests in trade, transport and othersectoral areas.

- 49 -

IV. Tax Policy and Investment Incentives

A. Introduction

4.1 While trade liberalization is expected to enhance Fiji'scompetitiveness, the domestic tax system is an important determinant ofinvestment incentives. At an aggregate level, taxation does createdisincentives to private economic behavior that could undermine efficientallocation of resources and growth. In Fiji, the tax system has evolvedthrough regular use of ad-hoc discretionary changes, which are characterizedprimarily by concerns of relative administrative ease rather than longer termdesirability. As a result, the tax system is coumplex; it is marked bynumerous exemrtions and special provisions, that fail to provide clear signalsto investors. Restructuring the tax system so as to reduce accumulatedinefficiencies will play an important role in reforming the incentivesenvironment for private investment.

4.2 At the same time, there may be a loss of public revenues as tariffrates are progressively reduced. A coordinated effort is needed to developalternative sources of public revenues so as to sustain revenues at anappropriate level relative to public expenditures. This poses an importantchallenge to the Government for the pace with which alternative revenuesources are generated will largely determine the pace at which the tradereform program can be implemented. The impending revenue gap also providesthe Government with the opportunity to undertake a domestic tax reform programthat will further enhance efficiency and investment incentives.

4.3 The primary function of the tax system is to generate revenue.Available evidence indicates that this function is being discharged adequatelyin Fiji. Other important objectives of the tax system are to encourageefficient capital accumulation; promote vertical and horizontal equity; theformer in terms of assessing taxes in line with one's ability to pay and thelatter in terms of equal treatment of all sources of income. Finally, theease of administration is an important factor to consider in the design of atax system, particularly when there are limited supplies of skilled manpoweror enforcement capacity within the civil service.

4.4 In certain instances, measures which improve the efficiency of thetaxation system are at odds with objectives of revenue buoyancy, equity orease of administration. In Fiji, however, the opposite is the case; neededfurther reform is consistent with improving buoyancy, enhancing equity andreducing the burden of administration. In particular, further reform isadvisable in four areas: (i) reducing exemptions and rationalizing personalincome tax rates; (ii) de-emphasizing tax expenditures in corporate profit

1/ Many of the special incentives introduced into the tax code weredesigned to offset the effects of high marginal rates of tax on incomeand corporate profits. The strategy of providing selective benefits to'priority' investment groups and households, to offset the high-costtrade and regulatory regime, wos characteristic of economic policy-making prior to 1987.

- 50 -

taxation; (iii) replacing existing domestic indirect taxes by a value-addedtax and selective excise taxes on luxury and demerit goods; and (iv) shiftingthe basis for indirect taxation from international trade to domesticconsumption. In addition to improving neutrality, these measures willincrease revenue buoyancy, enhance the equity of the tax system and reduce thetax administration burden.2 l sore describing tax reform strategies in moredetail, it would be useful to .eview key features of the Fijian tax system.

B. An Overview of the Tax System

4.5 Tax Effort. The Fijian tax ratio is reasonably good, relative toother countries which are small, open economies. The ratio of tax revenues toGDP has varied between 16 percent and 24 percent of GDP over the past twodecades (see Table 4.1). After falling below 19 percent of GDP in the mid-1980's, the share of tax revenues has recovered to 21 percent of GDP in 1990.During the latter part of the 1970s and early 1980s, when tax revenues weredeclining relative to GDP, the Government relied heavily on domestic borrowingto offset domestic revenue shortfalls. Since then, a strong effort has beenmade to increase the tax effort to meet domestic expenditure requirements.

Table 4.1: TOTAL TAX COLLECTION, 1980-89(percent of GDP)

1980 1986 1989

Fiji 18.3 18.9 21.3PNG 20.6 17.3 23.1Mauritius 18.4 18.8 22.1Singapore 17.5 13.5 15.2 aJamaica 27.8 27.9 /b .

/a 1988./b 1984.

Source: IMF, Government Financial Statistics, 1990.

2/ Revenue stability would be enhanced by elimination of personal andcorporate tax exemptions and by shifting the base for indirect taxationfrom international trade (which is subject to cyclic and random shocks)to consumption (which is more stable). Equity objectives would beserved by reducing exemptions which accrue disproportionately to themore affluent and by extending the indirect tax net to goods andservices which are disproportionately consumed by the more affluentgroups (e.g. services) and by groups which fall outside the direct taxsystem. The tax administration burden would be eased by simplifyingt&xation of income and trade, but this will be offset, in part, byincreased responsibilities for administration of a domestic value-addedtax.

- 51 -

While FijJ's tax effort compares favorably with other middle-income developingcountries, it falls well short of the levels realized in the developed marketeconomies (30 percent of GDP). Given, however, relatively modest revenuerequirements for infrastructure (see Chapter 2), the main objective would beto maintain the tax effort while identifying revenue sources to offset thelosses associated with tariff reform.

4.6 Composition of Tax Revenues. Direct and indirect taxes currentlyaccount for approximately 43 percernt and 57 percent of total tax revenuesrespectively. Of the direct taxes, individual income taxes are the moreimportant, accounting for 26 percent of total tax revenue; corporate taxes, bycomparison yield only 15 percent of the total tax take. Of the indirecttaxes, import duties are the most important, providing nearly a third of totaltax revenues. Export duties are relatively small, being limited to sugarcane,gold and forest products; they yield only 2-4 percent of total tax revenues.Taxes on domestic t-ansactions in goods and services yield 16-18 percent ofthe total taxes, with excise duties and turnover taxes providing the bulk ofthese revenues (see Table 4.2).

4.7 Over time, the tax base has shifted from reliance on direct taxes(income and corporate tax) to a greater reliance on indirect taxes (see Figure4.1). In the early 1980s, direct taxes contributed about 60 percent of totaltax revenues; by the end of the decade, this proportion had fallen toapproximately 40 percent. This shift -as due to a number of factors: (i)replacement of import licenses with revenue-generating import tariffs; (ii) abroadening of the excise tax base; and (iii) lack of growth in the paid workforce which contributed to slow growth in income tax collections.

Table 4.2: CENTRAL GOVERNMENT TAX REVENUE, 1989-90

1989 1990 1989 1990Zst. Est.

F$ million Z of total

Tax Revenue 381.4 427.2 100.0 100.0Taxes on Income & Profits 169.7 184.0 44.5 43.1Corporate 47.6 65.7 12.5 15.4Individual 114.2 109.5 29.9 25.6Unclassified 7.8 8.8 2.0 2.1

Taxes on Property 0.2 0.2 0.1 0.0Estate & Gift Duty 0.2 0.2 0.1 0.0

Taxes on Goods & Services 61.9 78.2 16.2 18.3Excise Duties 42.7 54.0 11.2 12.6Turnover Tax 14.7 19.0 3.9 4.4Vehicle Taxes & License Fees 4.5 5.1 1.2 1.2

Taxes on International Trade 145.4 159.0 38.1 37.2Import duties 138.6 144.0 36.3 33.7Export duties 6.8 15.0 1.8 3.5

Other Taxes 4.2 5.9 1.1 1.4

Source: Budget Speech, 1991.

- 52 -

4.8 Reliance on Indirect Taxes. Compared to outward-oriented economiesin the region, Fiji realizes a relatively high share of it s total taxrevenues from taxes on international trade (see Table 4.3). Singapore andAustralia, for example, both realize only 5 percent of their total taxrevenues from international trade taxes, compared to 34 percent for Fiji. Ahigh degree of reliance on international trade taxes has two important adverseeffects: (i) it contributes to fiscal instability because of the volatility oftrade flows and receipts; and (ii) it biases incentives against export-oriented activities. The Government is aware of such disincentives induced byheavy reliance on international trade taxes and has begun a program of tariffreform (see Chapter 3) and, in the 1991 Budget Address, indicated it'sintention to introduce a value-added tax in mid-1992 (see section 4.27 below).In fact, the increasing reliance on trade taxes was not designed into the taxsystem, as noted earlier it was largely a byproduct of the switch from non-tariff barriers to tariffs and slow employment growth. Nevertheless,maintaining fiscal balance while transforming the indirect tax base from areliance on international trade to a domestic consumption based tax will be amajor undertaking; will require careful coordination of fiscal, tax and tariffpolicy, as discussed in greater detail in section E below.

Figure 4.1: TAX REVENUE, 1976-90(% GDP)

15

A~~~~~~j ~

10 X m

1M7D '1N 4 1184 1987 '99 8 1 SW iBI

Ino m Wd r, iretl tn. ro*en

- 53 -

Table 4.3: TRADE TAX SHARE, 1988(Z of total tax revenue)

Fiji 34.0Singapore 5.1Australia 5.1New Zealand 2.4Mauritius 56.7PNG 30.4Indonesia 6.3Thailand 24.9Malaysia 24.5

Source: IMF, Government Financial Statistics, 1990.

4.9 Tax Buoyancy. Tax revenues have been relatively buoyant relativeto growth in domestic product (see Table 4.4). Mirroring the shift in thecomposition of tax revenues, the buoyancy of indirect tax revenues is markedlyhigher than that of the direct taxes, reflecting the shift from quantitativerestrictions to import tariffs. Within direct taxes, the corporate income taxhas been more buoyant that personal income tax. This reflects both theincrease in post-1988 enterprise activity and stagnation in formal sectoremployment. The buoyancy of indirect taxes is relatively high, reflecting inrecent years, the introduction of a number of new excise and turnover taxes,and increasing revenues accruing from tariffication of imports.

Table 4.4: TAX BUOYANCY ESTIMATES

Tax Revenue 1.1489Taxes on Income & Profits 0.9962Corporate 1.1813Individual 0.8935Unclassified 1.4000

Taxes on Goods & Services 1.5256Excise Duties 1.4476Turnover Tax 2.8384

Taxes on International Trade 1.4019Import duties 1.2468Export duties 1.9214

Other Taxes 1.2337

/a Buoyancy of tax revenues to nominal GDP,derived by regressing the log of tax revenues,1976 to 1990, on the log of GDP and a dummyvariable for the years 1987 and 1988.

- 54 -

4.10 Direct Taxes. The most important direct taxes are the personalincome tax and the company tax (or tax on enterprise profits) which aredescribed in Table 4.5. Unlike many developing nations, the tax base forpersonal income and corporate profits is relatively broad at nearly 50 percentof the paid labor force (for personal income tax) and close to 100 percent ofall non-agricultural enterprises (for company tax). Furthermore, starting in1991, agricultural households will be required to pay personal income taxes,effectively bringing the largest group of now exempt households into the taxnet. There are ten tax bands in the personal income tax, with a top marginalrate set at 40 percent.8 The corporate income tax is set at 37.5 percent fordomestic corporations and 47.5 percent for foreign corporations, the latterbeing notably high by the standards of the region (see Table 4.6). Despite acomplex rate structure, administrative costs are low and compliance isremarkably good.4 The direct tax system is marked by the provision of an

extensive and ad-hoc set of exclusions, waivers and holiJays from personal andcorporate income tax. The impact of the tax expenditures, and a strategy fordirect tax reform, is discussed in section C below.

4.11 Indirect Taxes. The indirect tax system includes import duties,export duties, excise duties, turnover taxes and a few other taxes with smallyields (road user tax, airport tax, fees and licenses). International tradetaxes--virtually only imports duties--are the major source of indirecttaxation. Imports contribute over 64 percent of indirect taxes and 33 percentof total tax revenues. Taxes on domestic transactions (domestic indirecttaxes) account for 32 percent of total indirect taxes and 17 percent of totaltax revenue. This is attributable to the narrow base of domestic indirecttaxes, to the extent that over 75 percent of domestic indirect taxes come fromthree goods and services--alcoholic beverages, cigarettes and hotelaccommodation charges. Although three products provide the bulk of therevenues, excise duties are applied on 47 domestically manufactured productsand a turnover tax (a consumption tax) is applied to fifteen services. Themain structural flaws in the indirect tax system include: (i) a high relianceon import duties from a highly differentiated tariff structure (whichgenerates distortions and discriminates against export-oriented activities);(ii) provision of numerous rebates and duty concessions (which erode theindirect tax base); (iii) a narrow base of domestic indirect taxes; (iv) theuse of specific duty and excise rates (which erodes the automaticresponsiveness of the tax system to inflation); and (v) asymmetric treatmentof domestically manufactured products and competing imported items fordomestic indirect taxes.

3/ Both personal and corporate taxes include a flat-rate basic tax of 2.5

percent in addition to the progressive income tax and flat-rate corporatetax.

4/ Collection costs are on the order of 0.8 percent of revenue generatedfor income, corporate tax and excise taxes and 0.4 percent of revenuegenerated by import and export duties.

- 55 -

Table 4.5: KEY FEATURES OF FIJI'S DIRECT TAX REGIME, 1990

Personal Income Tax

Basic Tax Rates 2.5?Number of Rate Bands (Progressive): 10.0Lowest Tax Rate: 4.OZHighest Tax Rate: 40.0XNumber of Filers (1988): 108,000Exempt and Excluded Income:

(1) capital gains excluding property(2) all business expenses including income

exempt under corporate tax provisions(3) family allowances(4) life insurance premiam(5) educational allowance for children

attending school away from home(6) interest earnings under F$400

Corporate Income Tax

Domestic Resident Rate: 37.5?Foreign Company Rate: 47.5zDividend Withholding Rate: 15.0?Number of Corporate Filers (1988): 1810Exclusions and Exemptions:

(1) capital gains(2) normal, accelerated and initial depreciation of

capital goods(3) special hotel construction allowance(4) minerals exploration, mining prospecting costs(5) 8 years of income for new developmental industries(6) 13 years of income for export oriented industries(7) cost of fuel savings measures(8) income associated with exports(9) income from movie making(10) agricultural land improvement costs(11) agribusiness income(12) 55Z of tourist vessel and tourist industry costs(13) interest payments below F$400(14) pensions, scholarships, inter-company dividends

Note: The basic tax rate refers to a minimum tax that is paid by allhouseholds and enterprises in addition to the corporate andpersonal income tax liability. For more details see Appendix 4.

Source: Government of Fiji.

- 56 -

Table 4.6: INTERNATIONAL COMPARISON OF CORPORATEAND INDIVIDUAL INCOME TAX RATES

(percent)

Corporate Maximum Rate ofTax Rote Individual Incom Tax

Country (local/foreign)

FIJI 87.6,47.6 40Singapore 88 /a so /IAustralia 89 /b 40 LiNew Zealand 281I sa8kMauritius 8a Is 85 iaPNO 80,48 1! 45 LmIndonesia 86 /! 85 InThailand 86 La 66 LoMalaysia 86 /h 46SL

1o Flat rate. No state or municipal taxes on incom.b Primary incom tax for both resident aid nonresident, public and private

companies.'c Flat rate for resident companies. No state and municipal taxes./d 16 percent for companies holding a developmnt certificate, an

agricultural developmnt certificate, an export enterprise certificate,an export service certificate a hotel management service certificatean lndustrial building certificate and companies operating a clinic onthe net incom derived by the clinic, exclusively from medical, surgicalor slimlar activities. 85 percent for all other companies.

/0 Income tax of 80 percent for resident companles (other than generalmining companies); 48 percent for nonresident companies; 60 percent forpetroleum mining companies; and 86 percent for general mining companies.There Is also an additional profits tax of 86 percent for general miningcompanies and 60 percent for petroleum mining companies.

If For companies withincome in excess of US828,000, the first US828O000 istaxed at 28 percent.

Ig 30 percent net profits tax for companies registered on the SecuritiesExchange of Thailand, and 85 percent for other companies and juristicpartnershipe.

1h Incom tax rate reduced from 40 percent to 86 percent effective 1989; 6percent development tax on profits derived from buuiness sources andrenting of property; 46 percent petroleum incom tax on profits frompetroleum operations In Malaysia.

/I For residents whoso taxable income exceed SU400,000, the first SU400,000in taxed at 27 percent. Porcentage on excess Is 88. Nonroeidentindividuals *re normally taxed at 82 percent.

Li For residents whose taxablo Incom exceed A160,000, the first A260,000Is taxed at 82 percent. Percentage on excess Is 48. For nonresidents,the corrosponding percentages are 87 percent and 48 percentrespectively.

/k For taxable Income In exceas of NZ88,9876, the first NZ89O,875 is taxedat 24 percent. Percentage on excess is 88.

/I For chargeable Incom in excess of Rc.50,000, the first Re.60,000 Istaxed at 17 percent. Percentage on excess is 86.

Im For taxablo incom In excess of K1I,000, the first K16,000 is taxed at24 percent. The percentage on excess is l.

/n For gross taxable Income in excess of Rp. 60,000,000, the first Rp.50,000,000 Is taxed at 28 percent. The percentage on excess is 86.

Lo For taxable Incom in excess of Baht 2,000,000, tho first Baht 2,000,000is taxed at 81 percent. Percentage on excess Is 56.

Ln For residents whose taxabl- Income exceed M8800,000, the first 83800,000Is taxed at 8S percent. Percentage on excess Is 45. For nonresidents,the corresponding percontages are 86 percent and 40 percentrespectively.

Sourc-: Price Waterhouse.

- 57 -

C. Tax Reform: Direct Taxation

(i) Personal Income Tax

4.12 Tax System Distortions. The income tax system in Fiji, wlilenotably progressive, is characterized by an excessive array of exemptions anda high degree of complexity in the rate structure. As a result, the averageeffective rate of taxation is low (19 percent in 1989); deductions andexemptions are numerous (40 percent of gross income in 1989); and the marginaleffective tax rates are high, particularly for the middle and upper incomegroups (see Table 4.7). This implies that, particularly for those inconmegroups likely to exhibit a high marginal propensity to save, the incentives tosave and invest are diminished by high marginal effective tax rates. Ideally,a personal tax system should be simple in design (to contain administrativecosts), strive to have a high average rate of taxation (for revenue raisingpurposes) and low marginal effective tax rates (for incentive purposes). Allsources of income should be captured and treated equally and equityconsiderations reflected in a progressive rate structure. This can beaccomplishad through an income tax reform program focusing on rationalizingthe rate structure (i.e. rate simplification).

Tab l 4.7: MAROINAL EFFECTIVE RATE OF PERSONAL INCOME TAX, 1969

Share of Percont MERT Statutory Morainal RateTax Band Gross Incom Deductions (1989) (8l91)

(X) (e) (X) (X) (%)

F83000 - F84000 6 66 -28 16 14Ft4000 - Ft6600 17 51 -6 28 22F35500 - F$7000 15 46 18 a8 26F7000 - F89000 14 40 19 88 8OF89000 - FS16000 21 29 81 48 84Ftl6000- FP26000 10 24 40 46 8aF825000- F0Sooo 2 20 48 48 88above FS0ooo 7 85 64 s0 40

Note: Marginal effective rates calculated directly from 1989 tax payment andgross incom accounts of the Inland Revenue Department.

4.13 Simplification. Simplification and rate rationalization of theincome tax system in Fiji would enhance neutrality and lower administrationcosts.5 Simplification could be effected in four respects: (i) reducing the

5/ An across-the-board reduction in the income tax rate has been proposedto partly offset the loss of purchasing power that will accompany theforthcoming implementation of a value-added tax. This would be a sub-optimal strategy in two respects. First, the VAT could be mosteffectively used to offset the revenue loss from a lowering of tradetaxes. Second, an across-the-board reduction in income tax rates wouldbe a regressive measure (as the affluent would obtain the greatestgains), would have little effect on the disincentives associated withhigh marginal rates of direct income tax and would not address theproblems associated with a highly complex tax system replete withnumerous opportunities for tax arbitrage.

- 58 -

number of rate bands from 10 to 4 or 5; (ii) combining the basic and normalpersonal income tax; (iii) eliminating exemptions from self-employed incomearising from tax-holidays; and (iv) lowering the top m;arginal tax rate to 35percent. Revenues lost from lowering top marginal rates would be offset bysavings from the elimination of exemptions. Lowering top marginal income taxrates would also stimulate private savings and investment. Progressivity mayalso be improved because upper income groups accrue a disproportionate shareof the exemption benefits. And, administrative cobts would be reduced becauseof the elimination of exemptions.6

4.14 Rate Structure. One possible, revenue neutral, simplified ratestructure for the personal income tax is presented below in Table 4.8.Underlying this structure are the following assumptions: (i) a level anddistribution of income as per 1989 conditions; (ii) basic and regular tax tobe combined and (iii) elimination of 50 percent of all personal income taxdeductions. Under this rate structure, the top marginal effective tax rateswould be reduced from 43-54 percent to 35 percent and, for middle incomeearners, from 31-43 percent to 19-27 percent; the average tax rate wouldremain at 19 percent of gross reported income (for wage earners and the self-employed).

Table 4.8: ALTERNATIVE REVENUE NEUTRAL PERSONAL INCOME TAX STRUCTURE(1989 income base)

Tax Band Marginal Tax Rate Share of Gross Reported Income

<F$3000 0 8?F$3000-F$6000 12 23ZF$6000-F$9000 19 29ZF$9000-F$l5000 27 21%>F$15000 35 19%

Note: Computations based on 1989 Gross Taxable and Chargeable Incomeestimations of the Ministry of Finance, Department of InlandRevenue.

(ii) The Corporate Income Tax

4.15 Tax Distortions. The corporate tax has a low, average rate oftaxation and a high degree of var'ation in marginal effective tax rates (andhence cost of capital to the enterprise) depending upon eligibility for a tax

6/ This would also improve prospects for presumptory because, with arelatively flatter rate structure, the risks of over and under paymentswould be reduced. Greater use of presumptory withholding would, inturn, further reduce the administrative costs associated with the incometax.

- 59 -

holiday or various types of special depreciation allowance.7 By selectingsome sectors and activities for corporate tax holiday and special depreciation(e.g. agribusiness, hotel building, and exporting), the Government ispenalizing those sectors which are not offered such holidays; by linking taxholidays to certain classes of capital goods, the Government is distortingincentives in favor of certain choice of technique (e.g. towards equipmentrather than buildings); and, by providing tax holidays of various duration fordifferent activities (e.g. exporters at 13 years and 8 years for new priorityindustries) the Government may (unintentionally) bias the very time-profile ofcapital investment.

4.16 Although tax-holidays are typically offered to encourage capitalfoimation and the introduction of new technologies, their impact is likely tohave only a short-term effect. As in the case of the garments industry, taxholidays encourage investors to finance investments which have a short-gestation period (thereby taking maximum advantage of the holidays) and whichfront-load the capital investment. The provision of extensive tax holidaystends more to attract foot-loose enterprises, instead of those which take alonger-term view towards the particular sector.

4.17 There is little reason to believe that tax holidays have beeneffective in attracting capital investment. Throughout the 1970s and 1980s,the Government offered generous tax holidays and concessions, but privateinvestment levels remained depressed. Experience in several countriessuggests that the overall private sector incentives environment is of greaterimportance than the provision of tax holidays. To the extent that investorsperceive that tax holidays are offered to offset difficult or uncertainbusiness conditions, the very promotion of such tax holidays may have aperverse effect on private investment response.

4.18 There are clearly cases in which tax holidays may discourageefficient capital investment. For example, expansion or replacementinvestment may not be undertaken because the income stream accruing from theinvestment will extend beyond the end of the holiday period. Since investorscannot defer (or inflation adjust) the depreciation allowance, the incomeaccruing from capital goods with a long economic lifespan (extending beyondthat of the life of the tax holiday) will be taxed at a marginal effective taxrate well in excess of the statutory rate.9 In the event that such

7/ In 1986, the average effective corporate tax rate was 29 percent ofreported corporate income, net of losses. Taxable income, however,represented less than 20 percent of gross corporate profits, due to taxallowances and tax holidays.

8/ The investment-myopia, or lack of incentive for capital deepening, canbe formally traced to the effect on investment of a sharp, rise in theeffective rate of taxation, and hence in cost of capital at theexpiration of the holiday period.

9/ This results because the portion of the costs of the capital good (e.g.depreciation) which generate income in the post-holiday period are notan allowable expense. See J. Mintz, "Corporate Tax Holidays andInvestment," The World Bank Economic Review, January 1990.

- 60 -

investments are necessary, then the actual tax-savings to the investor aregreatly diminished.

4.19 Another case in which the tax-savings of tax holiday legislationare diminished are for the foreign investor subject to home-country tax on allsources of income. For tnese investors, the tax savings froui a tax-holiday inFiji translate into a higher tax liability in their home country. Severalforeign investors in export oriented enterprises noted that the taxes saved inFiji had been paid to the Treasury's of Atustralia and New Zealand.10

4.20 In Fiji, the process of applying for tax holidays is relativelycomplex and time-consuming. The high information-search and transaction costsassociated with gaining approval for tax-holidays are such that only themiddle and larger sized enterprises are able to regularly take advantage ofsuch schemes. This, in effect biases investment incentives against thesmaller investors (by raising their effective cost of capital) and reducesopportunities for capital deepening in the rural areas.

4.21 The corporate tax system can be improved in two ways:

(a) a uniform, single rate of corporate tax should be charged at thesame rate as the maximum rate charged on personal income tax (30-35percent).

(b) tax holidays should no longer be offered; instead, a 100 percentinitial depreciation allowance, indexed for inflation, and withample loss carry forward provisions, should be used to lower thecost of capital investment.

Lowering the corporate tax rate to 35 percent would improve Fiji's (tax)competitiveness in the region and, if combined with an elimination of taxholidays and other tax expenditures, lead to little loss in revenues.Finally, the Government should focus its capital investment promotion effortson providing a form of depreciation allowance which does not distortincentives across sectors, activities or types of investments. A 100 percentinitial capital depreciation allowance, with inflation indexing (for losscarry-forward) would be an appropriate choice.

D. Indirect Tax Reform

(i) International Trade Taxes

4.22 Tariff Unification. Import taxes consist of 'fiscal duties' and'customs duties', both of which are levied on the c.i.f value of imports. Asnoted in Chapter 3, there is little justification for distinguishing betweenthese two duties; both raise the price of imports relative to the price ofdomestically produced goods, providing protection for domestic industries.

10/ Reliable estimates of the tax loss associated with the tax holidays arenot available and are conceptually difficult to define. Governmentsources estimate revenue losses of at least F$2 million per annum in themid-1980s associated with the investment promotion schemes.

- 61 -

Accordingly, the tariff structure should be simplified by combining thecustoms and fiscal duties into a single import duty. The highlydifferentiated tariff structure should be harmonized and reduced to a uniformrate which should not exceed 10 percent. In effect, the customs duty would bereplaced by a general sales tax (GST) (see paragraph 4.27).

4.23 Rebates and Concessions Rates. A considerable number of importitems are fully or partially exempted from import duties because of theprovisions of concessionary rates and rebates. These include concessionaryimport duty rates under parts 2 and 3 of the Customs and Tariff Act and therebate of all or part of the import duties on capital goods and intermediatematerials to: (i) tax-free factories (exporting 95 percent of output'; (ii)manufacturers of excisable dutiable products; and (iii) those industriesprovided relief from corporate income tax. These concessions erode the taxbase, leading to a revenue loss equivalent to 75 percent of total importduties (see Table 4.9). As a result of discrimination in the allocation ofimport duty concessions, different classes of investors face very differenttariff regimes. Elimination of these concessions and rebates would broadenthe import tax base and ease the revenue constraint associated withharmonizing and reducing tariffs. At the same time, however, it would stillbe necessary to protect exports by rebating (through duty drawbacks) thetariff costs levied on imported inputs (Chapter 2).

4.24 Specific Duties. All imports are subject to ad-valorem fiscal andcustoms duties except alcoholic beverages, cigarettes, tobacco, petroleum,matches and tires, to which specific fiscal duties are applied. The items forwhich specific duties apply generate over 34 percent of total import duties.Use of specific rates erodes the automatic r.sponsiveness of import taxes toinflation. To avoid an erosion of the indirect tax base, specific dutiesshould be converted to an ad-valorem basis.

4.25 Revenue Losses from Tariff Refom. Reduction and harmonization oftariffs to a uniform rate of 10-15 percent will greatly erode the tax take.The weighted average statutory rate of import tariffs is 26 percent.11Reducing this to 10-15 percent would directly result in a revenue loss ofF$66-91 million, or approximately 4-6 percent of GDP. These figures suggestthat tariff reform can be viable only if alternative, administrativelycollectible sources of revenue are identified.

(ii) Taxes on Domestic Transactions

4.26 Domestic Excise and Turnover Taxes. Taxes on domestic transactionsgenerate little revenue and are levied a narrow base. A 10 percent ad-valoremturnover tax is applied on fifteen services and contributes 7 percent ofdomestic indirect tax revenues. Of this, the hotel turnover tax accounts for65 percent of all turnover tax revenues. Excise duties are applied to 47domestically manufactured products. Alcoholic beverages, cigarettes, other

11/ The weighted average statutory import duty rate is defined as the ratioof import duties to the c.i.f value of dutiable imports, excluding thosewhich are exempted or are subject to import duty rebates andconcessions. This is above the average effective import duty rate, dueto the exemptions, import duty concessions and rebates.

- 62 -

Table 4.9: IMPORT DUTY REVENUES, RATES AND LOSSES DUE TO THE IMPORTDUTY CONCESSIONS AND REBATES BY FSIC CODE IN 198J9

Rovonue weighted revenue Revenue weighted revenueFiji contri'n Statutory loxx FIJI contrl'n Statutory loscode (X) Duty rate t%) code (U) Duty rate (X)

1 0.0 0.0 0.0 50 0.0 16.0 0.02 1.6 16.7 0.6 61 0.0 16.8 0.08 0.2 66.1 1.4 62 1.2 16.0 1.84 0.9 18.6 0.6 58 0.0 15.1 0.06 0.0 10.0 0.0 54 0.7 16.0 1.46 0.0 10.1 0.0 65 0.6 15.0 0.27 1.6 12.4 0.0 G6 0.1 19.4 0.18 0.7 82.0 0.1 67 0.4 76.1 0.29 0.6 18.8 0.0 s6 0.2 16.4 0.2

10 2.6 10.5 0.0 69 0.1 15.6 0.111 0.2 12.8 0.1 60 0.1 16.0 0.512 0.1 14.1 0.0 61 0.4 76.6 0.818 0.0 9.7 0.0 62 2.6 69.2 0.114 0.0 10.8 0.0 68 0.9 78.9 0.616 1.1 16.4 0.8 64 2.2 49.6 0.816 0.4 11.9 0.0 66 0.1 77.6 0.017 0.7 86.8 0.8 66 0.1 62.2 0.0t6 0.6 68.0 0.2 67 0.0 66.0 0.019 1.2 06.0 0.2 68 0.2 19.2 0.820 0.7 68.2 0.1 69 0.6 84.5 0.121 0.9 67.2 0.9 70 0.7 22.9 0.222 2.0 169.9 8.2 71 1.8 16.2 0.128 0.1 8.1 0.1 72 0.4 9.2 0.924 0.2 855.9 6.5 78 2.6 80.8 2.826 0.2 14.1 0.0 74 0.1 20.7 0.126 0.0 7.7 0.0 76 0.0 42.9 0.027 82.0 77.6 6.1 76 0.4 22.0 0.828 0.2 9.8 0.4 78 0.0 21.2 0.029 0.1 9.9 0.1 79 0.0 19.6 0.080 0.0 0.0 0.0 60 0.0 20.6 1.881 0.0 0.0 0.0 81 0.0 19.0 0.082 0.6 48.6 0.6 62 0.6 21.8 0.188 1.8 41.0 1.0 68 0.4 88.8 0.884 0.4 65.0 1.4 84 6.8 21.1 5.985 0.4 41.7 0.2 865 6.0 80.2 4.886 0.0 17.2 0.8 66 0.1 7.5 0.087 0.4 16.4 0.0 87 4.0 62.1 3.0as 1.1 89.1 0.7 88 0.0 17.6 2.639 2.1 84.6 4.8 89 0.1 848.2 0.240 4.1 47.2 1.6 90 0.7 17.6 0.941 0.0 17.9 0.1 91 0.4 11.9 0.042 0.8 81.6 0.8 92 0.0 24.9 0.048 0.0 82.6 0.0 98 0.0 80.4 0.444 0.2 80.6 0.2 94 0.6 61.5 1.046 0.0 86.6 0.0 96 0.4 21.1 0.146 0.0 67.4 0.0 96 0.8 28.6 0.247 0.1 48.4 0.0 97 0.0 22.6 0.048 1.8 82.1 5.6 V9 2.0 14.7 1.949 0.2 6.2 0.1

TOTAL - - - - 100.0 26.2 76.4 /a

/a Sum of the rovenue loss by SITC product category.

Source: Customs and Excseo Department.

- 63 -

tobacco goods, sugar, aerated waters and matches are subject to specificexcises while the other products are taxed on an ad-valorem basis.12 Theexcise duty base is narrow, with over 82 percent of total excise taxescollected from the manufacture of alcoholic beverages and cigarettes.-8

Unlike the situation prevailing in most nations, excise taxes are onlycollected for domestically produced goods; imports are not subject to domesticexcises. As a result, it is the difference between the import duty rate andthe excise rate which determines the degree of nominal protection to adomestic industry. The uniform application of ad valorem excise duties todomestic products and competing imports will eliminate the protective functionplayed by excises and broaden the excise duty base, eliminating resourcedistortions and facilitating the reduction and harmonization of import andexcise duty rates.

4.27 The General Sales Tax. In the 1991 Budget Address, the Governmenthas proposed to introduce a 10 percent multi-stage general sales tax (GST) byJuly of 1992. The objective of the GST will be to broaden the indirect taxbase and shift the indirect tax base from imports to domestic consumption.The GST will be equally applied to both imports and domestically producedgoods and services, with a minimum number of exceptions.14 It will replaceturnover taxes and excise duties, except selected excises on luxury goods. Toavoid double taxation, a "tax crediting" system will be established in whichGST payments for inputs would be offset against GST obligations on the sale ofproducts. Furthermore, exporters will be granted a drawback of GST (andexcise) payments.1' By structuring the domestic indirect tax system in thisfashion, the Government is introducing a measure of horizontal equity byexempting essential foodstuffs and by applying higher excise rates to high-elasticity luxury goods) into the consumption tax. While the design of the

12/ As in the case of specific import duties, the specific excise ratesshould be replaced by ad-valorem rates.

13/ Collection costs are a major constraint to expanding the excise net. Asa result of high collection costs, 14 products were eliminated from theexcise list in 1989.

14/ Proposed exemptions include farmers, business with a turnover of lessthat F$10,000, financial services, domestic rents, non-processed foods,public transport on buses and second hand goods unless sold by dealers.In addition, exports will be zero-rated under the proposed GST.

15/ To avoid burdening the tourism sector, international visitors should beexempted from VAT payment on the purchase of domestic products and(domestically purchased) international airline tickets. A VAT rebatecan be provided to tourists at the time of their departure, uponprovision of proof of purchase of domestic goods and international planetickets.

- 64 -

proposed GST is sound, much will depend on the Government's ability toadminister the new tax.18

E. Coordinating Indirect Tax and Tariff Reform

4.28 The Indirect Tax Model. The central theme of the policyrecommendations made in the previous section was to reduce the anti-exportbias and resource allocation distortions caused by a high and highlydifferentiated tariff structure without undermining the indirect tax-to-GDPratio. As discussed above, lowering tariff rates will lead to a major revenueloss, which would need to be offset by broadening the domestic indirect taxbase (through the GST). An indirect tax model was developed to model thesimultaneous reduction/harmonization of tariffs; the introduction of the GSTand the rationalization of excise duties. The model provides an empiricalframework in which changes in tax structure, tax basp and macro-economicaggregates affecting the tax bases are allowed to vary simultaneously.Parameters of the model are estimated econometrically, using 15 years of taxand national accounts time-series data.17

4.29 A series of assumptions were made, for the purposes of simulatingtax policy outcomes: (i) specific import duties were converted to an advalorem basis; (ii) fiscal and customs duty were combined into a singleimport duty; (iii) import duty rebates and concessions were abolished; (iv) amulti-stage GST with a tax crediting system was introduced; (v) excise dutiesand turnover taxes were replaced by the GST except for selected ad-valoremexcises on luxury goods; (vi) excise taxes were applied uniformly to importedand locally produced goods; and (vii) an indirect tax-drawback is to beprovided for exporters (including the tourist industry), for both importduties and the GST. In addition to this base set of reforms, two additionalpolicy packages were simulated:

(a) a 10 percent uniform import tariff applied to all imports exceptnon processed foods; a 10 percent GST; and excise duties of 50percent on alcoholic beverages and cigarettes and 20 percent onpassenger cars (Package A).

(b) the above package except that capital goods (machinery andequipment) were exempt from the import duty and GST (Package B).

4.30 Simulation Results. Simulation results are presented below inTable 4.11. Compared to the 1989 base case, the reduction of tariffs to 10

16/ To ease the administrative burden, it will be important to levy the GSTon a self-assessment basis. Key steps that would be required to improvethe administrability of the proposed GST include: (i) updating theInland Revenue Department's (IRD) computerized income tax files from a1987 to a 1990/1991 base; (ii) augmenting the trained (and computerliterate) staff of the IRD; and (iii) preparing outreach and educationprograms for the general public in the concept of the GST, the taxcrediting system and their operations.

17/ A more detailed discussion of model specification, estimation procedureand statistical fit is provided in Appendix 3.

- 65 -

percent, imposition of the GST and application of selected luxury exciseduties would (if combined with the other reforms listed above) lead to a 17percent gain in tax revenues and would increase the share of domestic indirecttaxes from 37 to 63 percent of total indirect tax revenues. The bulk of therevenue gains would arise from elimination of import duty exemptions andapplication of the GST. In the third case, where capital goods would beexempt from import duties and the GST, indirect tax revenues &re practicallyunchanged while the share of domestic indirect taxes rises to 62 percent oftotal indirect tax collections.

Table 4.11: SIMULATION RESULTS UNDER VARIOUS POLICY PACKAGES

The base Package Packagecase A B

Total revenues /a 206.6 240.6 216.8

Excise duty 45.3 22.7 23.9Import duty 140.3 88.1 82.4GST 21.0 /b 129.6 110.5

Statutory tax rates:Excise duty on:alcoholic bev. 50? 502cigarettes 50? 50?Passenger cars 202 20?

Import tariff 10? 10 /con Capital Goods 102 0?

GST 10? 10 /con Capital Goods 10o 0?

/a The revenue losses from indirect tax-drawback provision forexporters amounted to F$l0 million for import duties andF$42 million for the GST according to the 1989 data. Theselosses were deductedi from the simulated value of correspond-ing revenue.

/b Turnover taxes./c Capital goods--machinery/plant--were exempted from the import

duty and GST in this package.

4.31 Timing and Sequencing Indirect Tax Reform. The simulation modelresults confirm that a target uniform rate of import tariff of 10 percent isattainable, provided that the leakages (concessionary rates, rebates) in theimport tax system are arrested, that the Government proceed with theimplementation of the GST and undertake the complementary tax reformsdiscussed above. Furthermore, if tariff reduction (to a 10 percent level) isaccompanied by a broader package of indirect tax reforms, as described above,then the Government can expect to improve the composition of indirect taxes(by shift-ng from an import to a domestic consumption base) and generate

- 66 -

approximately 17 percent more indirect tax revenues. It should be noted,however, that this would depend very much on the Government's ability toimplement the GST. By 1993, however, the GST should be fully operable andtar'.ffs could safely be reduced and harmonized at a uniform 10 percent level.

F. Coordinated Tax Reform

4.32 Both the indirect and the direct tax systems will require reform tomaintain fiscal balance, improve investment incentives, increase equity andenhance the administrability of the tax system. To date, the Government haschosen to announce tax reform measures periodically, well in advance ofimplementation. There are, however, advantages to announcing a package of taxreforms, with the understanding that these would these would be implementedover a number of years. A piece-meal approach tends to reduce investorcertainty and creates many opportunities for policy reversal. By contrast,strong arguments can be advanced in favor of announcing a multi-year taxreform program given the importance of careful coordination of trade andindirect tax reform, the need to reverse previous exemptions/waivers fromvarious taxes and the many items within the personal and corporate tax thatwould benefit from reform.

- 67 -

V. Competitiveness Policy and Regulatory Reform

A. Regulatory Reform Objectives

5.1 Fiji's factor and product markets are regulated in a fashion whichimpedes competition, increases investor uncertainty and places a high degreeof discriminatory authority in the hands of a small number of Governmentofficials. As a result, high entry barriers, both to imports and to potentialmarket entrants, result in uncompetitive market structures and lead to highprice's, poor quality of service and limited technological innovation. Exitrestrictions compound these problems by locking resources into inefficientactivities.

5.2 The high degree of domestic market regulation is a legacy of whatwas, until recently, an inward-oriented development strategy with a highdegree of reliance on the Government as the leading agent of growth.Throughout the 1970s and early 1980s, the scope of domestic regulatory controlextended well beyond entry and exit conditions to include the actual pricingof and access to productive factors, goods and services. Many of the existingregulations have outlived their original intentions but their repeal or reformhas proceeded slowly. Before turning to a discussion of key regulationsaffecting factor and product markets, it would be useful to emphasize a fewsalient features of the domestic regulatory regime.

5.3 First, there are large differences in the incentives regime acrossindustries, as revealed by the great dispersion in effective rates ofprotection (see Chapter 3) and taxation concessions (Chapter 4). Thesedifferences often appear to be the result of ad hoc interventions without anycoherent policy rationale. They have a major impact on the allocation ofresources, while creating a highly politicized, rent-seeking environment.Second, the Government frequently offers tailor-made incentive packages at theenterprise level, so that two firms producing similar products may face adifferent incentives regime. This arises in particular because very few firmsin the organized sector pay the full tariffs or taxes as specified in therelevant decrees. All firms have to negotiate with the authorities forconcessions, but the guiding principles governing such concessions are rarelydefined clearly. As a result, effective rates of assistance (protection plustax relief) vary at the enterprise level, rather than for each industL., as isusually the case.

5.4 A third feature of the regulatory regime is the differentialtreatment of ownership groups. Public enterprises receive preferentialtreatment and their existence is usually guaranteed regardless of performance.Foreign firms face an opaque entry regime where few regulations are spelt outexplicitly and the range of potential outcomes is very wide. Even amongprivate domestic investors there are significant differences. Ethnic Fijianowned enterprises and cooperatives generally receive preferential treatment ina variety of forms: credit; licenses; oppcrtunities for orofitable joint-ventures with foreign investors; and, occasionally in government contracts.

5.5 A fourth aspect of the regulatory regime is continued heavyreliance on domestic controls. Public enterprises are usually protectedagainst competition from private firms; many industries (including those in

- 68-

which there are no public enterprises) are partly or completely closed; andforeign firms are denied entry to many industries, particularly services.

5.6 Finally, the regulatory regime is particularly unclear in the caseof large projects, which tend to be subject to case by case negotiations(especially tourism and mining). This arbitrary, case-by-case approachinevitably works to the benefit of large, often foreign owned enterprises andof those most able to influence decision-making. By contrast, small, ruralenterprise is disadvantaged by such an approach.

5.7 A comprehensive program of domestic market deregulation will berequired to ensure that: (i) the efficiency gains (and supply response)arising from a more neutral trade and tax regime are supported by an enablingdomestic regulatory regime; and (ii) that the credibility of the policy reformprocess--as measured by the speed and depth of private investment response--isnot undermined by countervailing domestic policies. The overall objective ofdomestic regulatory reform would be to place greater reliance on market forcesto guide resource allocation. As guiding principles in this regard,commercial regulations should be designed to reduce the transaction costsassociated with access, operation and exit of fims; furthermore, regulationsshould be clearly specified and transparent to all. To the greatest extentpossible, there should be equal regulatory treatment across sectors, amongstenterprises, and between different types of investors. With these principlesin mind, key areas for domestic enterprise regulatory reform are discussedbelow.

B. Factor Markets

(i) Land

5.8 Of all the regulatory issues confronting the Government, land andthe operation of the land market is the most complex. Fiji has a comparativeadvantage in land-intensive activities (including tourism), notwithstandingthe fact that the area of fertile land is limited. Land use and regulation isa sensitive issue, since some 83 percent of the country's land is to beretained by ethnic Fijians (as native land) in perpetuity, with the remainderbeing allocated to freehold (8 percent) and crown land (9 percent). Atpresent, the current regulatory regime does not ensure an efficientlyfunctioning land market, enabling land to be utilized for its highest socialreturn, and to be transferred freely between tenants. Nor does it providesufficient incentive for tenants to undertake necessary capital investment ordeliver high returns to native trustees.1

1/ Native trustees refer to individuals of ethnic Fijian origin who own theland in a form of common oroperty. With the bulk of native land leasesdue to expire in the 1990s, resolution of the various native land is3uesassumes a high degree of importance. Discussion of these issues can befound in Ward, R. G. (1985). "Land, Land Use and Land Availability", inH.C. Brookfield et al., Land, Cane and Coconuts: Papers on the RuralEconomy of Fiji, Department of Human Geography Monograph HG/17, ANU.

- 69 -

5.9 The principle land issues relate to the 83 percent portion undernative co,:trol. At least four aspects of the current regulatory regime appearto be in need of reform. First, in 1996, approximately 40 percent of allnative land-leases will be due for renewal. This is likely to be a verydifficult process; it is potentially fraught with dispute and could result inthe displacement of many long-established tenants from their lands.2 Theresolution of such disputes will be time-consuming owing to the system ofadministration and regulation which is complex and unwieldy. There are, infact, many Acts which impinge or, land use and regulation;8 their requirementsare often contradictory and there appears to be no mechanism for resolvingconflicting provisions.

5.10 Second, native land pricing policy is unnecessarily complex and

lease rates arc generally well below the market price. Land prices aredetermined on the basis of historically estimated unimproved capital values.An illustration of the complexity of the system is provided below inTable 5.1. Altogether 71 separate land-classifications are identified, withfurther disaggregation by island, sub-region, land use and quality. Rentalrates may not exceed 6 percent of the unimproved capital value of the land,adjusted every five years on the basis of the recommendation of the Committeeof Valuers. As a result of the excessive complexity of native land zoning,combined with an unrealistically low ceiling on rental rates, rental rates forNative Land Trust Board (NLTB) land are generally well below that forcomparable freehold land. In total, this results in a disproportionately lowshare of the returns from agricultural enterprises accruing to propertyowners. For example, in 1989 the total land rents collected by the NLTB wereF$8 million or barely 3 percent of agricultural GDP. Such low rents haveseveral undesirable effects: they lead to reluctance on the part of nativeland-holders to lease lands; confer resource rents on holders of low-costleases; they cause land-owners to try to unilaterally abrogate 'unfair' leases(particularly in the tourism area); and this contributes to a lengthy andcontentious process of obtaining lease-holds.

2/ The bunching of the land lease renewals reflects a change in the lS76Agricultural Land and Tenant Act, passed in 1976, which extendedexisting short-term contracts by 20 years. Causes of friction inrenewals would include land-rents fixed historically at values wellbelow market prices and reluctance on the part of existing landoperators to pay higher rents or relinquish access.

3/ These include: the Crown Lands Act, the Native Lands Act, the ForestsAcc, the Conservation of Lands Act, the Land Transfers Act, the LandSales Act, regulations pertaining to special regions (for example, theTotuman Lands Act and the Banaban Lands Act), the Rivers and StreamsAct, the Property Law Act, and region-specific provision# which applyunder the 'ocal Government Act.

- 70 -

Table 5.1: ASPECTS OF THE SCHEDULE OF LAND VALUES /a

Land Use Location Number of Total numberclassifications of classifications

Grazing Land Viti Levu 4Vanua Levu 4 8

Dairy Lands S, SE Viti Levu 4N, NW, SW Viti Levu 3 7

Rice Lands SE Viti Levu 4NW Viti Levu 4N Viti Levu 4SW Viti Levu 4N Vanua Levu 4S W Vanua Levu, Taveuni 4 24

Arable Lands WSW Viti Levu 4NW Viti Levu lb 4NW Viti Levu /b 4Cane, Vanua Levu 4 16

Coconuts Tavenui 4Lomaiviti, Lau 4Several /c 4Coastal Viti Levu 4 16

Total 71

/a Data refer to classifications used for unimproved capital values./b Separate provinces and localities of NW Viti Levu are identified./c Kadavu, Yasawas, Beqa, Vatulele and Mananuccas.

Source: Agricultural Landlord and Tenant Act, Chapter 270, Section 21.

5.11 Third, tenure arrangements undermine incentives for capitalinvestment in rural areas,4 owing to two problems with the current system:first, if leases are transferred within the life of the lease agreement, thereis no extension of the lease period. Since transfers of leases do occur, tiletenu-:e of many farmers is too short to provide an incentive to undertakecapital improvements or to maintain environmental quality. Secondly, banksare reluctant to accept a lease-..especially a truncated one--as collateral for

4/ Duration of leaves is generally not a problem. Most agricultural leasesare for 30 years (some are for 25) and foreign projects have leases thatare valid foe 99 years.

- 71 -

a loan. Since land is the principle asset in rural areas, a lack of securecollateral leads to shallow rural financial markets and under-investment inrural-based activities.

5.12 Finally, institutional arrangements Aor native land sLiervision arein need of improvement. The NLTB is charged with the preservation andmanagement of native land, including the rental of these lands. NLTBprocedures appear to be excessively time-consuming and costly. These need tobe streamlined and charges--in effect a 25 percent commission--should bebetter linked to the value of services provided.

5.13 In the long-run, a gradual shift of land-ownership from nativetrust to private property would improve the operation of the land market,increase agricultural investment and confer greater benefits to society as awhole. In the meantime, regulatory reform of the native land trust frameworkcan be used to improve both the efficiency and equity aspects of the landmarket. Key areas for reform are:

(a) simplification: Land legislation should be consoiidated andclarified so as to reduce regulatory uncertainty and minimizedisputes. A single (non-conflicting) set of land and land useregulations should be prepared.

(b) pricing: Lease values should be based on comparable freeholdprices, with a decentralization of authority to local government toimplement the pricing and renewal of land leases. Rates should beadjusted flexibly and more frequently, with the market value,(rather than the unimproved capital value) used as the standard ofvaluation.

(c) security: Tenants need to be provided greater security; at aminimum the 30 year rule should be applied for each new rentalagreement.

(d) NLTB: The procedures and charges of the NLTB should be examinedsystematically with the objective of shifting the role of the Boardfrom that of a property manager, to an arbitrator of native landdisputes.

(ii) Labor

5.14 Fiji requires a mix of economic and labor market policies thatdelivers wage levels that correspond closely to productivity levels, a wagestructure that facilitates the allocation of labor from low to highproductivity sectors, a public sector wage system that resembles thatprevailing in the private sector and wage employment growth in excess of laborforce growth to absorb labor force entrants, the unemployed and the transferof workers from the informal to the higher paid wage labor sector. Theefficient operation of the labor market is central to growth and development.

5.15 Labor Market Performance. Few of these objectives have been met.Employment in the paid sector has expanded by just one percent per annumthrough the 1980s, much below the population growth rate (2.1 percent). Forunskilled workers, wage rates are high compared to other countries of a

- 72 -

similar income level, although there has been some decline since 1987.6While real wages have fallen appreciably since 1980, by about 20-30 percent,the rate and pattern of decline bears little relation to changes inproductivity (see Table 5.2). In the public sector, wage rates for unskilledlaborers are far higher than in the private sector. Furthermore, publicsector wage awards and salary structure have been more closely tied to theshort-term fiscal situation, rather than to a notional parity with privatesector wages. This tends to generate cost-push pressure for private sectorwage awards.

Table 5.2: MEAN DAILY WAGES, 1980-90 Ia

(F$/day)

Year All Agriculture Manuf- Construc- Serv4 -JsIndustries acturinR tion

N R N R N R N R N R

1990 14.0 9.2 9.7 6.4 13.8 9.1 14.9 9.8 15.6 10.3

1988 12.6 9.5 8.6 6.5 10.8 8.2 11.3 8.5 11.8 8.9

1986 12.0 10.7 8.2 7.3 11.8 10.5 12.4 11.1 12.1 10.8

1984 11.8 11.2 8.6 8.2 12.0 11.4 11.9 11.3 11.8 11.2

1982 11.0 11.7 6.2 6.6 11.2 12.0 12.0 12.8 11.0 11.7

1980 9.3 11.8 7.4 9.4 9.5 12.1 9.4 11.i 9.7 12.3

/a N refers to nominal wages; R to real wages in 1983 prices,deflated by the consumer price index.

Source: Bureau of Statistics.

5/ High wages for unskilled workers result from a combination of factorsincluding, in order of importance, the distribution of the Lome rentsfrom the hvigh sugarcane prices largely to the paid workforce; the highwages provided to temporary and unsk. lled workers in the civil service;a historically strong and militant trade union movement; high pricedwage goods (for example, rice and dairy products) resulting fromprotection; the availability of the migration option to the neighboringhigh wage Australian and New Zealand economies, for skilled and evensemi-skilled workers; and a relative abundance of fertile land whichaffords a moderately high level of subsistence income in the ruralareas.

- 73 -

5.16 Labor Market Rigidities. The flexibility of the labor market isanother important issue with several dimensions. In the public sector,employment levels are often well in excess of competitive requirements andwages paid well in excess of the private sector. For unskilled laborers,there are sharp differences in minimum wages across industries. In addition,a high degree of unionization has resulted in barriers to labor dismissalwhich further exacerbates wage differences. As a result, there is a clearlack of integration in the labor market, as is reflected in the dispersion ofwages paid to unskilled laborers, presented in Table 5.3 below.6

Table 5.3: DAILY WAGE RATES FOR UNSKILLED LABORBY ACTIVITY, END-1990

Activity FS/Day

Rice Production 7Cocoa Production 7Ginger Production 13Sugarcane Cutting/Harvesting 12

Garment Production (TFF's) 5-9Commerce (non-unionized) 9-11

Unionized Private Sector 12-15Petroleum Industry (Private) 18-22

Public Works Department 17Fiji Sugar Corporation 18

Source: Ministry of Labor and Ministry of Primary Industry.

5.17 Labor Market Shortages. An important test of the efficiency of alabor market is the degree to which the supply and demand for different skillsare met. The labor market in Fiji has been unable to meet the demand for askilled, commercially oriented work force. As a result of the post-1987emigration *f skilled workers, there are severe shortages in practically everyfield, most notably accountancy, medicine, computer services, law and thetechnical trades. The need to import skills in such areas significantlyincreases the costs of operating an enterprise in Fiji. Operating in the

61 Labor disputes, or the threat thereot, reinforce rigidities in the labormarket and are a source of considerable uncertainty to new investors.While the direct economic losses from labor disputes have not been veryhigh--averaging about 15,000-18,000 work-days per year since 1987--thehigh frequency of disputes (68 in 1990) and the volume of publicityaccorded to them reduces new investment and employment creation.

- 74 -

absence of a sufficient cadre of trained workers--as, for example, manyGovernment agencies have been forced to do--leads to a noticeable decline inservice quality and labor productivity.

5.18 Reform Priorities. There are three key priorities for labor marketreforms (i) to maintain a level of real wages competitive with countries of asimilar level of incomes and productivity; (ii) to increase the flexibility,and allocative efficiency, of the labor market; and (iii) to increase laborproductivity, particularly in the skilled and semi-skilled segments of thelabor force. Macroeconomic policy adjustments will be the most effectivemeans of adjusting the wage level; in the traded goods sector, a reduction inprotectionism should result in a more competitive wage structure. However, aconcerted effort on the part of Government is required to establish a level ofwages for unskilled public sector (civil servants and public enterprise)employees that is more on par with wage rates prevailing in the privatesector.

5.19 Labor Market Flexibility. Regulatory reform is urgently needed inorder to improve flexibility in the labor market, in particular with respectto regulations affecting minimum wages, labcr disputes and the ethniccomposition of the work force. The Wages Council sets extraordinarilydetailed wage decrees for eight different industrial groups, establishingminimum wages, working conditions and a rigid structure of wage differentialsby type of worker. There is no apparent reason for different minimum wagesacross industries; for administrative involvement in setting salary ranges byskill category; or, for the linkage of health and public safety issues toannual wage awards. In line with the Minister of Finance's announcewent atthe 1991 Economic Summit, the Government should no longer issue wage decrees,but rely upon market forces to determine wages and wage structures.

7 Thoseitems relating to working conditions should be covered in occupational safetyand health regulations, which should not req-ire frequent revision.

5.20 Labor Disputes. A rapidly growing economy is the best solution toproblems of frequent, protracted labor disputes. In the near-term, moreeffort needs to be directed towards resolving the problem of frequentdisputes, particularly if the Government will no longer administer wagedecrees. In the regulatory area, there is a need to review Fiji's labor lawsand to avoid providing legal sanctity to predatory labor actions (e.g. cross-industry disputes, sympathy strikes). There is also a need to strengthen thearbitration function of the Ministry of Labor to ensure that alternativeinstitutional arrangements exist for the fair, impartial and speedy resolutionof disputes.

5.21 Labor Quotas. Since 1987, the Government of Fiji has adopted apolicy of requiring that 50 percent of all public sector positions, at alllevels, be held by ethnic Fijians. Although this policy is not applied toprivate sector positions, there are indications that larger enterprises areencouraged to follow suit. While redressing historical patterns of inequitymay be a legitimate objective, attempting to accomplish it through theimplementation of ethnic quotas in the labor force is a particularly

7/ Government of Fiji, Consultative Group Reports and Government Response,National Economic Summit, May 1991.

- 75 -

inefficient strategy and should be avoided. A mcre efficient approach toredressing ethnic inequities would be to target public investment ineducation, health care and other productivity-enhancing activities onparticular disadvantaged groups.

5.22 Skill Upgrading. Improving the supply of skills in the labor forcewill help lower production costs and increase productivity. For the unskilledlaborers, increased public investment is required to arrest and reverse thedecline in primary and secondary education resulting from the budgetarycutbacks to education in the 1980s. In primary education, there should be agreater degree of attention provided to the teaching of core subjects, such asmathematics, languages and science. Provision of more training materials inthe schools is badly needed and, while additional resources are required forthis, some resources can be mobilized by consolidating under-utilized schoolsand encouraging multi-ethnic schooling. In the semi-skilled area, immediateattention is required to increase the supply of vocational training institutesand to encourage the adoption of apprentice programs in the private sector.The garment training center which opened in 1990 is a good example of the typeof investment required; similar investments are required in practically all ofthe technical trades (plumbing, electrical repair, carpentry etc.) incomputer operations, in the hospitality industry and in basic accountancy.The focus of vocational training, however, should be on maintaining high-quality, state-of-the-art facilities which are, to the greatest extentpossible, financed by the private sector. In many instances, on-the-jobvocational training provides a more cost effective means of upgrading skills.In the hotel industry, for example, apprentice schemes have proven to be aneffective means of skill upgrading and should be encouraged. By the sametoken, those vocational institutes which are too small or show little sign ofpotential use should be closed. For skilled workers, the immediate concern isto remove barriers to the import of skills required for the enterprisesector.5 The present regulations regarding expatriate laborers requireenterprises to demonstrate that there is a legiticmate need for an ov^rseasemployee; that there are no suitably qualified local candidates; and, that theoverseas employee in question is in fact suitably qualified. While expatriatework permits are provided regularly, the process is time-consuming and placesa great deal of discretionary authority in the hands of the Ministry ofImmigration. The high cost of employing overseas, skilled workers is asufficient incentive to deter enterprises from unnecessary employment. Ratherthan attempt to regulate entry of overseas skilled workers, the Governmentshould provide work permits on a near automatic basis, particularly forperiods of 3 years or less.

(iii) Capital

5.23 Financial Market. Government regulatory controls affecting thedevelopment of the financial market have had an important effect on the

8/ There are few short-cuts to expanding the supply of highly skilledlaborers in Fiji, particularly given the high degree of integration withAustralia and New Zealand. A greater degree of self-financing on thepart of the student body and coimnercialization of tertiary educationinstitutions would improve the efficiency with which the educationsystem would respond to shortages in the labor market.

- 76 -

pricing and allocation of capital. The Fijian economy exhibits a moderatedegree of financialization and is well served by a network of financialinstitutions9 having total assets cf approximately F$2.6 billion, or nearly200 percent of GDP. Activity in the financial markets is focused on short-term commercial transactions. Since 1987, the financial markets have beencharacterized by high (and excess) liquidity, with real lending rates negativeuntil mid-1990 and deposit rates still highly negative in real terms. Despitenegative interest rates, financial deepening has occurred as domesticfinancial assets have increased rapidly, rising by 18 percent in 1989 and 23percent in 1990. Buoyed by an upsurge in private sector activity, privateborrowing increased by 31 percent in 1989 and 24 percent in 1990 (mid-year).In tne long-term, further development of the financial sector will play a keyrole in supporting a private-sector led pattern of growth and development.Two key deficiencies in the Fijian financial markets, at present, are capitalcontrols which increase investor uncertainty and Government subsidization andtargeting of term-finance. The manner in which Fiji's financial markets areregulated contributes to both these shortcowings.

5.24 Capital Controls. Through the Reserve Bank, the Government followsa policy of capital controls that include mandatory surrender of foreignexchange to the Reserve Bank by financial institutions, limits on foreignexchange transfers abroad by Fijian tourists and emigLants, restrictions ondividend payments and payout ratios by overseas and joint-venture companiesand limits on overseas equity investments by Fijian individuals andinstitutions. Some of the capital controls, such as restrictions on foreignexchange allowances for emigrants, were designed to slow capital flight in theaftermath of the 1987 political developments, and are expected to be removedwhen the financial markets perceive the political situation to be stable.Others, such as the mandatory surrender of foreign exchange, are intended toremain in place as a means of financial market control. On balance, thecapital controls are inconsistent with an outward oriented developmentstrategy; besides reducing monetary discipline, they raise the risks toinvestors that foreign exchange will be unavailable if and when they wish torepatriate profits; raise transaction costs in trade (e.g. currency conversioncosts); involve the Government in decisions, such as dividend payout ratios,which are best left to the management of the firms; shelter domestic financialinstitutions from overseas competition; and limit options and returns todomestic savers. To the extent that national foreign reserve management isneeded because of fluctuations in trade, indirect monetary instruments(including regulation of the open foreign asset position of financialinstitutions), rather than direct controls should be used. When positive realinterest rates are restored (e.g. surplus liquidity absorbed), a high priorityshould be attached to the lifting of capital controls and foreign exchangerestrictions: this WilL send an important signal to private investors and willconfirm Government's commitment to allow market forces to determine marketprices.

9/ This is headed by a Reserve Bank and includes 4 commercial banks, 1development bank, 1 merchant bank, 1 finance company, 1 unit trust, 1housing authority, 39 land purchase and housing societies, 8 insurancecompanies, 1 provident fund and 529 credit unions/societies.

- 77 -

5.25 Long-Term Capital Market Distortions. The long-end (or termportion) of the financial market is thin and dominated by Governmentinstitutions. Through the operations of the Fiji Development Bank, FijiHoldings and the National Provident Fund, the Government has come to dominatethe long-end of the financial market. As a result of a legacy of subsidizedand targeted term-lending and investment schemes, real interest rates forlong-term loans are low/negative; commercial institutions have been crowdedout of the term lending/investment business; portfolios of termlenders/investors are of highly questionable quality; savings (includinginsurance funds and private pensions) flock to less-politicized short-termfinancial instruments (depressing interest rates in short-term finance); andenterprises are encouraged to finance investments from debt instead of equity.Furthermore, it is the discriminatory nature of directed lending thatexacerbates variability in effective rates of assistance across differentclasses of investors and activities. It is this variability that trade andtax reforms are designed to eliminate.

5.26 Efforts are underway to reform the long-end of the financialmarkets. Under a World Bank assisted Housiaig Project, a commercial mortgagemarket will be developed. In addition, the Reserve Bank is reviewing theoperations of the near-moribund equity market. More could be done, however,to improve the operations of the financial market including: (i) divestitureof the Stock Market by the Fiji Develooment Bank; (ii) an abolition ofsectoral credit allocation guidelines and subsidized term lending by the FijiDevelopment Bank; (iii) liberalizing Pension Fund investment guidelines toallow a small portion of the funds to be placed off-shore; (iv) inclusion ofthe Fidi Development Bank within the supervisory domain of the ReserveBank.'

C. Product Markets

5.27 The fashion in which product markets are regulated is, in manyrespects, similar to that of the factor markets. Through licensing controlsand the reservation of selected activities for public enterprises, theGovernment is able to exercise regulatory authority over production levels andaccess to services. For many commodities, the Government also sets domesticprices and/or margins. The main difference in regulatory regime arisesbecause product markets is the extent of uncertainty caused by a lack of clearrules and regulations governing entry and exit of firms. This, in conjunctionwith the regulatory deficiencies of the factor markets, combine to reduceFiji's competitiveness and dampen incentives for efficient production andgrowth. The case of foreign investment regulations illustrates the problem ofa lack of clarity in the regulatory regime.

(i) Entry and Operation Conditions: Foreign Investment

5.28 As discunsed in Chapter 2, growth in foreign direct investment willbe crucial in the 1990s if Fiji is to mobilize the savings needed to financeinvestment, increase the efficiency of capital investment, expand exports and

10/ Better prudential supervision of the Fiji Development Bank would assistin early identification of portfolio problems associated with a legacyof providing term-finance to highly protected sectcrs of the economy.

- 78 -

sustain rapid growth in imports of capital goods and manufactured products.Over the next decade, the ratio of foreign direct investment to GDP will needto double by the end of the decade, an objective that is well within reach,despite modest foreign direct investment flows to date. Besides serving as asource of financing, foreign direct investment will become increasinglyimportant as a source of managerial, technical and marketing skills. This isespecially the case in tourism and garments, two of the main export activitiesforecast to grow rapidly in the 1990s.

5.29 After a sharp decline in 1987, foreign investment inflows reboundedstrongly during 1988-1990, and are forecast to remain buoyant in 1991.Averaging about F$30 million per annum for 1980-1985, foreign directinvestment increased to an annual average of F$65 million between 1988-1990.This recovery indicates a rapid return of confidence on the part of theinternational business community and it has compensated to some degree for theoutward flow of capital and skilled labor that has occurred over this period.

5.30 Investment projects approved and implemented under the auspices ofthe Fiji Trade and Investment Board (FTIB) from 1988 to 1990 (first threequarters) in manufacturing have been overwhelmingly in garments, which hasaccounted for 83 percent and 73 percent of employment and investmentrespectively (Table 5.4). Employment in tax-free garment factories alone isnow estimated to account for more than one-third of total employment inmanufacturing; in total tax-free factories account for 44 percent of totalmanufacturing employment. Under these schemes, some 80 percent of the foreigninvestment has come from Australia and New Zealand, although a growing EastAsian interest is evident. Suva has received the largest share of foreigninvestment projects, followed by Lautoka and Nadi.12

5.31 The foreign direct investment regime is not transparent. Thecurrent emphasis is on 'flexibility' in regulating foreign investors, whichhas the advantage of expediting bureaucratic procedures and facilitatingadaption to new circumstances. However, the absence of clear guidelinesintroduces uncertainty for potential investors, places too much discretionaryauthority in the hands of officials, and may result in concessions beinggranted without a clear economic basis. Three areas in which foreign

11/ An indication of the relative importance of foreign inve3tment is theseflows in relation to GDP in Fiji compared with a medium-sized, openeconomy (Malaysia) and a small liberalizing one (Mauritius).

1985 1986 1987 1988 1989

Fiji 3.7 2.3 0.5 4.2 2.6Malaysia 2.2 1.8 1.3 1.9 4.9Mauritius 0.9 0.6 1.1 1.3 1.4

Source: IMF, International Financial Statistics, 1990 Yearbook.

12/ FTIB incentives are available to both foreign and domestic firms, and ofthe 104 projects implemented during 1988-1990 half have been locallyowned.

- 79 -

Table 6.4: INVESTMENT PROJECTS IMPLEMENTED THROUGH FTIS, 1988-90 La

(1) By Sector

Number of Employment InvestmentPro ect. X of total

Garments 70 82.9 78.0Wood and furnitur 9 2.6 4.6Loathor and footwear 8 8.1 2.7Food 4 9.0 11.6Othor 18 2.6 8.2

Total 104 100 100(9,827) (844.1.)

(2) BY Equity Source (number of projects)

100X Joint lOOX TotalLocal Venturo Forelan

Fiji 62 62Australia/New Zealand 16 26 41East Asia 6 eEurope 2 8

TOTAL 62 20 82 104

(8) By Location

Number of Employment InvestmentProjects X of total

Suva 41 44.9 48.4Lautoka 88 26.5 22.4Nadi 18 11.0 8.6Other L! 12 17.6 20.7

TOTAL 104 100 100

La Through the third quarter of 1990.L Includes the single largest tax free factory, Pacific Fishing Company at

Levika, with a workforce of 600 people and Investment of 86.5 million.

Source: Fiji Trade and Investment Board.

investment regulations are uncertain, and which may deter investors, aresectoral access, 'Local participation requirements and minimum size ofinvestment.

(a) Sectoral access. There is no 'negative list' stating which sectorsare closed to foreign investors. All non-sugar manufacturing is inprinciple open. In services the picture is mixed. Wholesaling andretailing are closed. In tourism, officials emphasize that theyare not interested in projects below F$O.5 million; that theyprefer proposals from well-known operators; and that secondarytourism (e.g. off-hotel attractions) are largely closed to outsideinvestment. In construction and related fields, foreign investmentis not encouraged because the industry is regarded as "saturated"and there is a desire to promote local firms. Officials emphasizethat what is regarded as open or closed is subject to negotiation.

- 80 -

(b) Local participation. No local participat n guidelines are issued.Local equity is, however, encouraged. In tourism, some localequity is required and usually takes the form of a 5-10 percentequity share being awarded to local land-owning groups. For firmsobtaining subsidized credit from the Fiji Development Bank, a 49percent ceiling on foreign equity share is imposed. No specificlocalization provisions apply after commencement of a project, butofficials emphasize that it is regarded as highly desirable.

(c) Minimum size. There is no prescribed min'mum size of foreigninvestments, but an informal limit of F$0.5 million for tourism andF$0.2 million for other investments appears to operate. The sizean.i scope of investment concessions offered is proportional to thesize of the initial investment.

5.32 Compared to many nations, Fiji's foreign investment regime, whiledeficient in certain respects, is relatively favorable. While the FTIB has

issued ample promotional materials dc!scribing incentives offered to foreigninvestors, the credibility of the promotional effort is damaged when foreigninvestors learn that many of these incentives must be negotiat'd and are notprotected under the law. The top reform priority is to clarify the foreigninvestment regulations. A second priority for regulatory reform would besimplification of the foreign investment guidelines. Sectoral access

restrictions should be lifted; minimum size requirements eased and localparticipation requirements reduced in scope. The choice of type ofinvestment, size of operation and partnership arrangement is best left to the

firm; the Government should focus it's efforts on promotion of investment, and

restricting regulation to ensuring that the foreign investor is reputable; is

aware of the laws and regulations that are in force; and has developed a

business plan for operations in Fiji.18

(ii) Price Controls

5.33 The Government of Fiji maintains a battery of price and wage

controls, the coverage of which extends far beyond that prevailing in mostmarket economies. The major regulatory authority is 'he Prices and IncomesBoard 'PIB), but in addition a range of line Ministries are involved.

14

Moreover, the Government has considerable power in setting pr,ces for publicenterprises, directly in the case of statutory authorities and indirectly forthe corporatized firms. The Government's objectives in maintaining thesecontrols are generally three-fold: to curb inflation, to ensure that wage

outcomes and structures are observed (income controls), and to restrain mark-

ups in small, protected markets or for the non-tradeables sector.

13/ The financial viability of the plan should not be a matter for(Covernment approval except in those case whereby the Government takes an

equity position or provides subsidized credit to the firm.

14/ The Department of Communications, Works and Transports sets taxi and bus

fares. The Department of Employment and Industrial Relations is closely

engaged in wage settlement and establishment of minimum wage guidelines.

- 81 -

5.34 PIB Price Control. More than 46 categories of goods fall under PIBprice controls.Lb The largest list are for those 30 goods for which mark-uprestrictions apply. Another category are the essential goods and services forwhich their are fixed wholesale and retail prices. Two additional groups areplywood and flour products under fixed ex-factory prices, and residential rentcontrols. PIB also has the authority to regulate dividends but has not doneso since 1984.

5.35 The economic implications of price and wage controls are wellknown: (i) the system hampers the allocative function of markets, resulting inefficiency losses; (i') the system is costly to administer: the PI8 budget hasbeen in the range of F$0.5 million in recent years; (iii) the system issubject to manipulation, in that firms can use it to *rotect monopoly profits;and (iv) such a system leads to a lack of incentives for efficiency intrading, leading to a pattern of 'cost-plus' pricing in the distributivesector. The alternative sets of measures which can achieve the objectives ofprice and wage control are equally well known. Non-competitive pricing oftradable goods and services is best overcome by trade policy reform. Mostnon-tradeables are already in the public sector, and a system of internationalreference prices could be used as a benchmark for regulaticor. of non-tradeableprices. Monetary and fiscal policy are the most appropriate tools forcontaining inflation; direct product and wage controls may lead, in fact, toentrenched inflationary expectations. The most appropriate course of actionis the abolition of the PIB and the nullification of the existing pricecontrol legislation. To heighten consumer awareness, the Government may wishto retain some non-regulatory price surveillance and monitoring capacity, theresults of which could be disseminated to the public.

(iii) Public Enterprise Management

5.36 Fiji has a large public enterprise sector (includes 52 parastatalenterprises and financial institutions). The parastatal enterprises had a networth of approximately F$l billion in 1988 and, although precise estimates areunavailable, would account for approximately 45 percent of gross domesticproduct. As in other countries, the definition of a public enterprise is notalways clear-cut: there are many firms that might be regorded as 'quasi publicenterprises' in the sense that they directly owe their existence to Government

15/ Goods which are controlled under restrictions on percentage mark-upinclude dairy products, edible oils, fish, rice, potatoes, onions, salt,garlic, pesticides, fertilizers, veterinary medicines, wire netting,plywood, medicines, stationary and office supplies, books, tires,batteries, assorted motor vehicle parts and sugar. Goods for wnichwholesale and retail prices are fixed include inter-island shippingrates, petroleum products, flour, sharps, bread, tea, butter, biscuits,washing soap and medicines. Goods which have fixed ex-factory pricesinclude plywood, flour and other milling by-products. Residentialpremises and md fall under PIB rent control.

- 82 -

initiative.18 In addition, several public enterprises own a range ofsubsidiaries, such as the Fiji Sugar Corporation which controls South PacificDistillery and South Pacific Fertilizer. As a result, the direct reach of theGovernment of Fiji into the organized sector of the economy is considerable.

5.37 The public enterprises have generally been a significant drain onthe budget. Over the period 1985-1987, budgetary appropriations wereequivalent to over half of the government's total capital expenditures (Seetable 5.5). In more recent years this share has fallen markedly, yet thereare indications that substantial transfers will be required to restorefinancial viability to some of the larger enterprises (Fiji ElectricityAuthority and Fiji Development Bank). More generally, the rate of return on(conservatively valued) assets in the public sector is very lows 4.2 percentin 1988 and lower still in previous years. These low rates of return applyalmost uniformly to all the public enterprises; only a few (such as AirPacific) delivered returns which might be regarded as commerciallysatisfac'ory.

Table 5.5: GOVERNMENT APPROPRIATIONS T) PUBLIC ENTERPRISES, 1985-90

1985 1986 1987 1988 1989 1990

Total appropriations (F$m) 29.7 54.8 36.9 24.0 33.4 25.7as Z of:total capital 56 99 74 38 36 30expenditurestotal expenditures 7 13 8 5 6 4

Source: Calculated from Ministry of Finance, Supplement to the 1991 BudgetAddress.

5.?8 The public enterprises operate under a system of rules andregulations quite unlike that for normal commercial enterprises. Inparticular, they are exempt from many of the rules ard regulations governingprivate firms: taxation, import restrictions, environmental standards andoccupational safety standards. In addition, certain of the public enterprisesare provided sole authority to engage in production (e.g sugar processing,rice milling) while in others, moreover, they enjoy a natural monopolyposition because of scale economies. The public enterprises have historically

16/ Examples include companies which have received equity investment fromFiji Holdings Ltd. (finance by a recent F$20 million grant through theFijian Affairs Board); loans from the Fiji Development Bank (FDB) thatmight be regarded as broadly developmental in nature (for example, tofoster ethnic Fijian business development); and cooperatives such asRewa Rice and Rewa Dairy, which have been set in place by Governmentdecree.

- 83 -

received ample budgetary support, have had theJr losses underwritten by theBudget, and have had preferential access to low-cost term credit from the FijiDevelopment Bank and the Provident Fund. These regulatory exemptions,combined with market control and subsidies, provide the publL enterpriseswith a distinct commercial advantage vis-a-vis private firms, and led to non-competitive practices in a number of sectors. On the other hand, the publicenterprises have been subject to a number of regulatory restrictions whichimpede their ability to operate commercially. For example, the publicenterprises are owned and operated by Government ministries; they tend to beoverstaffed; have fees regulated by the Government; and provide services (suchas electricity generation in far flung areas) that are not commerciallyviable.

5.39 The Government has responded to the problems of the publicenterprises in two ways. First, a process of corporatization has beeninitiated, and by early 1991 extended to almost half of the major publicenterprises.17 Corporatization entails placing the public enterprises underthe provisions uf the Company Act, including the payment of company tax.While in principle this denotes greater commercial autonomy, given the legacyof state controls and the Government-weighted composition of Boards, thetransformations so far are limited. The second response have been selectivereorganizations, including changes in management, company structures and incommercial objectives; the most important example ia this regard has been AirPacific. To date, the Government has eschewed closure or privatization as astrategy for reform.18

5.40 Public enterprise reform is a high priority in order to enhancecompetitiveness, increase returns to asset holders and reduce the budgetarydrain associated with weak financial performance. The specific reformstrategy will differ for each parastatal and a detailed investigation ofmanagement options, on a company-by-company basis, is warranted. Nonetheless,while the reform strategy will differ by enterprise, the main elements wouldinclude: (i) equal regulatory treatment of enterprises, regardless ofownership; (ii) greater mar gerial autonomy; and (iii) a more rapid shift outof the ownership and management of commercial enterprises by the publicsector.

5.41 Equal Regulatory Treatment. Providing equal regulatory treatmentto the public enterprises, through for example corporatization, will encouragethe enterprises to respond more efficiently to market r inals; reduce'regulatory rents'; and provide for competition on a mo..e equal footing

17/ Five others have been selected for corporatization during 1991,including the National Bank of Fiji, the Fiji Broadcasting Commission,the Ports Authority of Fiji, the Fiji Meat Industry Board and theNational Marketing Authority.

18/ There have been exceptions however: Fiji Can, a joint venture betweenPAFCO and Japanese interests, was closed in 1990. Some new equity hasbeen injected into distressed public enterprises, although theenterprises concerned remain in public hands and often the new partnersare quasi-public enterprises for example, Fiji Holdings now has a 20percent interest in the Fiji Sugar Corporation).

- 84 -

between the public enterprises and private firms. In the context of imposingmarkat discipline, it is important that corporatization be accompanied byrestrictions on access to subsidized capital, including targeted credit fromthe FDB; special equity injections from Fiji Holdings; targeted cor.cessionaryloans or loans backed by sovereign guarantee. Furthermore, there must be anexplicit agreement that poorly performing firms will be allowed to fail, justas any other commercial undertaking.19

5.42 Greater Managerial Autonomy. A high priority is that managers ofpublic enterprises be given full commercial autonomy, including explicitcompensation for any non-economic responsibilities tney are required toundertake. The principle of secure and guaranteed employment for all levelsof employees needs to be discarded. Managers should be guided by acommercially-skilled Board and be free to set salary scales and enterpriseincentives in line with established commercial practices, To strengtheen theautonomy of the public enterprises and to improve financial surveillance, thepublic enterprises should be brought directly under the control of theMinistry of Finance.

5.43 Privatization. For many of the commercial activities, privati-zation should be actively encouraged. The evidence from most countries isthat the performance of private companies is generally superior to that ofpublic ones, mainly because most governments have a strong propensity tointerfere in the operations of public enterprises and to inhibit managerialperformance. While the techniques of privatization are complex, and thepolitical economy of the process often delicate, it is imperative in Fiji'scase that this be undertaken in a comprehensive fashion to demonstrate theGovernment's commitment to shifting the public sector out of the management ofcommercial activities. Although Fiji's capital market is thin and politicaluncertainties may arise from foreign ownership and management of 'strategic'enterprises, it is useful to note that many nations with very similar startingconditions and concerns have successfully mounted comprehensive privatizationprograms.20 High priority candidates for privatization would be the morecommercially oriented, exporting firms such as Air Pacific, the PineCommission, IKA and Pacific Fishing. At this juncture, it would be useful todevelop, in as transparent a iashion as possible, a privatization plandetailing a time-table and procedures for Government withdrawal fromcommercial operations for a number of parastatal enterprises.21

19/ It is also important to develop improved procedures for setting utilitytariffs, to ensure that the corporatized entities do not require publicsubvention to operate or replace assets.

20/ For examples of Charles Vuylsteke and Helen Nankani, "Techniques ofPrivatization of State-Owned Enterprises,' two volumes, World Bank,1988.

21/ Further, in-depth attention to public enterprise reform is warranted.Strategies for public enterprise reform will be reviewed in theforthcoming Regional Economic Report.

- 85 -

(iv) Anticipating Market Failure: the Environment

5.44 An outward-oriented future growth strategy, sparked by an increasein private investment, will have important consequences for environmentalpreservation and the sustainable use of natural resources. Regulatory andfiscal intervention will be required to ensure that the divergence betweensocial and private values, which arise in the use of natural resources, aretaken into account in investment and allocation decisions. At present, Fijisuffers from relatively few environmental probljms: the country has a smallpopulation and is lightly settled; the industrial base is small, and heavy,pollution-intensive manufacturing virtually non-existent; and the country'surban infrastructure comparatively well-developed. There are however, anumber of areas in which regulatory and fiscal improvement is required, notonl3 to enhance Fiji's quality of life, but also because the maintenance andgrowth cf a number of activities. tourism most significantly, but aisoagriculture and fisheries, depend on sound environmental management.

5.45 Natural Resource Management. Tourism in Fiji is overwhelmingiycoastal in nature--coastal resorts and urban coastal centers account fornearly all tourist visits--so there will be increasing pressure on the coastalecology. Although the tourism industry generally engages in sound resourcemanagement practices, the construction of some large hotels on unstabledeltaic lands adjacent to shifting shorelines, calls into question theadequacy of Government's land zoning practices. The second aspect of coastalmanagement relates to the fishing industry. While current catch levels arewell below sustainable yields, no overall management plan has been developedfor this sector, and there are potential problems of demarcation and tenancyanalogous to land. In the forestry area, the main concern is with themanagement of native hardwood forests, which have been poorly managed,contributing to serious soil erosion in some localities. A national forestryinventory is being conducted which should provide valuable information forreserve protection and the setting of appropriate felling and stumpagecharges.

5.46 Urban Environmental Quality Control. Fiji's urban and industrialareas also need to be monitored for their environmental impact. If thegarment industry continues to expand quickly, there is the prospect of aheavily-polluting dye-stuff plant being established. For this type ofindustry, it would be useful to require an environmental appraisal, whichwould assess the likely effects and pollution control strategies to be adoptedby the factory, before the investment is approved.22 Otherwise, Fiji'surban amenities are reasonably good, although sewerage and drainage serviceshave been unable to keep up with the urban sprawl, particularly around Suva.

5.47 Institutional CaPacity. The Government's environmental policy isimplemented through the Environmental Management Committee, which operates

22/ Given the paucity of investments which are likely to cause environmentaldamage in the foreseeable future, it would be advisable to requireenvironmental assessments only for those investments above a certainsize which have a moderate to high risk of adverse environmentaleffects.

- 86 -

under the Town Planning Act and has been in force since 1988.28 There is aneed for greater coordination among government agencies, especially theMinistry of Primary Industry and the Director of Environmental Affairs onforestry policy and coastal management policy. Furthermore, governmentdepartments and public enterprises, which are currently outside the relevantenvironmental decrees, need to be treated in the same way as the privatesector. Consideration should also be given to increasing the monitoringresources of the Environmental Management Committee, which is currently servedby a staff of just two persons.

23/ Several environmental initiatives are currently underway including aNational Environment Management Project funded by the Asian DevelopmentBank and a National Environment Strategy Project.

Appendix 1Page 1 of 7

Note on Methodology Used to Derive Effective Rates of Protection

1. The basic data for the cal ulations is the 1985 Census of Industriesby the Bureau of Statistics, Fiji. Although a later Census for 1988 isavailable, the 1985 Census is considered to be the more reliable by the FijiDepartment of Finance and Planning.

2. The effective rates of protection (ERPs) for 1990 and 1991 areestimated by applying the actual nominal ta: iff rates for each of those yearsto the production and cost data from the 1985 Census of Industries. Themethodology is similar to that used by the Department of Finance and Planning,with some changes in assumptions.

3. The output figures for each industry are derived from Table 10 ofthe Census by adding local sales to exports, industrial services provided toothers, changes in stocks of work in progress and of finished goods. This'net output' differs from the 'gross output' in Table 10 of the Census, sinceown capital construction and miscellaneous incomes are excluded.

4. Net local sales are 'net output' less exports for each itidustrygroup (other than sugar where the drawdown of finished stocks was adjusted sothat net local sales are not negative). The rate of duty paid on output isset to be the sum of the fiscal and customs duty rates while the nominal rateof protection is the sum of these two rates, less the rate of excise dutypayable by any local producer.

5. The value of output without protectiot ̂ s calculated by applyingthis nominal rate of protection to net local sales.

6. The value of tradeable inputs is calculated from Tables 4 and 8 ofthe 1985 Census. Raw materials purchases are adjusted for changes in stocks(changes in stocks of local and imported raw materials are assumed to be inproportion to the corresponding shares of total raw materials purchase). Anyduty payable on raw materials is based on the share of imported raw materials.Fuel is treated as a tradeable input and an average duty of 10 percent isassumed to be paid.

7. Other imports, including electricity and water (Table 4) andservices (Table 6), are treated as non-tradeables when deriving the value oftradeable inputs with or without protection.

8. The nominal, duty, and excise rates for 1990 are the same as thoseused by the Department of Finance and Planning (with the exception of cement,where the 1991 budget speech suggests that the fiscal duty had been reducedfrom 70 percent in 1990 to 50 percent in 1991, whereas the previouscalculations used a 50 percent rate for 1990). The rates for 1991 are basedon the 1991 Budget speech and the revised tariff schedule released at the timeof the 1991 Budget.

Appendix 1Page 2 of 7

Comments on Differences for Fiii Department of Financeand Planning Calculations

9. The method of calculating the share of exports and local salesdiffer slightly, since all services provided to others are assumed to be localsales. That does not affect results appreciably.

10. The main difference is the treatment of fuel used in production as atradeable. This decreases the share of value added to tradeables andincreases the effective rate of protection in each case. As may be seen fromthe calculations for 1990, there is negative value added without protection inmany manufacturing industries, while positive ERPs are above 600 percent inmany case.

Comments on Differences Between 1990 and 1991

11. In most cases, the nominal rate of fiscal duty is reduced from50 percert to 40 percent, or in some cases by more than 10 percent, between1990 and 1991.

12. Accordingly, the share of value added without protection to nominalvalue added rises. In some cases, value added without protection changes fromnegative to positive and in most others the ERP is lower for 1991 compared to1990.

13. There are some exceptions for products where the fiscal duties werealready less than or equal to 40 percent in 1990 and were not affected by thegeneral reductions in fiscal duties to 40 percent. If the customs duties inthese cases were adjusted upward slightly to the new standard rate of10 percent, then the total nominal rate of protection is increased, resultingin a slightly higher ERP for 1991 (see for example FSIC 3111: Butchering andMeat Packing).

Appendix 1Page 3 of 7

Table .1 EFFECTIVE RATES OF PROJECTION IN MAIFACTJUWi0, 1990

Duty Value Value added EffectiveNominal on rea addrd with without rose of

FtlC Industry L& Output L Protection !a Materials L Protection Protection ProtectionS X

3111 Butchering A Moet Packing 9g6 30.0 0.0 698 522 348112 Dairy Products 15,669 M5.O 0.0 6,289 773 above 6003113/14 Fruit A Fiah 16,235 45.0 0.0 5.126 4,104 25311 Edible A Coconut Olla 26.188 45.0 0.0 5,831 -1,830 n, e

3116 Rice A Flour Millintn 33,411 30.0 10.0 8,338 741 above 6003117 Bakery products 12,876 S5.0 80.0 4.893 -495 n.vy..8118 Sugar 104,768 48.0 0.0 27,896 27.669 03119 Confection-ry 4.641 45.0 0.0 2.619 1.098 1393121 Hiacellaneoue Food Products 4.600 4E.0 0.0 876 -1,174 n.v.s.

8t22 Animal Foed 6S.38 85.0 0.0 1.721 -594 n.y.§.3133 Non-alcoholic Drink* 4.690 47.8 0.0 2.877 657 88210 Teztiles A Clothes 16,798 87.5 7.5 6,044 -2,271 n.v.s.

8220 Footwear 388 82.5 7.5 125 -60 n.v.a.

3311 Saweilling 19.204 17.8 0.0 10.783 8,708 248320 Furniture & Uphol-toring 10.0S2 57.5 7.5 4.136 -1,425 n.vy..3410 Paper products 7.688 47.5 0.0 a,468 240 above 008420 Printing A Publishing 18.577 57.5 7.5 7.508 325 abowe 6003611 Paint 6.l78 47.5 0.0 1.410 -1.331 n.y.c.3581 Soap, Toiletries AChew. Prod. 13.996 447.5 0.0 4,213 -1.898 n.vy..8519 Miscellaneous Chew. Prod. 2.364 47.5 0.0 1,936 877 1213520 Retreading 8.385 52.5 0.0 1.429 -348 n.v.c.am30 Plastics 7.292 47.5 0.0 4,117 78S 4258800/8700 Cex,ent A Conc. Prode. A Basic Metal Ind. 25,493 67.8 0.0 14.495 -2.479 n.v.s.3811 Metal Furniture 4 Fixtureo 747 47.8 0.0 318 -35 n.v.c.8812 Structural Metal Products 18,840 47.8 0.0 4.629 -2.847 n.v.c.3889 Fabric, etal prods. *x. Mach & Eta-aent 7.083 47.5 0.0 2.,53 -681 n.v.s.

3821 Agricultural Mach. & Eluip. 1.189 0.0 10.0 624 657 -5

3829/383 Repa;r k IMint. of ndl. Machinory 2.541 0.0 10.0 778 935 -178841 Boat * Ship Building * Repairing 6.9m 57.5 10.0 1.627 -1,398 n.y.c.3849 BuS Building 791 87.5 10.0 410 -240f n.y.a.8901 Jewalery A Related Article. 1.081 10.0 0.0 18e 82 129

L Industry groups are based on FSIC. the Fiji Standard Industrial Classificatlon. Production and coat data are based on the1985 Census of Industri-a by the Fiji Bureau of Statistics. Duty rates are actual& for 1990.

it aros output leas own capital construction and aisacel neou- income.L Fiacal and Customs duties payable on import., le" excise duty payable by domestic producere.Lt Duty rate on tradeable rew mteriala other than fuel, where a 10i duty rate i- applied.

Appendix 1Page 4 of 7

_Tble 1.2: TRADITIONAL RICE ERP CALCULATION

Costs per hectare Yield Fl/kg paddy(8) kg/hectare equivalent

Farm production costsMachinery and labor 200 1,600 0.188Seeds 48 1,500 0.032Fertilizers 0 1,50C0 0.0Herbicides 0 1, 00 0.0Insectieides 0 1,600 0.0Fungicides 0 1,600 0.0

Total form costs 248 1.600 0.165

Producer margin 427 1,500 0.284Farmgate value 676 1,600 0.460Froight to mill 0.010Milling margin 0.030

Ex-Mill valu- 0.490(unpolished)

Importse f price 0.36

(unpolished rieo)Stevodoring cost and freight to mill 0.03Notional ex-mill value 0 39

Tradoable inputs La 0.08Duty on trad.ablo-Tnputs Lb o 0.

Apparent ERP Le 22%

Za Assuming halt of machinory and labor costs and half milling costs are tradeable.Assuming 1OX customs duty on tradeablo Inputs; no ftiscal duty.(0.49 - 0.08) -(0.89 - .07) a 22X

(0.49 -0.08)

However. this apparent ERP tigure to not maningful tor several reasons:

(i) thore may be a considerable quality differential lnvolved since traditional rico is soldin local markets In unpolished form, making It ditticult to compare with imported ricesold polished;

(il) since no wholoealing costs are incurrod, the retall price for traditional rice is 80.68per kg paddy equivalent, well below the 80.76 retail price at which polished rice is madeeval able locally.

(llT) this could account for the extremely high producer margin In the above table;(iv) the only meaningful conclusion Is that traditional rice would be competitive with

importod unpolished rice at reasonable producer margins.

Appendix 1Page 5 of 7

Tablo 1.3: REWA RICE (IRRIGATED ERP CALCULATION

Costs per hectare Y.old Fl/kg paddy(8) kg/h.ctaro equivalent

Farm production costsMachinery and labor 286.0 2,600 0.114Seeds 29.6 2,600 0.012Fertilizers 178.6 2,600 0.071Herbicides 81.0 2,500 0.012Insecticides 222.6 2,600 0.089Fungicides 0.0 2,500 0.0

Total Farm Costs 748.7 2?600 0.80

Producer rfirgin 66.8 2,600 0.03Farmgste value 812.6 2,500 0.38

Freight to mill 0.010Drying margin 0.070Milling margin 0.120Polishing margin 0.040

Ex-mill value 0.670(polished)

Notional value unpolished 0.680

Imports c.i.f. price 08960

(unpolished rice)Stevedoring cost and freight to mill 0.030Notional ex-mill value 0.390

Tradeable imports 4a 0.160Duty on tradeable imports Lb 0.015

ERP estimate Le 49X

L Assuming half of machinery and labor costs and half milling costs tradeablo; andfertilizers, herbicides and Insecticides fully Imported.

b Assuming 10% customs duty on inputs; no fiscal duty.(0.63 - 0.16) - (0.39 - 0.135)

(0.53 - 0.15)(i) This estimate is for only one producer of irrigated rice; costs may vary substantially by

location. Moreover, the c.i.f. price for unpolished rico may vary considerably overtime.

(ii) It is Interesting to note that the effective protection to Irrigated rice To providedonly partly by the IOX customs duty (around 4¢/kg of paddy equivalent). An equivalenceof ox-mill prices of polished rice from Rowe or from imports i accounted for by allowingthe miller to charge ak polishing margin of l5t/kg for imported comparod to 4e/kg forRewe rice. The 165/kg is derived as a rosidual between the domestic ex-mill cost(67*/kg) tho cost and the cost of imported unpolished rico delivered to mills (48$/kg).Totais may not add duo to rounding.

Appendix 1Page 6 of 7

Tablo 1.4: COCOA ERP CALCULATION

Fs/kgdrlod beans equivalent

Farm production costs a 0.60Producer margin 0.00Farmgate cost 0.50

Frelght to formentory 0.03Fermenting costs

Firewood 0.13RAM / 0.88Margii 0.10

Ex-formentary vulue 1.13

Froight to morkoting depot 0.08Value ox-depot 1 19

Marketing costs SuvaVariable

Labor 0.08sagging 0.0SFreight to wharf 0.01Interest 0.07Fixed costs 0.11

Total cost f.o.b. 1.64

f.o.b. value /d 1.48Price subsidy 0.08

Tradoable Inputs /o 0 5Duty on Inputs /j 0.1146

ERP estimate /g 1.4%

; Production cost breakdown not avoalable corresponding to unit costs on which processinq andtransport costs are derived. Based on other cost* estimated for traditional cocoaproduction, all costs are attributed to machinery and labor. Half of this is assumed to beimported.

b Producer margin sets to zero In data obtained, possibly because output is subeidized to matchworld pricos ;In order to permit exports, but not to allow for profits.

/e Ram costs per unit compared to firewood cost for drying appear excessive, compared torelative costs for drying copra.

Ld F.o.b. value dorived from comparoble USS c..f. prices, adjusted for freight, customs andbrokerage, converted to FS.

Le Tradeablo inputo are assured to be half of labor and machinery costs and half of RAM costsand bagging costs.

f Assumed to be 10X customs duty, zero fiscal duty.This estimate Is subject to variation, due to fluctuating world prices for cocoa. If oniy26X of on-farm costs are assumed to be tradeable, the ERP estimate would change to over 2X,st!ll a low value.

Appendix 1Page 7 of 7

Tab!. 1.6: COPRA ERP CALCULATION

YloldI per hectare kg/hectaro FS/kg

Farm pro$jction costs /aLabor 38 400 0.096Machinery 12 400 0.030Othor 18 400 0.045

Total farm costs 68 400 0.17

Producor margin 20 400 0.05Farmgato cost 88 400 0.22Freight to erier 0.22Drier costs

Firewood 0.02R&M 0.02

Ex-drier value 0.27Freight to mill 0.02Value ex-mill 0.29

Mill costsoperating 0.09energy 0.02labor 0.01administration/management 0.04less revenue from by-product -0.06net-mi I I costs 0.12

Total cost f.o.b. 0.41

F.o.b. value lb 0.22

Price subsidiesto growers 0.13to millers 0.08Total 0.19

Tradeable inputs /c 0.146Duty on inputs /d 0.016

ERP estimate o eox

a There is no full breakdown of production corresponding to unit cost data on which marketingmargins are calculated. It Is assumed that 50 out of 68 8/ha are labor end machinery costs;with a high (75#) proportion of labor and all machinory Imported. The remaining costs areassumed to be imported fertillzors, Insecticides, etc.

Lb F.o.b. value derived from comparable Rotterdam US$ c.i.f. prices adjusted for freight andcustoms, then converted to FS.

e Machinery and Insecticide etc. assumed to be Imported, SOX of drier RAM costs and millingoperating costs and 100X milling energy costs assumed imported.

/d Customs duty of 10%, fiscal duty O assumed to be paid on tradeable inputs.0 This estimate Is suLiect to variation, given variability of costs by location end

variability in world copra prices.

Appendix 2Page 1 of 7

Sugar Sub-sector Incentives Policy

1. The sugar industry is the largest agricultural sector in the countryand a main export earner. The wealth of the sector comes from two sources.First, the climate and land are well suited to sugar cane production, makingFiji a natural low cost producer. The small-holder system of cane productionis also very efficient which further contributes to the earning potential ofthe sector. Secondly, Fiji sells about one-third of its crop to protectedmarkets under the Lome Convention or under the US quota system at prices wellabove world market prices. Currently the prices in these protected marketsare about i50 percent above world market levels.

2. Threc important issues need consideration in the sugar sector.First, the sector and the country are dependent upon preferential sales to theEEC and the US for one-fourth to one-third of export revenues. Whether thesepreferential sales will continue to exist in the future is a serious concern.Secondly, the current long-term land leases covering most of the sugar caneareas are scheduled to begin expiring in 1996 and this could cause many tenant'armers to lose their leases. This may lead to considerable instability inthe sector with disruptions in sugar cane production. This issue poses asignificant risk to tte stability of the sector as well as the country.Finally, the farmers have gained an increasing share of the revenues from thesale of sugar at the expense of both government revenues and the sugar millsand associated equipment maintenance. The "rents" from the preferential salesto the EEC and the US have been largely captured by the cane growers throughaggressive labor negotiations. A significant equity issue is involved as towhether these "rents" should go to the cane farmers or the general treasury.

3. The government is also considering expanding the sugar growing landto a new area near Suva, which currently is used for rice production. Thearea would produce approximately 1 million tons of cane or 120,000 tons of rawsugar. A sugar mill and a small refinery would also be included with capacityto produce about 40,000 tons of refined sugar to be sold in the domesticmarket and nearby islands. The balance of the production would be used forcattle and fish feed and possibly for export as gur to India. The additionalproduction would not be sold on the world market as raw sugar. It should benoted that sugar was previously produced in this area, but was abandonedtecause the area was too wet for efficient sugar growing.

Exports

4. Total exports were about 400,000 tons in 1989 and of this totalabout 175,000 tons went to the United Yingdom under the Sugar Protocol of theLome Convention (see Appendix Table 2.1). About 12,000 tons went to theUnited States under its quota system. These sales received favorable priceswhich are more than double the world market levels The sales to the UK wereat an average price of US 24 cents/pound and the sales to the US were at anaverage price of US 22 cents/pound. Sales to the UK in excess of the quotareceive world market prices. The remaining 53 percent of sales were at worldmarket prices although some of the sales were at prices established in longterm bilateral agreements. Sales to Malaysia, for example, were at pricesabove recent world market levels as negotiated under the long-term agreement.

Appendix 2Page 2 of 7

Sales to New Zealand, Japan and Korea were at spot market prices. Worldmarket prices for raw sugar averaged US 12.8 cents/pound in 1989. The totalproceeds from the sale of sugar and molasses was F$200 million in 1989, andabout F$68 million was due to sales at preferential prices to the EEC and theUS rather than at world market prices.

5. The system of preferential access to protected markets which the EECand the US grant to countries is under threat from several sources. Anagreement to reduce the levels of trade protection for agriculture, whetherunder GATT or bilateral arrangement, would likely phase out these preferentialmarkets over time. Such an agreement is being discussed, however manycountries, including the European Community and Japan, oppose such anagreement. Even if these preferential markets remain, the prices for sales tothese markets may decline.

Appendix Table 2.1: SUGAR EXPORTS ('000 tons)

De&tination 1984 1985 1986 1987 1988 1989

United Kingdom 176.5 179.2 169.2 169.3 186.1 181.3New Zealand 21.7 34.8 39.8 41.3 58.4 58.2USA 33.9 - 14.0 21.9 8.1 11.7Singapore 14.0 14.0 - - - -Malaysia 65.8 59.8 64.1 113.6 66.6 52.0Japan 29.4 14.4 - 15.8 31.5 31.5China 19.9 55.9 30.0 62.0 50.0 50.0Canada - 18.0 - - - -Korea 12.2 - - - -

Portugal - 28.0 - - -

Source: Fiji Sugar Corporation.

6. If the preferential access were eliminated, direct aid might stillbe made to the countries to replace the aid nature of the sugar purchases.The current system is essentially trade-tied-aid ori the part of the countriesof the EEC and the United States. Future aid would not necessarily be tied tocommodity exports, but would likely go directly to the country. This shift ofaid would result in a substantial shift of wealth from the sugar industry tothe general population of the country. Since nearly one-third of Fiji's sugarexports are to these preferential markets, any reduction in the value of thesesales would be very significant.

Land Tenure

7. The land tenure system in Fiji dates to the 1940s when the NativeLand Legislation was passed. Under this legislation, about 85 percent of all

Appendix 2Page 3 of 7

lands were allocated to traditional landowners (native Fijians) which weretribal clans called Matagali. The land could never be sold, but it could beleased or used by members of the Matagali. The Native Land Trust Board wasestablished to manage these lands and distribute the leases to the traditionalowners. The amount of the leases were standardized based on thecharacteristics of the land. About 15 percent of the land had already beensold prior to this legiwlation and it became freeholder land which can be soldfreely.

8. About 95 p .t of the sugar producing land is covered by theNative Land Legisl. and Most of this land is leased by sugar caneproducers. Most o' i.; ne farmers (about 85 percent) are Indians. Landleases were initially of ^ short duration causing uncertainty and thereluctance of the land .essor to improve the land. This led to theAgricultural Land Tenant Act of 1969 which standardized and extended theleases to 20 years. Many of these leases were negotiated in 1976 and are dueto expire in 1996. About 40 percent of the sugar cane producing areas will beaffected by this provision in 1996. The land will automatically return to thecontrol of the MataQali. If the land is not leased to the current tenant,then the landowner must pay the tenant for improvements made. A review boardwill be established to determine the value of the improvements.

9. The land rents currently prevailing are only a fraction of themarket rates. The total rents of all land in Fiji is about F$10 million peryear, which suggests that land rents do not reflect market rates. The landrent currently paid for sugar cane lands is estimated to be about 4 percent ofthe market rate. This has led to conflicts between the native Fijianlandowners and the tenant cane farmers. If more equitable land rents cannotbe established, the land will very likely revert back to the control of thenative landowners.

10. Land lease payments for agricultural land in other countries rangefrom 30 percent to 50 percent of the value of the crop. When the tenantfarmer provides all labor and inputs, the lease could be as low as 30 percentof the crop. The payment could be as high as 50 percent when the landownerprovides machinery and inputs for use by the tenant.

Distribution of Sugar Revenues

11. Payments to cane growers in Fiji are based on a negotiated share ofproceeds from the sale of sugar and molasses. The cane producers of Fiji havereceived an increasing share of the proceeds while the share of the Fiji SugarCorporation (FSC) has declined. The current formula for division of theproceeds is as follows:

Total Sugar Produced Growers Share FSC Share

Up to 325,000 tons 70.02 30.02For next 25,000 tons 72.5? 27.5?For tons above 350,000 75.0 25.0?

Appendix 2Page 4 of 7

12. By comparison, the grower's share was 57.75 percent prior to 1969,

with millers guaranteed recovery of cost, otherwise the miller's share was

42.25 percent. From 1969 to 1975 the growers share was 65 percent, with 35

percent to millers. From 1975 to 1980, the growers share was 70 percent and

the mills share was 30 percent. Since 1980, the current formula has been

used. The average cane grower in 1989/90 had 3.24 hectares of cane and

produced 57.7 tons of cane per hectare. The total revenue from the sale of

cane was approximately F$8,805 per farm.

13. The share of sugar proceeds received by growers in other major cane

producing countries averages 60 percent according to recent studies. In a

recent Bank report, this was the average share received by cane growers in the

major cane producers: Australia, Brazil, Colombia, Mauritius, South Africa andThailand. This estimate was also confirmed by the Landell Mills Commodities

Studies.

14. The generous share given to the growers has come at the expense of

the government and the sugar mills. The four mills; LAUTOKA, RARAWAI, LABASA

and PENANG are owned and operated by the FSC, which is a private corporation70 percent owned by the government. The two largest shareholders, after the

government, are local corporations who account for 24 percent of the total

shares. The remaining shares are owned by local corporations and individualsincluding a small foreign ownership. The stock of the corporation is publicly

traded on the Fiji stock exchange.

15. A serious question exists as to the performance of the Fiji Sugar

Corporation's management. The management should focus their efforts on

earning a high return for their shareholders and maintaining their plant and

equipment. Over time the share of the proceeds from sugar sales going to the

growers has increased and it is now among the highest in the world. These

gains have been possible because of the acquiescence, if not outright support,

of the management of the Fiji Sugar Corporation. If the growers shares of

sugar proceeds had been kept at the industry standard of 60 percent, rather

than more than 70 percent, the FSC would have had larger operating profitswhich could have been used to improve the mills or distributed as dividends to

the shareholders. The total proceeds from the sale of sugar and molasses infiscal 1990 (year ending March 31) were F$268.7 million. The FSC share wasF$77.0 million or 28.66 percent and the farmers share was 71.34 percent.

16. The high payout to cane growers does not appear to be reflected in

higher than competitive wages paid to farm laborers. The FSC, however, pays

its unskilled workers nearly double the wage of unskilled workers in otherindustries. The average wage paid to unskilled workers by FSC in 1990 was

F$2.30 per hour compared with about F$1.20 in other sectors.

Conclusions and Policy Recommendations

17. The combination of factors discussed, lead to economic distortions

in the sugar sector and the general economy and to serious equity

considerations. The sugar cane growers receive a larger share of the proceeds

from sugar sales than in most other countries. The proceeds from sugar sales

go exclusively to the sugar sector even though part of the proceeds are due to

sales in preferential markets and represent trade-tied-aid. Cane growers also

Appendix 2Page 5 of 7

pay substantially less than market rates for land leases because of longstanding lease arrangements. These factors increase the return to sugarproducers and increase resource use by the sector. Sugar production isexpanding into marginal areas such as hillsides and wetlands where yields arelow. The cost of transporting cane to the mills is increasing as the serviceareas are extended. Wage rates are increasing, thereby reducing thecompetitiveness of the country in manufacturing. The economic benefits of thesugar sector are not equitably distributed to the landowners and the generalpopulation.

18. The high returns to sugar cane growers raises several equityconsiderations. First, the landowners receive less than market rates for thelease of their lands. Second, the benefits of crade-tied-aid go primarily tothe sugar cane producers rather than to the government for the benefit of thegeneral population. Third, the producers receive a larger than average shareof the proceeds from sugar sales, and this reduces the profits of the FijiSugar Corporation and the revenues paid to the shareholders. Since thegovernment owns 70 percent of the FSC, the revenues paid to the government arereduced.

19. A number of changes are needed to reduce distortions and moreequitably distribute the benefits of the sugar sector. The current landleases which are scheduled to begin expiring in 1996 should be renegotiated atmarket rates. This would result in substantially higher payments from thecane grow;ers to the landowners. However, this is necessary for equity reasonsand to ensure the stability of the sector. The landowners cannot be expectedto extend the leases unless they receive just compensation. If more equitablerates are not negotiated, the land will most likely be taken over by thelandowners. This would displace the current farmers or convert them intohired labor. The level of efficiency of the sector would probably decline.

20. The share of sugar sale proceeds which goes to the growers should bereduced to the world industry standard of about 60 percent. However, a periodof adjustment should be considered, since the growers will already facesignificantly higher land lease payments baginning in 1996 when current leasesbegin to expire. The Fiji Sugar Corporation would then have additionalrevenues to improve its plant and equipment and the government and othershareholders would receive a larger return on their investment.

21. Finally, the question of who should receive the benefits ofpreferential sales of sugar to the EEC and the US markets needs to beaddressed. These benefits primarily go to sugar cane growers under currentarrangements. However, these above market prices for sugar sales partlyreflect economic aid from the EEC and the US. This aid is not likely intendedto benefit only sugar producers, but rather the entire country. Consequently,a phased increase in the tax on sugar exports should be used to capture aportion of the revenues from sales to preferential markets. These revenuescould go to the government to either reduce tax burdens on all citizens orprovide improved services. The proceeds could also be used to compensate forbelow market rates currently being paid for land leases on cane areas. Thiswould also reduce the incentive provided by these high prices to expand thesugar sector into marginal areas.

Appendix 2Page 6 of 7

22. Expansion of the sugar sector into new areas should be consideredonly if it is profitable at expected world market sugar prices. Since thepreferential sales to the EEC and the US are under serious review, thesemarkets should not be used to justify larger production. Specialty markets,such as the export of gur to India or production of cattle feed from sugar,should not bk used to justify production which is not profitable at worldmarket sugar prices. These specialty markets may provide a premium price fora period, but would quickly become uncompetitive if price premium: are large.

Appendix Table 2.2: FIJI SU.AR DATA

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

8nsic DateAre. Harvested ('000 ha) 84.S19 62.284 65.U39 65.888 69.27 59.171 68.605 70.546 70.086 68.493 63.864 70.496Cans Production ('000 tons) 2849 4058 3360 3931 4074 2202 4396 3042 4109 2960 3185 4099Sugar Production ('000 tons) 346.7 473.2 396.2 470 488.7 278 480.1 341 501.8 401.1 362.8 460.6Sugar Conwauption ('000 tons) 31.2 28.3 31 36.6 34.6 36.4 30.1 23.9 30.5 34.4 31.9 40.8Sugar Exports ('000 tons) 315.5 444.9 385.1 433.4 452 252.9 448.6 317.3 471.1 365.5 332.8 419.4Molasses Production ('000 tons) 106.1 163.' 128.8 151.9 152 84 188.5 108.4 158.7 130.2 129.9 150.7Iblai.ee Consumption ('000 tons) 1.6 1.8 2.2 2.9 3.3 3.7 4.3 3.7 3.1 2.4 3.5 3.1Nolasee Export* ('000 tons) 104.7 162.1 127.4 148 144.9 80 184.2 106.7 155.7 127.3 125.8 147.1

YieldsCone yields/ha s2.3 6S.1 S1.2 59.7 58.8 87.2 64.1 43.1 58.6 44.8 49.9 58.1Cene/augar ratio (TC/TS) 8.2 8.6 8.5 8.4 8.4 8 9.2 8.9 8.2 7.4 6.8 8.9

Prices

Crowers prices (FS/cane ton) 23.85 33.19 28.24 26.75 29.65 22.26 24.61 36.86 52.37 48.95 46.40Growers prices (P6/eugsr ton) /a 205.11 299.115 220.416 224.7 237.2 204.792 219.029 299.792 387.888 388.76 413.672Domeetic Sugar price (FS/ton) 187.31 187.31 295.4 298.4 295.4 335 365 365 390 400F08 ewport unit value (FS/suger ton) 273 398 322 304 326 289 263 418 472 540 600World price (FS/auger ton) 145.6 178 516.7 310.1 173.3 190 124.3 103.7 150.6 185.3 321.8 418.3FPi price em S of world price 1.53 0.76 1.01 1.75 1.72 2.33 2.84 2.78 2.85 1.69 1.43

Export Earnings (FS million)Sugar 117 174 132 125 112 109 105 133 200 217 279

Employment (number of workers)F rer 18383 19233 19567 20936 21558 21671 22130 22154 22182 22255 22127 21771Cane cutters 17003 19300 19411 19911 11295 16243 12924 '647 12845 12280 12682F_C 3073 3133 -024 2990 2812 2790

Toatl(sc S of total epIloysent)

Value Added( at 1977 prices)Sugar agriculture (as S (DP) 9.7 11.7 10 11.3 11.7 7 11.2 8.3 11.3 9.6 8.6 9.7 . 1Sugar agriculture (as S Total Agarculturo MP) 42.7 49.5 44.4 47.1 47.4 33.2 45.7 37.5 46.2 39.6 36.7 41.7 DOSugar mnufacturing (** S of Total Manufacturing CDP) 31 35.8 32.5 35.1 37.3 23.6 34.9 28.5 35.2 31.7 29 32.9 m :J

Tot l Sugar (as S of CDP) 13.4 16.3 13.8 15.6 16.2 9.7 15.4 11.5 15.6 13.3 11.9 13.5 -4 0.O X

/s Crowers price for auger cone has been converted by the cane/auger ration.

Source: Fiji: A Transition to Manufacturing, World Btnk Country Study. 1987.Fiji SuaSr Corporation

Appendix 3Page 1 of 6

The Indirect Tax Model

1. Changes in the structures of import taxes (?f) and domesticindirect taxes (Td) will "directly" affect the revenue arising from thetaxation of imports (Tf) and domestic transactions (Td). Furthermore, thesechanges will "indirectly" influence Tf and Td through the price mechanism. Asa result of trade and tax reform, the (rf/Td) will vary, leading to variationsin the price of imported goods (Pm) relative to the price of competingdomestically produced items (Pd). To maximize utility, consumers will changetheir demand for imported goods and domestically produced items, affecting theimport tax base (Xf) and the base of domestic indirect taxes (Xd) and, hence,the Tf and Td-

2. To estimate the direct and indirect responses of import anddomestic indirect taxes to reform, this study first develops a positive modelwhich captures the interaction of rf and Td with Tf, Td, Xf and Xd at anaggregate level; and then, the model is converted into a "normative" (taxpolicy) model by re-defining If and Td in accordance with proposed reforms.In the model, each source of tax revenue is related to its corresponding taxbase, and the tax base to GDP at factor cost (Y) and (Tf/Td) aB followst:

ln(Tf)t= a0 + Gjln(Xf)t + a2(Tf) +Ult (1)

ln(Xf)t= U3 + U41n(Y)t + U5(rf/rd)t + U2t (2)

ln(Td)t= HT0 + "Tlln(Xd)t + HT2(Cd)t+ U3t (3)

ln(Xd)t- HT3 + T41n(Y)t + 5(Tf/d)t + U4t (4)

1+ [ In (Xd) t-ln (Xd) 0

(Td)t= (rd)…t- - ---~… -- (5)l+HTlIln(xd)t-ln(Xd)oJ

1+[ln(Xf)t-ln(Xf)o)(r)t- (rf)t--------------------- (6)

I+Ul[ln(Xf)t-ln(Xf)o]

1 For more details on the theoretical development of the model see:J. Ehdaie (1990) "An Econometric Method for Estimating the Tax Elasticity andthe Impact on Revenues of Discretionary Tax Measures: Applied to Malawi andMauritius", WPS 334, The World Bank. Time series data on the decomposition ofimport duties by end-use category were not available to disaggregate the importtax function.

Appendix 3Page 2 of 6

where

(rd)= (Td)/(Xd),

(rf)= (Tf)/(Xf),

Td = domestic indirect taxes,

Xd = private consumption net of Td,

Tr = import duties,

Xf = the c.i.f value of total merchandise imports,

ac>O, built-in elasticity of Td to Xd,

a 2 >0, "direct" response of Td to Td,

a1l4<O, "indirect" response of Td to the reform,

HT1>O, built-in elasticity of Tf to Xf,

HT> 0 , "direct" response of Tf to tf,

HT1HT4>0, "indirect" resporse of Tf to the reform,

Equations (l)-(6) constitute the positive model which captures the interactionof tf and td with Xf, Xd, Tf, Td and GDP at factor cost. After substituting(5) and (6) into (1) to (4), the parameters of the reduced form model wereestimated using 1975-1990 time series data and a non-linear three-stage leastsquares estimation method (N3SLS). The results provided in AppendixTable 3.1, indicate that the model captures fairly well the structure ofindirect taxes during the 1975-90 period.

Appendix 3Page 3 of 6

Appendix Table 3.1: THE N3SLS ESTIMATION RESULTS OF THE POSITIVE MODEL1

ln(Td)t= -4.28 + 1.027ln(Xd)t + 22.13 (Td)t R 2=0.987(-57.8) (64.8) (26.6) DW=1.62

ln(Tf)t= -2.81 + 0.997ln(Xf)t + 6 . 1 5 (Tf)t R2 =0.978(-32.9) (70.3) (36.2) DW-1.98

ln(Xd)t= -0.52 + 1.0071.1(Y)t + 0.023(Trf/Td)t R2=0.965(-1.47) (22.4) (0.81) DW=1.96

ln(Xf)t= 1.92 + 0.7751n(Y)t - 0.332(Tf/'Cd)t R2 _0.934(3.0) (9.57) (-6.64) DW-2.54

1 + (ln(Xd)t-ln(Xd)oI(Td) t- (rd) t

1 + l.O2 7 (ln(Xd)t-ln(Xd))o

i + (ln(Xf)t-ln(Xf)oJ(Tf)t= (rf)t

1 + 0. 9 9 7(ln(Xf)t-ln(Xf)oI

1/ N3SLS refers to non-linear, three stage least squares regressLontechniques.

Appendix 3Page 4 of 6

3. Regarding the proposed tariff and tax reform, Tf and Td are re-defined as follows:

Trd-8s fF'i I l-ri) (1 +T9j) rg+,TiJ (7)

sr =2m±((Te±+Tmi)+(1+?.±+s±)?g (8)

where

mi - share of the ith imported item over total merchandise imports

si =the turnn"re: resulting from the production/sale of the ithcommodity/_.rvice, Si, over the total turnover, S.

e S/Xd=

ri the share of intermediate inputs/goods used to generate Si in Si--allowing the deduction of the OST paid on intermediaite inputs/goodsfrom the GST due on the output/sale,

Tmi, the import duty rate on the ith imported goods,

?es= excise duty rate on the ith luxury goods, if applied,

= the GST rate applied to the duty-inclusive c.i.f value of importsand of the turnover emerging from the domestic production/sale ofgoods and services

,rt= the Tr after the reform,

Trd' the Td after the reform,

In these identities, the statutory rates of import duty, excise duty and theGST are all policy variables. The value of "a" depends on the ability of theInland Revenue Department (IRD) to identify GST payers and, hence, broaden theGST base. Assuming that all the self-employed individuals and companies witha turnover of more than F$10,000 who paid income taxes in 1986 will pay theGST, the parameters of equation (7)--s, sis and ris--were estimated using theinformation from the tax roles2. Parameters of equation (8)--mis--wereestimated using 1989 trade data provided by the Customs and Excise Department(CED). The estimation results are provided in Appendix Tables 3.2 and 3.3,respectively. Equations (1) to (4), (7) and (8) constitute the tax policy(normative) model.

2 The most recent information was not available to estimate theseparameters. These parameters were assumed to remain fixed during the 1987-b9period in the process of simulation of the model for alternative policypackages.

Appendix Table 3.2: Estimates of Parametera of Equation (7)

Turn.>F3 10.000 Turn.>FS 10.000 Turn.>.FS 10.000Coods A Servicea FSIC Goods & Services FSIC Coods A Services FSIC

CODE Si ri CODE si ri CSOE si *i

A. Companies: clothing 6230 0.0001 0.6163-Agr./livestock/foreatry/logging rubber 3520 0.0025 0.6808 clothing/other 623I 0.0084 0.7451

coconut 1112 0.0005 0.0771 rubber/other 3525 0.0002 0.6106 footwear/leather 6232 0.0004 0.7360ginger 1114 0.0001 0.7030 plastic 3530 0.0013 0.4667 household goodo/fppliances 6240 0.00o0 0.6863tobacco 2111 0.0008 0.4166 plastic/other 3560 0.0003 0.6068 tourist goode 6250 0.0125 0.7697fruit, vegetables... 1116 O.OD20 0.9198 cemnt. non-setalic minerals 3600 0.0100 O.S45 pharmacutical/coas.tics 6260 0.0002 0.6925poultry, egg 1117 0.0117 0.5949 furniture/fixtures from metal 3811 0.0012 0.7945 other pher. 6261 0.0038 0.SS8milk, cream 1118 0.0000 0.0367 structural metals 3812 O.OOS1 0.7631 chemical 6262 0.0003 0.7602livestock 1119 0.0004 0.064 structural metals 3818 0.0001 0.4251 hardware 6270 0.0102 0.7829Agri. service 120 0.0005 0.7956 other metals 3819 0.0069 0.7551 motor vehicles 6281 0.0057 0.7248fishing excluding sub. fie. 1300 0.0001 0.8913 machinery, agr. 3821 0.0000 0.5112 petroleum 6282 O.OD48 0.8847subsistance farming A fishing 1400 0.0000 0.0000 machinery, other 312 0.0001 0.3756 books.... 6291 0.0026 0.7321forestry 1210 0.0007 0.9667 machinery, other 3829 0.0004 0.4t48 restaurants 6310 0.0024 0.5882logging 1220 0.0087 0.8628 ole'l machinery/nppl. 3830 0.0028 0.7416 hotel- 6320 0.0345 0.2394

-#ining A quarrying *l-l machinery/other 3838 0.0003 0.7250 -transport. storage/coou.metel ore mining QlSO 0.0001 0.6562 tranep. quip./ehip 3841 0.0000 0.4567 land transport 7111 0.0073 0.1131quarrying/extraction 2201 0.0005 0.5662 tranap. equip./other 3849 0.0015 0.6292 taxi 7112 0.0015 0.0210other mining 2209 0.0000 0.3452 jesellery 3901 0.0001 0.8165 freight tranport/road 7113 0.0025 0.1301

-Manufacturing other mnufactures 3908 0.0005 0.6331 freight transport/road 7114 0.0002 0.1568_et 8111 O.O20 0.7118 -construction freight transport/road 7117 0.0001 0.1679dairv products 3112 0.0089 0.6422 building 5100 0.0148 0.4897 other land transport 7119 O.O055 0.1765canning/packed fruit/veg. 3113 0.0005 0.6827 other 5200 0.0024 0.4993 water transport 7120 O.O00 0.0988conning/packed fish,.. 3114 0.0121 O.b062 -wholesle trade cruise/tour 7121 0.0D12 0.0345vegetable/animal i l/fats 3115 0.0081 0.7401 wholesale/uncl. 6100 0.0049 0.7375 other aster transport 7122 0.0113 0.0216grain mill produce 3116 0.0161 0.7132 food,drinks.tobacco 6111 0.0069 0.7998 water t n., *services 7123 0.0741 0.0554bakery products 3117 0.0069 0.4882 alcoholic beverage 6112 0.0005 0.5974 sir transport 7130 0.0366 0.0558sugar factories and refineries 3118 0.1214 0.6210 cloth 6121 0.0049 0.7276 tran. agnts/air 7190 0.0077 0.0027cocoa, chocolate. sugar, snack 8119 0.0002 0.2761 footwer/leather goods 6122 0.0006 0.60?7 other air, transport 7191 0.0014 0.0658other food product. 8121 0.006 0.609s household goods/appli ances 61 0.0914 0.446 communication 7200 0.0131 0.1654animI fes 8122 0.006% 0.7040 tourist goods 6140 0.0052 0.7575 -finance, insurance, real estatespirits 8321 0.0011 0.5611 phmr_ceuticla/cosetics 6151 0.002 0.6978 monetary ins. 8201 0.0c82 0.0000beer Stout * d maIt 8132 0.0029 0.02 chemi al 6182 0.0003 0.6470 motary ins. 8102 O.O01 0.0000sft drinks 8138 0.0081 0.5790 hardwre 6160 0.009 0.7701 other finmnl ins. 8109 0.0104 0.0217tobacco 3140 o.o006 O..099 motor vehicles 6171 O.0062 0.8078 insurance S0 0.0202 0.0139wearing apparel 8210 0.0060 0.848 petrolem 6172 0.0640 0.7594 real estate 810o 0.0108 0.0497footmear/leather goods 3220 0.0006 O.6892 office.... 6130 0.0006 0.6910 accounting,... OM 0.0013 0.0000wood mills 3811 O.09 0.3580 books... 6191 0.0002 0.4O08 dota procesing S3 0.0010 0.4291other wood products 3819 0.0014 0.7261 commission agencies 6192 0.0023 0.7482 e oering.... e82 O.O51 0.4801 I fDfurniture/fixtures 3820 0.0060 0.U64 -retail other 8829 0.0010 0.1214 apaper 3410 0.0041 0.5868 reteil/unal. 6200 0.0082 0.6eea -unclasified 0000 0.0080) 0.31l8printing/publi hing 3420 0.0098 0.2271 genral merchandise 6210 0.1522 0.7957paints... 811 0.0041 0.8008 grocery 6211 0.0002 0.7106 8. SLF-BVLOYD 0.0178 0.4297 |isosp, cosmetics, 9 512 0.0069 0.9f12 alcoholic beveraes 622 0.0235 0.8198other chemicals 3819 0.0056 0.4962 other 6222 0.0004 0.8017 C. Share of total turnover in priv. cona. 2.0154 -

Source: T;.e Inland Revenue Depertent.

Appendix 3Page 6 of 6

Appendix Table 3.3: Estimates of Parameters of Equation (8)

mi

(ratio)

A. Luxury goods*Alcoholic Beverages 0.0045Tobacco and Cigarettes 0.0016Passenger Motor Vehicles 0.0269Jewellery, gold coins, precious metal 0.0142Cosmetics (Beauty/make-up) 0.0038Electro-Mechanical Domestic appl. 0.0006Thermo-Electric Domestic app. 0.0012Video Decks 0.0019Hi-Fi Sets 0.0017Air Conditioners 0.0000Electric Storage Water heaters 0.0001Washing Machines and Dryers 0.0007Pri. Pleasure Craft/Vessels/aircraft (in'l) 0.0003Table or Parlor Games 0.0000Carpets and Rugs 0.0013Crystal Ware 0.0009Bone and Chinaware 0.0013

B. Other imports 0.9389Petroleum 0.1640Food 0.1335Crude materials, an'l/ve'l oils, chemical 0.1076Machinery & equipments 0.1651Transport equipments, excl. pass. cars 0.0609Manufactured goods, incl. misc. 0.3075

* These items were specified by the Customs and Excise

Department.

Source: The Customs and Excise Department.

Appendix 4: FISCAL INCENlIVE PROCRAMS

Incentive Program Eligibility Tax Holiday Description

Hotels Aid Ordinance Those who build a 7% subsidy of approved Tax concessionshotel or expand an capit4l expenditure available underexisting one. excluding cost of land. the Lrdinance for

Write-off of approved hotel builderscapital expenditure lesssubsidy against hotelincome in the 16 yrsfollowing the year in whichcapital expenditure is incurred.6S% investment allowance ofapproved capital expenditureexcluding cost of land isls9o availavblo.

Mining A Petroleum Mining companies With a valid prospecting licence, Tax exemptions orOperations whose operations a write-off against total reduced tax ratespromote economic income from all sources of the for mining companies.developmont of total amount of prospectingFiji. expenditure.

New Industries Industries deemed Tax exemptions in respect of Tax holiday up to 8expedient to profits or gains of FS-,0o0 p.a. years for 'developmertsaFiji's economic or if greater, ISX of the lesser of industries'.development, paid-up equity capital or total

fixed capital investment.For highly labor IntensiveIndustries, the percentageIs between 20 and 26 percerb.Accelerated depreciationallowances available forIndustries which proposo toIncur substantial capitalexpenditure.

Fuel Economy Relief Permission granted for 100S Special provisions regardingdeduction of expenditure If relief in respect of capitalsuch expenditure reduces expenditure relating to fuelconsumption of electricity economy A alternative sourcesor fuel oil. Initial allowance of energy used by a company "Iof 50% of said expenditure or an individual.will be given. Fuel economy IIInvestment allowance of up to O x40% of expenditure incurred alsoavailable. 4

Non-resident Film Individuals en- Tax exemption or reduced tax rate.Companies gaged by non-

resident compan-lee to make filmIn Fiji.

(Poge 2 of 3)

Incentive Program Eligibility Tax Holiday Description

Export Incentives Trade or product If local value added in respect Partial tax rebatesto be approved of export goods Is less than 30X, for exporters.4nder the Incoe between 40% A S0X, and over SO%, theTax Act. following rebates apply (respectively):

one half of tax chargeable on *xportprofits, three-quarters of taxchargeable on export profits, andthe full amount of tax chargeable onexport profits.

Companies whose Provided a 13 year holiday from 'Tax free' export developmentoutput is 96X corporate tax, sales and turnover promotion scheme.exported. taxes. Firms are exempt from import*nd export duties on capital goodsand Intermediate products.

Agricultural A Those engaged in Indefinite -,rry-ertmrd of losses Concessions provided forPastoral Industries agricultural A i." _oct91e2ly so4 off against in the Income Tax Act, applica-pastoral eu* profits; allowance for ble to taxpayers engaged inindustries. cnpital expenditure incurrod, agricultural A pastoralInter asin, on Improvements to industries.land used for agricultural Apastoral purposes; recoupment ofallowances given for capitalexpenditure.

Sp*cial Exemption Individuals 100% exemption from normal tax for Tax exemption for farmersfrom Normal Tax ngaged in a period of 6 yrs on Incowe derived (valid to l991).agriculture. from cane farming, coconut A ricegrowing, dairy farming, beat product-lon or goat farming; income derivedfrom other forming activitiesIncluding forestry & fishing is 856exempt from normal tax for a poriodof 6 years.

Special Tax Holiday Companies Exemption from income tax for 6 yrs Finance Minister designatesengaged in out of any 10 yrs commencing from the rural enterprises eligibleagricultural date on which the company commenced for tax holiday.entorprises. commercial production. aTourist Vessels Operators of sea Set off of 55X of cost of Sea Vessel PromAtion Scheme.Investment Allowance vessels constructed construction against Income from

in Fiji for carri- ship or other ships or income 41age of tourists, from other tourist activitiescarried on by vessel owner.

(Page, 8 Of 8)

Inentilve Progrm Eligibility Tax Holiday Description

Exmpt Inco Interet not exceeding Tax exempt from basic Exemption of some s0 classesF8400 ree ived by a and normal tax. of income froe basic andneidmnt indtvidual norm l tax.during am Income yer;Ex-gratia lump sumpayment reei wvd ontermination oi loss ofoffice or employmentwith maximum deductible*llowance of P85,000;certain types of lumpson voluntary paymentsreceived on v.tirement;any capital payment orrefund from an approvedretirement or super-annuation fund subjectto certain onditions;Inome arising fromscholarship awards;dividends pald by acompany incorporated InFiji received by a res'd4ntcompany; pension reelvoedby a FijI citizen from FNF;any other pension receivedby a resident individualto F81,000.

VAt

STATISTICAL APPBENXX

1. NATIONAL ACCOUNTS

1.1 Gross Domestic Product by Industrial Origin at Current FactorCost, 1981-88.

1.2 Gross Domestic Product by Industrial Origin at Constant 1977Factor Cost, 1982-90.

1.3 Gross Domestic Product by Type of Expenditure at CurrentPrices, 1982-91

1.4 Investment and Savings. 1981-90

II. POPULATION

II.1 Population by Ethnic Origin, Sex and Age at 1986 Census.11.2 Population by Ethnic Group, 1978-89.II.3 Population and Labor Force by Sex, 1976-86.11.4 Economically Active Population by Employment Sta is, 1976-

1986.II.5 Emigration by Ethnic Category, 1986-89.II.6 Emigration by Occupational Class, 1987-90.II.7 Education Attainment of the Fiji Population, 1976-86.

III. EMPLOYMENT

111.1 Paid Employment by Industry, 1977-90.II.2 Growth of Paid Employment by Industry, 1977-90.

IV. WAGES AND PRICES

IV.1 Index of Consumer Prices by Commodity Group, 1983-90.IV.2 Mean Daily Wages of Wage Earners by Industry, 1982-91.

V. PUBLIC FINANCE

V.1 Central Government Revenue and Grants, 1983-91.V.2 Turnover Tax Revenues and Rates by Service Category, 1988-90.V.3 Excise Duty Revenues and Rates by Commodity Category,

1988-90.V.4 Central Government Expenditures, 1983-91.V.5 Central Government Expenditures by Function, 1983-91.V.6 Expenditure Elasticities by Major Consumption Categories.V.7 Operating Profit of Major Public Enterprises, 1985-89.V.8 Financial Position of Public Enterprises, 1986-88.

VI. MONEY AND BANKING

VI.1 Monetary Survey, 1983-90.VI.2 Assets and Liabilities of Commercial. Banks, 1983-90.VI.3 Interest Rate Structure, 1984-90.VI.4 Financial Institutions: Numbers and Assets, 1987.VI.5 Commercial Bank Lending by Priority Sectors, 1983-89.

VII. BALANCE OF PAYMENTS AND EXCHANGE RATES

VII.1 Exchange Rates, 1980-90.VII.2 Balance of Payments, 1982-90.VII.3 Invisible Receipts, Payments and Transfers, 1982-90.VII.4 Volume of Principal Domestic Exports, 1982-90.VII.5 Value of Exports by Type of Product, 1982-90.VII.6 Unit Values of Principal Export Products, 1982-90.VII.7 Sugar Exports, 1983-90.VII.8 Visitor Arrivals by Country of Residence, 1983-90.VII.9 Value of Imports by SITC Classification, 1982-90.VII.10 Direction of Trade, 1982-89.

VIII. EXTERNAL DEBT

VIII.1 External Public Debt Outstanding (Including Undisbursed) asof December 31, 1989.

VIII.2 Service Payments, Disbursements, and Outstanding Amounts ofExternal Public Debt, 1982-89.

'VIII.3 Annual Commitments per Creditor Source, 1982-89.

IX. MANUFACTURING

IX.1 Manufacturing Output and Employment, 1986.IX.2 Indices of Industrial Production, 1983-90.IX.3 Manufacturing: Growth and Structural Change, 1981-90.IX.4 Ownership Shares in Hanufacturing, 1988.IX.5 The Size Distribution of Manufacturing Establishments,

1988.

Table I .1 GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGINAT CURRFNT FACTOR COST, 19111-6

(FS ml III on)

1981 1982 1998 1984 1986 1986 1987 1066

Agriculture, Forestry A Flhing 189.7 206.6 169.9 220.2 216.7 277.1 804.9 279.6

Mining A Quirrylng 0.7 6.1 6.6 0.9 18.9 17.6 22.4 89.1

Manufacturing 100.1 108.9 94.4 112.6 111.8 188.6 180.6 187.2

Electricity, OGs A Water 20.0 22.0 27.2 41.7 40.4 48.2 64.8 69.9

Construction 81.8 80.6 76.8 61.8 68.9 64.8 61.8 60.4

Wholosalo A Retal Trade,Restaurants a Hotels 188.8 180.8 188.8 208.7 210.0 228.6 207.6 278.4

Transport A Comunications 86.2 90.8 98.4 108.6 121.7 181.7 188.7 161.6

Finaneo, Insurance, RoelEstate A Business Servlces 126.8 188.9 140.7 168.9 166.9 181.9 182.0 197.0

Community, Soieal APorsonal Services 206.8 284.6 262.7 289.7 281.4 819.4 268.4 286.1

Lose: Imputed Bank Service Charges 45.8 48.6 46.8 40.5 46.6 64.6 70.0 86.2

GOP at Factor Cost 968.7 1020.6 1081.8 1161.7 1177.7 1886.1 1286.2 1885.1

Source: Bureau of Statistics.

Table 1.2s GROSS DOMESTIC PROWUCT BY INDUSTRIAL ORIGIN ATCONSTANT 1977 FACTOR COST, 1982-90

(Ft millon)

1982 1988 1984 1986 1986 1987 1988 1989 1990Est.

Agriculture, Forestry A Fishing 176.6 148.6 181.0 166.2 188.0 178.1 169.1 189.8 194.4Sugarcane 88.2 47.8 82.7 £1.8 86.0 68.6 82.1 79.0 79.0Other Crops 24.5 28.9 26.1 25.5 27.4 26.4 25.0 26.0 28.2Livostock 6.6 7.2 7.2 7.1 7.4 7.6 7.6 8.8 8.8Fishing 10.0 12.1 11.1 9.8 9.4 11.8 12.6 12.9 18.8Forestry 4.8 5.4 6.6 6.0 5.7 9.8 11.6 12.5 14.3Subsistenco 46.6 47.4 48.4 49.1 60.1 60.6 60.6 60.6 60.8

Mining A Quarrying 0.6 0.6 0.7 0.8 1.8 1.8 1.9 1.9 1.8

Manufacturing 86.5 77.7 91.0 79.8 94.6 88.9 88.2 92.9 97.7Sugar 82.2 18.8 81.8 22.6 88.8 26.6 24.1 80.6 80.6Other 61.9 67.0 6C.7 54.1 68.8 565. 69.1 62.8 67.2Self Employment 2.4 2.4 2.5 2.6 2.6 2.6 a/ */ */

Electricity, Gas A Water 7.0 7.4 8.0 8.4 9.0 8.8 9.6 10.1 10.4

Construction 58.4 50.9 89.8 41.4 40.0 82.9 28.2 86.0 86.9

Wholesale A Retail Trade,Restzurants A Hotels 118.0 122.8 122.0 124.8 t 6.2 117.2 129.9 167.6 186.9Trade 87.7 100.8 97.6 99.6 ii. 97.2Hotels, Restaurants, Cafes 25.8 21.5 24.4 25.1 20.2 19.9

Transport A Coumunications 77.6 78.0 87.7 90.8 89.8 87.8 96.4 105.4 110.8Transport 65.8 65.4 74.9 77.0 75.7 78.8Communications 12.3 12.6 12.8 18.8 14.1 14.8

Finance, Insurance, RealEstate A Businoss Services 90.8 98.7 96.8 97.6 98.4 96.0 96.9 98.7 100.8

Community, Social APersonal Services 128.0 181.1 187.7 181.6 180.6 136.2 184.6 187.9 189.8

Less: Imputed Bank Service Charges 20.8 21.5 22.8 28.8 28.7 22.0 22.6 24.2 24.9

CDP at Factor Cost 712.2 688.9 741.8 707.1 761.9 714.2 728.2 814.8 868.6

Source: Bureau of Statistics and staff estimates.

a/ Included In Other.

Tabl- I.8: GROSS DOMESTIC PRODUCT BY TYPE OFEXPENDITURE AT CURRENT PRICES, 1982-91

(FS million)

1982 1988 1984 1985 1086 1987 1988 1989 1990 1991Est. Proj.

Consumption 888.4 979.8 1039.0 1090.0 1126.0 1212.0 1816.0 1622.0 1686.0 1879.0

Private 684.7 748.2 794.1 888.0 878.0 980.0 1098.0 1286.0 186C.0 1642.0

Government 208.8 281.6 244.9 262.0 268.0 262.0 226.0 286.0 826.0 887.0

Grovs Investment 284.6 241.5 241.2 261.1 266.0 216.0 200.0 280.0 882.0 416.0

Fixed Investment 262.6 289.2 218.0 289.1 215.0 210.0 188.0 228.0 867.0 840.0

Privet. 118.2 112.2 180.9 160.0 145.0 186.0 76.0 98.0 107.0 170.0

Government 61.0 86.8 87.9 41.0 43.0 88.0 40.0 68.0 67.0 72.0

Public Enterprises 1/ 88.6 90.7 49.2 88.1 27.0 42.0 78.0 74.0 188.0 98.0

Change In Stocks 21.9 2.4 28.8 12.0 51.0 6.0 12.0 7.0 25.0 76.0

Foreign Balance -71.2 -62.0 -18.6 -5.0 82.0 40.0 40.0 89.0 -27.0 -69.0

Exports (ONFS) 481.8 498.1 546.2 684.0 609.0 658.0 862.0 1116.0 1277.0 1827.0

Imports (GNFS) 662.6 560.1 569.8 689.0 677.0 618.0 812.0 1076.0 1804.0 1396.0

Statistical Discrepancy 11.7 -17.1 8.7 -20.0 87.0 -22.0 -20.0 -- -- -

GDP at Market Prices 1118.4 1142.2 1276.8 1816.1 1461.0 1446.0 1658.0 17' .0 2040.0 2226.0

Net Indirect Taxes 92.9 110.4 128.6 189.0 186.0 185.0 168.0 198.0 222.0 281.0

CDP at Factor Cost 1020.6 1081.8 1151.7 1177.1 1826.0 1810.0 1886.0 1698.0 1818.0 1994.0

Source: Bureau of Statistics and staff estimates.

1/ There is a break In the series as of 1988 as certain unit. were reclassified from the privatesector to the public enterprise sector.

Table 1.41 INVESTMENT AND 8AVINGS, 1091-90

1981 192 1988 1984 IOSS 19J6 19?7 19NO IO9 1990Est.

(tl IIIIon at current pleos)

Gross Domostec Investment 882 265 242 241 251 268 215 200 280 862

Flxed Invostment 281 268 289 216 289 215 210 168 228 867

Private 1SO 11 112 181 10 145 185 76 98 107

Oovernment 78 61 88 85 41 48 88 40 56 67

Public Enterprises 77 68 91 49 s8 27 42 78 74 168

Change In Stocks 82 22 2 28 12 51 5 12 7 2b

arose National Savings 178 198 177 214 287 274 209 256 280 881

Gross Domestte Savings 175 222 186 288 264 806 265 258 252 868

Net Factor Incom -18 -40 -as -40 -44 -42 -46 -46 -54 -46

Net Current Transfers 15 16 25 16 20 11 -11 48 32 21Official 22 19 27 20 86 17 1* 48 51 61Private -8 -8 -2 -4 -12 -B -28 -6 -19 -89

Current Account Deficit 1/ 189 87 64 28 14 -8 6 -55 0 61

Memorandum ItemResource Cap 188 6B 64 8 -a -89 -60 -58 -22 26

(In Percent of CDP)

Gross Dometic Investment 84.8 26.6 21.1 18.9 19.1 16.2 14.9 18.0 12.8 18.7Fixod Investment 26.6 28.8 20.9 17.1 16.2 14.7 14.5 12.2 12.5 17.6

Private 12.4 10.2 9.8 10.8 12.2 9.9 9.8 4.9 5.2 6.2Govornment 6.9 6.6 8.2 8.0 8.1 2.9 2.8 2.6 8.1 8.8Public Enterprises 7.8 7.9 7.9 8.9 2.9 1.6 2.9 4.7 4.1 9.0

Change In Stocks 7.7 2.0 0.2 1.8 0.9 8.6 0.8 0.6 0.4 1.2

Gross National Savings 16.4 17.8 15.6 16.7 16.0 18.7 14.4 16.6 12.9 16.2Gross Domsetic Savings 16.5 19.9 16.4 16.7 19.8 20.9 18.8 16.8 14.1 17.4Not Factor Income -1.6 -8.6 -8.1 -8.2 -8.8 -2.9 -8.2 -8.0 -8.0 -2.8Net Currant Transfers 1.4 1.6 2.2 1.2 2.9 0.7 -0.7 2.8 1.8 1.1

Sources Data provided by FIjI authoritles and staff estimates.

1/ Including official transfers.

Tablo 11.1: POPULATION BY E1HNIC ORICIN, SEX AND AGE AT 1986 CENSUS

F13 Ian Indian Otors Total Perestof

Mail Female Total Mail Female Total Male Female Total Malo Female Totel total

0 - 5 25,647 23,902 49,449 23,919 23,014 46,932 2.615 2,326 4,941 62,060 49,242 101,322 14.2

C - 9 22,125 20,849 42,974 23,363 22,226 46,569 2,362 2,227 4,689 47,690 45,302 93,152 18.0

10 - 14 18,796 17,83 36,632 19,549 18,887 38,436 2,013 1,944 3,957 40,358 18,67 79,025 11.0

15 - 19 17,110 16,693 $3,803 17,967 18,038 36,006 1,9V3 1,816 3,s80 37,070 36,546 78,616 10.8

20 - 24 16,438 16,650 32,968 18,390 18,678 37,063 1,903 1,794 3,697 36,731 36,997 73,728 10.8

25 - 29 18,637 13,220 26,857 16,714 16,696 33,410 1,601 1,640 3,141 31,962 31,456 03,406 6.9

30 - 34 10,661 10,793 21,444 13,338 13,319 26,657 1,338 1,269 2,307 25,337 25,37 50,706 7.1

35 - 39 9,162 8,996 18,148 10,698 10,677 21,276 1,185 1,109 2,294 21,035 20,682 41,717 5.8

40 - 44 7,624 7,617 15,141 8,920 8,810 17,730 1,026 872 1,890 17,670 17,199 34,789 4.9

4S - 49 6,761 6,651 13,412 6,887 6,9m9 13,825 803 762 1,65 14,481 14,351 28,802 4.0

r0 - 64 5,603 5,438 11,041 5,186 5,153 10,339 713 571 1,284 11,502 11,162 22,064 8.2

55 - 59 4,285 4,130 8,415 3,S6 3,705 7,670 599 485 1,064 0,749 8,320 17,069 2.4

60 - 64 3,275 8,06 6,381 2,457 2,411 4,868 468 348 814 6,196 5,64S 12,048 1.7

65 - 69 2,424 2,619 4,943 1,876 1,771 3,047 309 291 600 4,609 4,581 9,190 1.8

70 - 74 1,768 1,632 8,890 1,109 1,057 2,166 230 222 462 3,097 2,911 6,006 0.8

75 * 1,389 1,682 3,071 1,145 1,143 2,288 210 222 432 2,744 8,047 6,791 0.8

not stated 671 585 1,256 447 467 904 117 86 203 1,235 1,128 2,38J 0.8

Total 167,258 162,049 329,30 175,829 172,875 348,704 19,483 17,883 37,366 362,568 352,807 715,875 100.0

Source: Bureu of Statistics.

Table 11.2: POPULATION BY ETlHNIC CR~,P1 1978-89(Mid-yer Estimtes)

1978 1979 1980 1981 1982 1983 1984 1988 186 1987 1968 1989

Ethnic FiJians ('000) 270 276 282 288 294 801 g80 816 821 85 842N of total population 44.5 44.4 44.5 44.6 44.7 44.8 44.9 45.3 45.9 46.5 47.6Ave. annual growth rate (X) 2.8 2.2 2.2 2.1 2.1 2.4 2.3 2.6 4.1 2.1 2.1

Ethnic Indiana ('000) 808 810 817 824 829 a86 842 847 846 848 341X of total population 49.9 49.9 60.0 50.2 50.0 50.0 49.9 49.6 48.7 48.3 47.4Aye. annual growth rate (X) 2.0 2.8 2.3 2.2 1.5 2.1 1.8 1.5 0.6 0.0 -2.0

Other thnicu ('000) 84 a8 8S a4 85 86 36 84 88 38 36% of total population 6.6 S.6 6.5 5.J 6.8 6.2 5.2 4.9 5.8 6.3 5.0Ave. annual growth rate (X) -2.9 2.9 0.0 -2.9 2.9 0.0 2.9 -5.6 6.8 -0.3 -5.0

Total population ('000) 607 621 684 646 6e8 672 686 697 714 721 719 727Growth (3) 1.8 2.8 2.1 1.9 1.9 2.1 2.1 1.6 2.4 1.0 -0.3

Source: Bureau of Statistics.a/ End-yer eatimat.

Table 11.8: POPULATION AND LABOR FORCE BY SEX, 1976-198W

September 1976 August 1986- --- - -- - - -------- ~~~~~~~~~~~Labor Foro.Sox/ Popula- Economical- Popula- Economical- Change, 1978-66Age tion ly Active LFPR tion ly Active LFPRLfP

No. No. X NO. No. X No. X

Males0- 14 - - 140,252 -1C A over 174,086 146,815 84.1 222,816 189,929 $6.4

Total 146,315 862,6S8 189,929 52.4 48,614 29.6

Fma lo0 - 14 - - 188,211 - -16 A over 172,065 29,470 17.1 219,6# 61,281 23.8

Total 29,470 852,007 61,281 14.5 21,761 78.6

Both Sexes0 - 14 241,977 - - 278,488 - -16 5 over 846,091 176,786 60.8 441,912 241,160 C- .6

Total 568,066 176,785 29.9 715,875 241,160 U.7 65,876 87.2

Source: 1976 and 1986 Population Censuses.

Table 11.4! ECONOMICALLY AC4VYA POPILATION BY EMPLOYIENT STATUS, 1976-1996

1976Total FiJl ane Indtian Others Total

No. s No. X No. S NO. s No. S

D n account worker 80,467 17.8 83,811 29.7 46,224 89.9 1,964 14.2 31,000 J8APublic emplord 80,939 17.6 16,283 16.1 16,961 14.9 2,856 20.7 83,102 15.1Privte employed 59,574 38.9 20,491 16.0 87,889 83.0 5,638 41.2 68,558 2.4Unprid family worker 18,676 7.3 82,257 23.8 4,864 4.1 2,810 16.7 89,231 18.3Uneployed 41,129 28.4 8,600 7.6 8,616 7.6 911 6.6 18,189 7.5Xt stated a/ a/ 410 0.4 607 0.6 6s 0.5 1,065 0.4

Total 175,765 100.0 118,904 100.0 118,464 100.0 18,792 100.0 241,160 100.0

Percent of each group by race

Own account worker 41.7 5t.8 2.4 100.0Public employed 48.0 44.5 7.5 100.0Private employed 82.2 C8.3 8.9 100.0Unpaid family worker 82.2 11.9 5.9 100.0Unbmployed 47.6 47.4 5.0 100.0Not Stae"d 37.8 t5.9 6.8 100.0

Total 47.2 47.0 6.7 100.0

Source: Census OffICe.

a/ Included In un mployed.

Table 11.S: EMIORATION BY ETHNIC CATEGORY lof-so

196 1 t 1OJ 1909

FlJlan 176 851 20J 249Indiln 2,382 4,294 4,000 4,C01European 48 47 87 soChtneo It 170 187 103Rotumano 21 45 17 27Pacific Islandero 10 19 15 11Part Europann 01 166 N0 100Others * 24 14 0

Total 2,79 5 C11 5,498 5,510

Soure:t Bureau of Statletice.

Table r.6: EMIGRATION BY OCCUPATIONAL CLASS, 1987-90

Occupation Oroup Indian Other Total

Occupation Group 1 1,462 214 1,670Architect,, Engineers, A Related Technicionc 805 71 876Lit. Scientits & Related Techniciaons 4 6 40Medical Dental, Veterinary A Related Workers 192 49 241Statieticians, Mathematic)&ne A Systms Analysts 48 8 61Accountants 276 20 296Jurists 82 8 asTeachers 457 22 479Workers In Religion 22 6 28Authors, Journalists A Related Writers 12 10 22Other Protosslonal, Technical & Related Workers 64 24 100

Occupation Group 2 669 e1 670Logislative Offictals A Govt Administrators 27 7 84managers 6C2 74 6S6

Occupation Oroup a 1,468 287 1,725Clerical Supervisors 58 6 s8Government Executive Officials 115 10 125Stenographers Typ;itm etc 876 74 450Bookers, Cashiare iRelated Workers 296 46 840Computing Machino Operators U1 14 65Othor Clerical A Related Workers 698 89 687

Occupation Group 4 845 47 892Working Propriotors, Wholeale & Retall Trade It 2 29Technical Salesmen, Comm reral Travollers, etc 18 5 28Insurance a Other Business Services Salesamn 28 8 26Saloeoen, Shop Assistants & Related Workers 259 88 292Other Sales Workers 18 4 22

Occupation Group 6 198 e6 264Cooke, Waiters, A Related Workers 64 28 112Protective Service Workers 61 18 74Other Service Workers 58 26 78

Occupation Group 6 284 84 298Farmrs 246 81 276Other 19 8 22

Occupation Group 7 1,820 164 1,474Tailors, Dressmakers, etc 180 6 185Machinery Fitters, Machine Assemblers, etc 886 48 429Plumbers, Welders, etc 112 12 124Blocklay rs, Carpenters, etc 158 21 179Transport Equipment Operators 128 12 140Other 406 61 467

Occupation Group 8 6,417 1,200 9,625Housewiv n 2,824 814 8,186Students 16 yro a ovor 8a4 46 430Students lose than 18 yrs A Intent, 4,671 760 5,821Retired 594 81 675Other 44 1? 61

Total 14,088 2,041 16,124

Source: Data provided by Fiji authorities.

Table 11.7: EDUCATION ATTAINMENT OF THE FIJI POPULATION, 1976-86

Household EconomicEducational Attainment Level 1978 Census 19W Census Activity Survwy

------- -- --- - ------------------

Number X Number X Number X

No Forml Schooling 146,624 24.7 164,788 21.6 44,606 19.8Below Class 4 74,088 12.6 81,404 11.4 81,007 18.4Class 4 to Form 1 173,306 29.6 170,822 28.8 49,2S'1 21.8Form 2 to Form 4 144,885 24.6 206,817 28.8 64,077 28.4Form 5 to Fiji Junior 22,428 8.8 47,141 6.6 21,930 9.6Form 6 to NZSC/Senior Cambridge 7,496 1.8 27,ao8 8.8 18,401 7.1Form 7 to NZUE/Fl1J Sch. Cert./ 9,784 1.7 17,270 2.4 10,238 4.4

FoundationUnivoreity/CollegsGraduate 2,807 1.2Non-Graduate 628 0.2

Not Stated 10,612 1.8 10,827 1.6 -- --

Total 688,068 100.0 716,875 100.0 280,706 100.0

Source: Data provided by Fiji authorities.

Table 111.1: PAID EMLOYMENT BY DWJSTRY, 1977-90(as at end--Jun.)

1977 1978 1979 1900 1981 1962 1088 1964 1965 1966 1987 196 1969 1990Est.

Agriculture 2,441 2,787 2,808 2,627 2,600 2,274 2,517 2,288 2,577 2,165 1,915 2,004 2,180 2,800

Todontry 28,102 26,022 2S,811 27,786 25,165 28,976 24,685 28,622 24,268 24,218 28,215 25,17m 26,900 80,300

Mining 1,841 W9 724 1,056 1,066 1,145 1,226 1,289 1,214 1,206 1827 1,868 1,465 1,400maaufacturing 11,265 18,464 13,943 16,418 14,223 18,522 14,702 14,134 14,067 13,908 13,814 14,040 19,666 21,100

Eletricity, Gas 1,678 1,84 2,86 2,2865 2,750 2,168 2,281 2,065 2,141 2,070 2,062 2,471 2,54 2,600Constructlon 6,129 ,96 0,608 90,085 7,146 7,148 6,724 6,084 6,66 6,094 5,092 5,304 5,227 5,700

Servicee 46,640 48,775 49,425 60,069 58,712 52,087 52,675 52,842 54,287 58,476 52,467 52,549 57,141 55,900

Trde 12,117 12,776 18,099 18,878 14,140 18,978 14,366 14,904 14,605 14,100 11,347 11,616 13,606 14,900Troneport 7,196 7,808 6,111 6,122 7,065 6,092 7,696 7,500 7,811 7,747 7,679 0,046 90,62 9,500Finance a Reel Estate 4,169 4,196 4,82 4,486 4,926 5,080 5,057 4,61 4,901 4,864 4,967 5,on 5,835 5,00Community, Social aPersonal Serve 288568 24,568 28,688 24,138 26,6M1 26,147 25,082 25,687 26,780 26,765 26,434 27,614 26,209 2S,900

Total 72,J86 76,534 78U9 60,484 61,406 78,289 60,075 783,02 61,002 79,34 77,597 7,71 66,177 090,000

Source: Dat provide by Fiji authoritie.

Table 111.2: GOWTH MF PAID EMPLDYMENT BY INDUSTRY, 1977-90(Percent)

1977 1978 1979 1980 1981 1982 1983 1984 1986 1986 1987 1988 1989 1990Est.

Agriculture -6.1 14.2 -17.4 14.1 -4.5 -9.4 10.7 -11.1 16.1 -16.0 -11.6 4.6 6.3 8.0

Industry 3.0 8.3 7.1 3.6 -9.4 -4.8 3.8 -5.6 3.2 -0.2 -4.1 -0.2 24.7 6.6

Mining 18.8 -66.1 -10.5 46.7 1.0 7.4 7.1 1.1 -2.0 -0.7 10.0 2.7 7.6 -4.4Manutacturng -1.7 19.6 3.4 10.5 -7.7 -4.9 8.7 -3.6 -0.9 -0.6 -1.1 1.6 40.1 7.3Electricity, 0Gs 6.6 -2.4 27.4 -2.2 20.4 -21.2 2.9 -7.4 3.7 -8.8 0.6 18.7 3.1 2.0Construction 6.0 9.4 10.2 -7.8 -20.9 0.0 -6.9 -10.8 13.6 1.6 -14.0 -11.6 -1.6 9.0

Services 3.8 4.1 1.8 1.8 7.8 -3.1 1.2 0.3 2.6 -1.4 -1.9 0.2 8.7 -2.2

Trade 3.6 5.6 2.5 2.1 6.7 -1.9 7.3 0.1 -0.7 -4.8 -19.6 2.4 17.9 8.8Transport 6.2 1.6 11.1 0.1 -3.2 -11.2 10.3 -1.6 3.0 -0.8 -0.9 4.8 22.4 -8.6Finance A Real Estate 12.8 0.4 4.7 1.2 11.0 2.1 0.5 -7.6 4.7 -0.6 1.9 2.3 6.2 4.0Community, SocIal aPersonal Service. 1.7 4.9 -2.8 1.8 11.0 -2.4 -4.3 2.0 4.1 0.1 6.4 -2.4 1.4 -8.2

Total 3.1 5.8 2.6 2.6 1.1 -3.8 2.3 -1.8 3.2 -1.6 -2.8 0.2 13.4 0.9

Source: Table 111.1.

Table IV.1: INDEX OF CONSUMER PRICES BY COMMODITY GROUP, 198a-90(Annual average percentage change)

198B 1984 1986 1986 1987 1988 1989 1990Est.

Food 33.9 6.9 8.8 -1.8 6.1 18.4 9.4 8.2

Drinks and Tobacco 8.4 8.9 8.2 16.0 7.0 9.4 3.2 7.6

Housing 18.6 18.0 1.2 4.4 1.7 -1.8 1.6 6.3

Heating and Lighting 4.9 0.7 0.7 -9.2 3.7 10.1 -0.1 10.7

Durable Household Goods 7.8 5.4 -- 8.0 9.8 12.0 7.8 6.3

Clothing and Footwear 6.3 2.8 -0.4 1.5 8.1 18.2 9.2 6.0

Transport 11.8 6.8 4.6 2.9 6.6 9.9 2.2 10.7

Services 8.7 4.6 1.8 1.4 6.4. 9.9 1.4 20.6

Miscellaneous 4.8 8.2 2.7 6.6 12.5 32.6 9.1 6.2

Combined Index 6.7 6.8 4.4 1.9 6.7 11.9 6.1 8.1

Source: Data provided by Fiji authorities.

Table IV.2: MEAN DAILY WACES OF WAGE EARNERS BY INDUSTRY, 1982-91(Ft at curront prices)

1982 1983 1984 1986 1980 1987 1988 1989 1990 19911/ 2/ Est. 3/ ProJ.

Agriculture 6.2 7.0 8.8 8.3 0.2 8.6 8.6 9.2 9.7 10.2

Mining 9.3 9.6 10.6 10.6 10.7 11.4 9.9 12.0 12.8 13.4

Manufacturing 11.2 11.9 12.0 12.2 11.8 12.8 10.8 13.1 18.8 14.6

Electricity 13.0 14.8 14.8 16.0 16.2 16.2 18.7 17.1 18.2 19.1

Construction 12.0 11.8 11.9 12.2 12.4 13.3 11.3 14.1 14.9 16.7

Commerce 10.3 11.0 11.2 11.4 11.8 11.7 10.2 12.4 13.1 13.8

Transport 11.8 12.2 12.6 18.2 13.2 14.1 12.3 14.9 16.8 16.6

Service 11.0 12.2 11.8 12.1 12.1 18.9 11.8 14.8 15.6 16.4

All Industries 11.0 11.7 11.8 12.0 12.0 18.2 11.3 13.9 14.6 14.9

Source: Bureau of Statistics.

I/ Estimates based on the 16 percent cut In wages and salaries of civil servantsand related employees and the average decline of 12.6 percent for wages andsalaries In the private sector effective September 1987 and on thegeneral increase in all wages and salaries of 6 percent effoctive July 1988.

2/ Estimates based on the general restoration of all wages and salaries to thepro-September 1987 levels and on the further 6 percont Increase effectiveJuly 1989.

3/ Estimates reflect cost of living adjustments.

Table V.1: CENTRAL GOVERNMENT REVENUE AND GRANTS, 1988-91(FS million at current prices)

1988 1984 1986 1986 1987 1988 1989 1990 1991Est. Budget

Total Revenue 288.3 824.7 886.6 886.6 880.8 872.6 462.7 502.7 506.0

Tax Revenue 287.8 278.4 279.8 276.0 268.7 292.9 881.4 427.2 428.1Taxes on Incomo A Profits 126.9 146.9 141.0 186.1 128.6 186.8 189.7 184.0 188.6Corporate 80.0 84.2 88.6 84.6 a1i2 44.7 47.6 65.7 67.7Individual 95.7 109.4 104.6 97.2 91. 68.8 114.2 109.6 112.8Unclssified 8.2 8.2 2.6 4.4 6.7 8.6 7.8 8.8 8.0

Taxes on Property 0.8 2.4 0.6 0.8 0.5 0.1 0.2 0.2 0.1Estato A Glft Duty 0.8 2.4 0.6 0.8 0.6 0.1 0.2 0.2 0.1

Taxes on Goods A Services 81.0 86.2 40.9 48.8 44.9 62.8 61.9 78.2 64.1Exciue Duties 25.8 27.8 81.7 84.2 86.8 88.9 42.7 64.0 58.7Turnover Tax 1.6 4.8 4.9 6.6 6.9 9.9 14.7 19.0 20.5License Fees 0.4 0.4 0.4 0.4 0.4 a/ a/ a/ a/Vohicle Taxos 8.8 8.9 8.9 2.8 2.2 4.0 4.5 5.1 4.8

Taxes on International Trade 78.4 84.9 92.4 91.4 69.0 99.6 145.4 169.0 160.6Import duties 78.4 64.9 92.4 91.4 69.0 98.9 188.6 144.0 144.8Export duties 0.0 0.0 0.0 0.0 0.0 0.7 6.8 15.0 6.2

Other Taxes 8.2 8.1 4.8 8.9 8.6 8.5 4.2 5.9 6.0Stamp Taxes 8.2 8.1 8.7 8.4 8.1 8.0 ..Other 0.0 0.0 0.6 0.6 0.4 0. 6

Nontax Revenue 61.0 51.8 68.4 60.5 64.1 79.7 71.8 76.6 78.0UN Peacekeeping Forces 12.9 12.8 18.9 18.4 18.9 28.6 17.9 22.0 21.9Monetary Authority Profits 7.8 6.9 6.4 6.8 6.8 8.0 10.2 18.8 12.0Public Enterpriso Dividends 0.9 0.0 1.9 1.9 5.6 6.9 4.9 1.7 6.1Other 29.4 88.1 84.1 88.9 88.4 42.8 86.2 89.4 88.0

Foreign Grants 10.0 10.1 10.6 9.6 11.4 22.2 12.0 18.6 18.4

Total Revenuo & Grants 298.8 884.8 846.1 845.9 842.2 894.6 464.7 616.2 524.4

Source: Data provided by FiJI authorities.

n/ Included In 'Vehicle Taxes.

Tablo V.2: Turnovor Tax Revenues and Rates by S.rvice Category, 1989-1090

Ft million As X of total excise dutiesEffectivo

Sorvices tax rate1988 1989 1990 1988 1989 1990 average 1990

All services 9.9 14.7 20.2 100.0 100.0 100.0 100.0 10

A. Hotel 6.1 9.2 14.4 62.1 62.2 71.2 66.2 10B. Miscolianeous services 3.7 6.6 6.8 87.9 87.8 28.8 34.8 10

Live entertainmnt 0.01 0.00 0.01 0.1 0.0 0.1 0.1 10commercial advertising 0.84 0.61 0.70 3.4 8.5 8.6 8.6 10Yetch hire 0.02 0.02 0.02 0.2 0.1 0.1 0.1 10off-licence liquor 0.79 0.94 1.08 8.0 6.4 6.8 6.6 10Lotteries 0.07 0.06 0.04 0.7 0.8 0.2 0.4 10Oversea Travel (Ft 16) 0.67 1.08 0.61 6.7 7.2 8.0 5.7 -Vidoo 0.14 0.16 0.24 1.4 1.0 1.2 1.2 10Rental cars 0.27 0.88 0.56 2.7 2.6 2.7 2.7 10Betting 0.22 0.34 0.32 2.2 2.3 1.8 2.0 10Bar sales/Night clubs 0.96 1.78 1.89 9.6 11.7 9.8 10.2 10Restaurant sales 0.28 0.39 0.38 2.2 2.6 1.9 2.4 10

Source: Inland Revenue Department.

Tablo V.8s Excise Duty Revenues and Rates by Commodity Category, 1988-1990

EffectiveFS mililon As X of total excose dutlee rate of

___________________ *__________________________ exciseExcieo dutiablo products duty

1989 1989 1990 1988 1989 1990 average 1990

Major revenue-generating Ite m 32.2 86.8 44.1 82.9 83.9 91.9 82.9 160.1Cigarettes A tobacco 18.4 17.7 24.1 42.4 41.6 44.8 42.9 128.6Beer A Spirits 16.7 18.1 20.0 40.5 42.4 87.1 40.0 189.2

Oth-r Items: 6.7 6.9 9.8 17.1 16.1 18.1 17.1 10Polypropyleno Bags 0.03 0.03 0.04 0.1 0.1 0.1 0.1 10Instant Noodles 0.04 0.06 0.08 0.1 0.1 0.2 0.1 10Baking Powder 0.02 0.02 0.08 0.0 0.0 0.1 0.1 10Deodorant Blocks 0.00 0.00 0.07 0.0 0.0 0.1 0.0 10Sweet Biscuits 0.28 0.18 0.00 0.6 0.4 0.0 0.8 10Blank Video Cassettes 0.03 0.04 0.07 0.1 0.1 0.1 0.1 10Paper Bags 0.02 0.02 0.06 0.0 0.0 0.1 0.1 10Portland Cemnt 0.15 0.18 0.21 0.4 0.4 0.4 0.4 10Polythelen- Bags 0.13 0.16 0.36 0.8 0.4 0.7 0.4Thinners 0.04 0.06 0.06 0.1 0.1 0.1 0.1Stout 0.02 0.02 0.02 0.0 0.0 0.0 0.0 10Snack Foods 0.16 0.19 0.20 0.4 0.4 0.4 0.4 10Sugar 1.92 1.86 1.74 4.9 8.9 3.2 4.0 10Dead Poultry. Etc. 0.42 0.61 1.63 1.1 1.2 3.0 1.8 10Cordials 0.11 0.16 0.18 0.3 0.4 0.2 0.8 10Paints 0.29 0.35 0.78 0.7 0.8 1.4 1.0 10Galvanized Roofing Sheets 0.06 0.09 0.07 0.2 0.2 0.1 0.2 10Ropes and Cables 0.01 0.01 0.06 0.0 0.0 0.1 0.1 10Margarine 0.02 0.02 0.10 0.0 0.0 0.2 0.1 10Aluminium Utensils 0.02 0.01 0.10 0.0 0.0 0.2 0.1 10Paper Serviette, Etc. 0.06 0.05 0.07 0.1 0.1 0.1 0.1 10Soap A DOtergent 0.77 0.64 0.84 2.0 1.6 1.6 1.7 1oFlip Flops 0.08 0.07 0.06 0.1 0.2 0.1 0.1 10Iron A Steel Bars A Rods 0.00 0.01 0.03 0.0 0.0 0.1 0.0 10Toilet Paper 0.32 0.38 0.81 0.8 0.9 0.8 0.8 10Lourve Blade Frames 0.02 0.02 0.06 0.1 0.1 0.1 0.1 10Suitcases, Etc. 0.02 0.01 0.03 0.1 0.0 0.0 0.0 10Elect Acc. 0.06 0.08 0.19 0.1 0.1 0.8 0.2 10Edible Oils 0.19 0.20 0.18 0.5 0.6 0.8 0.4 10Retread Tyres 0.06 0.06 0.03 0.1 0.1 0.1 0.1 10Dentrifices 0.11 0.10 0.09 0.8 0.2 0.2 0.2 10Ice Cream 0.26 0.29 0.49 0.8 0.7 0.9 0.7 10Nails A Fasteners 0.02 0.03 0.12 0.1 ).I 0.2 0.1 10PVC Pipes, Etc. 0.04 0.06 0.23 0.1 0.1 0.4 0.2 10Steel Welded Mesh 0.01 0.01 0.07 0.0 0.0 0.1 0.1 10Butter 0.06 0.06 0.06 0.1 0.1 0.1 0.1 10Aerated Waters 0.34 0.48 0.68 0.9 1.1 1.0 1.0 10Confectionery 0.18 0.21 0.28 0.6 0.5 0.4 0.5 10Matches 0.88 0.81 0.88 0.9 0.7 0.6 0.7 9.6Other 0.10 0.11 - 0.8 0.8 0.0 0.2 -

Source: Customs and Excise Department.

Table V.4: CEiTRAL COVERNMENT EXPENDITURES, 1983-91(Ft million at current priees)

1988 1984 1986 1988 1987 1988 1989 1990 1991Est. Budget

Current Expenditures 288.0 824.0 326.3 880.9 865.4 842.2 400.0 429.0 438.4Wages & Salaries 166.0 186.0 177.8 186.0 187.6 171.2 202.1 226.1 280.6

Salaries 160.6 168.8 161.8 144.1 174.5 198.8 198.0Wages .. .. 2.6 27.7 26.1 27.1 27.8 82.8 82.6

Employes' Contributionto FNPF 7.1 8.0 15.9 14.8 28.8 20.2 19.1 26.2 26.9

Purchase of Goods A Services 41.0 46.0 58.4 48.8 54.6 67.6 72.7 59.0 62.0Interest on Public Debt 82.0 87.0 40.6 45.1 68.8 66.8 65.4 70.7 69.4

Extornal 12.0 14.0 14.1 18.8 15.9 20.6 18.4 21.2 19.9Domestic 20.0 28.0 26.6 81.6 37.3 45.2 47.0 49.6 49.5

Subsidtes A OtherCurrent Transfers 39.9 47.0 34.1 36.2 36.8 27.4 40.7 47.0 49.4

Development Expenditures 66.0 52.0 66.8 84.1 60.7 70.2 113.4 108.2 81.2Acquisition of Fixed Assets 82.8 .. .. ..Capital Construction 29.7 .. .. ..Capital Purchase 2.6 .. .. ..2..

Capital Grants A Net Lending 24.0 .. .. ..Grants .. .. 20.7 .. .. ..Net Lending 7.0 8.0 8.4 29.8 12.0 6.7 21.6 6.4 -9.1

TOTAL 842.0 377.0 382.6 415.0 416.1 412.8 618.4 682.2 619.6

Source: Date provided by Fiji authorities.

Table V.5: CENTRAL COVERNMENT EXPENDITURES BY FUNCTION, 1988-91(Ft million at current prices)

1988 1984 198S 1986 1987 1988 1989 1990 1991Budget Budget

Oenerol Public Services 62.2 67.6 68.2 70.8 67.8 67.8 74.8 78.5 94.7Defense 15.4 16.9 16.2 20.1 81.1 86.2 48.1 29.8 88.0Soclal Services 129.7 148.8 161.8 148.5 165.6 188.6 161.2 165.7 197.6Education 75.6 82.4 82.2 88.9 87.7 82.8 98.9 98.8 118.1He*lth 28.0 82.9 81.7 86.7 88.8 28.7 84.6 88.9 88.9Social Security A Welfare 19.6 26.9 80.4 17.1 26.7 22.9 21.7 28.6 81.1Housing A Community Amenities 4.4 8.8 5.8 5.8 6.9 4.7 6.1 7.9 9.4Other Community & Social Services 2.1 2.8 2.2 .. .. ..

Economic Services 94.9 9s.6 101.8 100.6 98.8 102.0 189.6 128.4 128.6COneral Administration 12.6 12.6 17.4 19.7 14.8 14.8 12.4 14.7 17.0Agriculture1 Forestry, etc. 22.2 28.0 29.7 81.8 29.9 25.5 88.6 87.0 84.0Mining, Monufocturing, etc 1.6 1.6 1.6 1.8 2.4 1.4 4.6 2.2 2.6Water & Electricity 21.6 18.0 12.6 16.0 17.5 17.9 21.4 18.8 18.0Transport & Communication 32.8 83.7 84.4 26.0 25.2 87.6 46.6 46.7 42.8Other Economic Services 4.5 4.6 5.7 6.8 9.0 4.8 17.1 14.2 14.2

Unallocable A Other Purposes 82.2 87.2 41.8 45.4 63.7 71.9 78.2 74.8 69.8Inter-st 82.2 86.7 40.6 45.2 65.8 e6.8Other 0.0 0.6 1.2 0.2 0.4 8.1

Net Lending 7.4 8.4 3.8 29.6 12.0 6.7 21.6 2.7 -9.1

Total Expenditure A Net Lending 341.6 369.9 1/ 382.8 416.0 416.1 412.2 613.4 477.4 519.6

Source: Data provided by Fiji authorities.

1/ Does not Include F86.6 million of wages A salarles paid In promissory notes.

Table V.6: EXPENDITURE ELASTICITIES BY MAJOR CONSUMPTION CATEGORIES

Category Linoar Double Log

Food, Beverages A Tobacco 0.6849 0.8621Bread and Cereals 0.4266 0.8877Meat 1.1761 1.4686Flsh 0.6868 0.7222Milk, Cheese and Eggs 0.8408 1.2631Oils and Fats 0.6592 1.0086Fresh Fruits 1.2279 1.6682Fruits A Vegetables (dried) 0.8675 1.4690Fruits A Vegetable Juice 1.8931 1.9368Fresh Vegetables 0.9067 1.2651Preserved Fruits, Vegetables Nuts 1.2711 1.8396Root Crops 0.7180 1.2059Sugar, Coffee, Tea 0.2411 0.3068Other Food 0.7614 0.9214Non-alcoholic Beverages 0.8047 1.1339Alcoholic Beverages 1.7665 2.4809Tobacco 0.8480 0.4309

Rates, Fuel, Power 1.0814 1.0055Housing Cost 1.2200 1.3848Fuel and Power 0.8041 0.7881Land Provincial Rates -0.4938 -0.8169

Clothing and Footwear 1.68_.; 1.8205Mans and Boys Clothing 1.4886 1.8632Womens and Girls Clothing 1.7692 2.2388Footwear 1.6829 2.3190

Household Equipmont and Operations 1.1033 0.9694Furniture and Carpet 0.9532 1.1443Household Textiles 1.3204 0.9869Household Appliance 1.4609 1.8608Kitchen and Table Utensils 1.2157 1.1077Nondurable Household Goods 0.7108 0.7189Household Services 2.0937 2.7356

Medical Care and Health Services 0.9386 0.9738Medicines 1.2863 1.6078Doctors, Optometrists, Dentists 1.1316 1.0882Hospital Charges 0.4032 0.3670Accident Health Insurance 1.6371 2.3609

Transport and Communications 1.4304 1.6147Personal Transport Equipment 2.1482 2.7710Operational Charges, Transport 1.9807 2.8661Purchase Transport 0.8691 1.1272Communications 1.6699 2.8322

Recreation and Entertainment 1.6463 1.7216Duty Free Equipment 1.8338 1.6898Recreational Durables 1.1365 1.6541Hobbies and Sports Equipment 1.7624 1.7641Entertainment Services 1.4683 2.1114Books and Newspapers 1.2466 1.7617

Education 0.792S 0.6983

Miscellaneous Coods A Services 1.2809 1.3486Personal Care 1.0277 1.7181Goods for Personal Care 1.1331 0.9808Jewelwlry and Watches 1.8076 1.3686Holidays 1.1344 1.3083Miscollaneous Sorvices 1.2907 1.8688Other Personal Goode 1.2937 1.1982Expenditure in Restaurants 1.2720 1.6416

Souree: Sturton, M. MODELLING THE FIJI ECONOMY, (1989).East-West Center, Research Report Series No. 12.

Table V.7: OPERATINO PROFIT OF MAJOR PUUC ENTERPRISES, 19C54t9(Flo)

Govt. Status 1985 198e 1987 1988 1989Shares !/

(U)

1. Posts & telecomunications 100.0 C 5.3 6.2 6.8 11.6 7.5

2. Ports Authority 100.0 S 0.9 0.1 (1.6) 0.4 2.0

3. Fiji Sugar Corporatlon 67.0 C (5.6) 19.2 28.0 165. 19.6

4. Nablonal Marketing Authority 100.0 S (0.6) (0.8) 0.8 (0.4) (0.2)

S. FIJI Internat;onal 61.0 C 6.7 7.6 11.4 11.0 14.9Telocommunication Company

6. Fiji Electricity Authority 100.0 S (1.8) (7.2) (7.8) 21.9 2.8

7. Housing Authority 10.0 S (1.6) (2.5) (6.3) (6.4) (4.1)

8. Native Land Trust Board 100.0 S (0.7) (1.2) (1.0) (0.8) (1.4)

9. National Bank of Fiji 100.0 S 0.8 0.a (6.8) 0.4 0.8

10. Fiji Development Bank 100.0 S 1.4 1.7 1.7 2.9 0.6

iI. Fiji Pine Comission 100.0 C (0.2) (0.6) (18.6) 2.4 (0.6)

12. FiJi National Provident Fund 100.0 S 17.4 21.0 23.2 28.7 26.2

13. Fiji Broadcasting Commission 100.0 S (1.4) (1.6) (1.8) (0.9) (1.1)

14. Civil Aviltlon Authority 100.0 S (0.1) (0.3) 0.6 1.1 2.0

16. Fiji Trade and Investment Board 100.0 S (0.7) (0.8) (0.7) (0.9) (1.2)

1S. Air Pacific 72.0 C 0.4 1.6 2.4 9.1 16.8

17. Fiji Air Limited 28.0 C 0.2 0.4 (0.2) 0.0 0.1

18. Home Finance Company 26.0 C 1.0 1.1 0.8 0.9 0.6

19. 1KA Corporation 100.0 C (0.2) 0.0 0.4 0.1 0.1

20. Public Rental Board 100.0 S 0.0 0.0 0.0 0.0 2.9

21. Rawa Rice Ltd. 79.0 C 0.3 0.7 0.1 (0.3) (0.5)

22. Pacific Fishing Co. 100.0 C (1.7) (0.8) 1.6 2.0 2.1

23. Reserve Bank of Fiji 100.0 S 7.0 7.0 9.0 11.4 13.4

24. Yalavou Rural D*velopment Board 100.0 S (0.5) (0.4) (0.3) (0.6) (0.6)

25. Native Land Development 100.0 C (1.8) (1.6) (0.8) 0.2 o.eCorporation

26. Fiji Visitors Bureau 100.0 S (1.0) (1.2) (1.3) 0.0 0.0

TOTAL 28.8 48.0 36.7 104.2 96.9

**C refers to Corporation, OS* to Statutory Authority.Note: Negative numbers are shown in parentheses.Source: Data providod by Fiji authorities.

Tablo V.Ss FINANCIAL POSITION OF PUBLIC ENTERPRISES 199084(FS.)

198s 1987 lse8Asset Liability Net AetiityNot Asset Liability Net

Worth Worth Worth

1. Posts & t.l.communications 96.6 82.8 63.7 109.0 85.3 78.6 120.0 89.0 81.9

2. Ports Authority 89.8 10.9 28.7 88.4 16.9 22.6 41.0 14.0 27.0

3. Fiji Sugar Corporation 192.6 188.8 59.2 228.0 169.6 68.6 181.6 104.8 77.1

4. National Marketing Authority 4.7 0.7 8.9 2.8 0.4 2.4 2.4 0.2 2.2

5. Fiji International 27.6 11.4 16.2 29.9 13.4 16.4 81.8 16.5 14.8Telecommunication Company

8. Fiji Electricity Authority 388.8 305.6 63.2 882.4 874.7 (42.3) 829.2 848.2 (14.0)

7. Housing Authority 99.1 89.5 9.6 96.2 94.4 1.8 100.2 101.8 (1.4)

8. Native Land Trust Board 4.8 2.7 2.1 6.8 4.6 2.2 6.9 4.9 2.0

9. National Bank of Fiji 83.8 78.6 5.8 89.7 88.7 1.0 104.9 102.8 2.1

10. Fiji Development Bank 133.9 92.2 41.7 140.6 96.2 46.4 147.8 98.4 48.9

I1. Fiji Pine Commission 66.9 70.4 (3.4) 64.6 88.6 (21.9) 66.0 85.6 (19.6)

12. Fiji National Provident Fund 836.3 0.4 636.0 692.6 0.6 691.9 770.1 1.0 789.1

13. Fiji Broadcasting Commission 2.1 0.6 1.5 1.9 0.6 1 4 2.0 0.6 1.4

14. Civil Aviation Authority 39.0 8.4 36.7 38.9 2.9 38.0 41.6 8.6 88.0

15. Fiji Trade and 3.1 0.7 2.4Investment Board

16. Air Pacific 21.4 45.0 (23.6) 80.0 45.8 (15.8) 56.4 58.9 (2.6)

17. FijI Air Limited 8.4 2.8 0.6 8.2 2.8 0.4 4.0 8.6 0.4

18. Home Finance Company 43.1 40.2 2.9 46.1 41.3 3.8 48.6 89.6 8.9

19. IKA Corporation 2.6 0.4 2.2 2.8 0.2 2.6 2.8 0.1 2.6

20. Public Rental Board 2.1 2.1

21. Rewa Rice Ltd. 2.7 0.4 2.3 5.6 2.4 8.0 7.4 4.8 2.6

22. Pacific Fishing Company 4.6 4.0 0.6 8.8 4.8 2.0 7.2 8.2 4.0

28. Reserve Bank of Fiji 267.9 241.2 16.8 800.1 282.6 17.6 897.4 878.6 18.9

TOTAL 2136.6 1169.2 967.8 2265.2 1852.0 913.1 2468.8 1404.6 1069.8

Source: Data provided by Fiji authorities.

Table VI.l: MONETARY SURVEY, 1988-90 1/(Ft million at current prices)

(End of Perlod)

1988 1984 1986 1986 1987 1988 1989 li9OSept

Not Foreign Asoets 108.0 117.8 180.9 109.6 194.6 827.7 881.7 879.1

Not Domestic Assets 886.7 872.2 871.6 896.8 418.8 406.8 477.7 689.1Domestic Credit 581.6 412.6 483.8 471.4 641.8 501.0 601.9 786.8

Government (not) 82.9 29.8 28.8 47.4 81.5 19.1 58.1 42.0Offlicial Entities 78.8 68.6 69.0 66.4 66.2 70.4 68.0 71.8Private Sector 275.8 824.8 860.4 867.6 898.6 411.6 640.8 672.0

Other Items (not) -46.0 -40.4 -66.7 -74.6 -128.0 -95.7 -184.2 -198.2

Brood Money 448.7 490.0 502.6 588.5 607.9 783.0 809.4Narrow Monoy 141.6 142.8 146.4 178.6 173.2 279.5 275.7 276.0

Currency 68.7 61.0 61.8 68.1 64.9 67.7 78.0 77.8DOmand Doposits 2/ 02.9 61.8 84.6 115.5 108.8 211.8 197.7 197.7

Quasi-money 3O2.1 847.7 856.1 407.8 484.7 463.6 538.7 893.2

Source: Data provided by Fiji authorities.

1/ As .f the last Wednesday ot the month.2/ Includes local bills payable.

Table VI.2: ASSETS AND LIABILITIES OF COMMERCIAL BANKS, 1988-90 1/(FS million at current pricee)

(End of Period)

1988 1984 1985 1986 1987 1908 1989 1990

March Juno Sept.

ASSETS 470.4 525.5 567.7 718.4 686.0 602.0 932.9 979.0 1048.0 1166.2Reosrvoo 28.8 89.6 41.4 68.4 48.7 131.5 78.1 60.7 06.1 67.8Foreign Aseoto 0.2 9.6 49.8 123.2 87.9 58.0 67.0 84.4 94.7 180.2Claims on Government 52.9 44.6 60.2 77.2 62.5 68.6 71.6 72.5 70.4 69.1Claims on Offticial Entitiso 61.6 62.0 68.4 5.1 60.9 70.4 67.9 75.8 72.6 71.8Claims on Private Sector 276.8 824.8 860.4 867.6 898.0 411.5 540.8 592.6 629.0 872.0Othor Asooto 48.9 64.6 22.5 85.8 84.4 51.9 92.5 98.5 116.7 146.4

LIABILITIES 470.4 626.6 567.7 718.4 683.0 602.6 902.9 979.0 1040.0 1165.2Demand Deposits 2/ 62.9 81.8 84.6 116.4 108.8 211.7 196.6 191.9 178.2 197.7Time & Savings Deposits 802.1 847.7 86S.0 407.6 434.7 468.6 588.0 592.9 683.0 698.2Govornment Deposits 14.9 21.7 17.8 17.7 7.5 26.4 18.2 10.8 9.7 9.1Foreign Liabilities 8.0 7.0 49.1 120.1 28.8 40.7 70.8 08.0 64.8 114.8Other Liabilities 62.6 67.8 60.6 51.8 d9.2 64.4 114.0 119.8 142.8 140.4

Source: Data prov;.dd by FIJI authoritles.

1/ As of the lost Wednosday of the month.2/ Includes local bills payable.

Table VI.8: INTEREST RATE STRUCTURE. 1984-90(End of Period)(X per annum)

1984 1986 1988 1987 1988 1909 190

Mar. June Sept.

Reserve BankMinimum Lending Rate 11.00 11.00 8.00 11.00 11.00 8.00 0.00 8.00 8.00Deposit RateCommercial Banks 1/ 8.S0 8.60 8.60 8.60 8.60 3.50 8.50 8.60 8.60Other Depositors

1-3 months 6.00 0.00 0.00 6.00 .. ..3-8 months 6.60 6.60 6.60 6.60 .. ..6 months or more 7.26 7.26 7.26 7.25 .. ..

Commercial BanksIntorbank Rate 9.21 13.16 2.08 8.70 1.00 8.00 2.00 2.70 1.90Loan RatesMaximum 18.50 13.60 13.60Average 2/ 12.95 18.06 11.97 13.72 12.30 11.50 11.80 11.80 12.10

Deposit Rates 3/Savings Deposits 6.00 6.00 6.00 6.00 4.00 4.00 4.70 4.70 4.70Time Deposits 8/

7 days-i month .. .. 5.60 9.00 4.0 -- -- -- --1-3 months 8.00 6.00 6.00 6.00 4.00 4.00 4.00 6.00 4.003-8 months 0.50 6.60 6.60 8.00 6.00 5.80 6.00 6.50 6.006-12 months 7.26 7.26 7.25 7.25 7.80 6.50 6.60 7.00 6.801-2 years 8.00 8.00 8.00 6.00 8.00 7.60 7.60 8.50 7.702-3 years 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.60 9.008 years or longer 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.

Unregulated Time Deposits 4/7 days-i month .. .. 8.00 8.00 -- 8.60 4.80 4.30 4.601-8 months .. 11.84 8.86 11.06 0.70 1.70 4.40 4.30 6.708-8 months .. 11.01 4.67 18.55 5.60 4.80 5.10 5.70 6.008-12 months .. 12.14 6.48 18.86 3.60 6.00 6.40 6.20 7.601-2 yoars .. 12.48 7.18 16.23 8.10 6.90 7.40 7.60 8.00

Public Sector Securities (yield)Treasury Bills 5/ 7.18 6.70 6.80 11.20 0.60 4.80 4.30 4.20 4.008-year Bonds 9.70 -- 8.10 9.00 - -- -- 6.00 6.206-year Bonds 6/ 10.41 10.42 9.66 9.75 7.20 -- -- -- 8.0010-yoer Bonds 7/ 11.48 11.06 10.89 9.60 -- 9.10 8.70 8.60 8.70Promissory NotesFiji Sugar Corporation 9.01 7.76 8.78 12.90 1.10 4.60 4.80 4.30 4.80Fiji Electricity Authority 9.01 7.76 8.78 19.99 .. ..

Source: Data provided by Fiji authorities.

1/ Paid on statutory roserve deposits of commercial banks.2/ 1981-84 estimates; 1986 onword - weighted avorage for tho year.3/ Maximum rates on regulated deposits of under F8260,000.4/ Deposits over FS260,000. Weighted average figures from 1986.5/ Weighted average for the year from 1984-89.6/ Weighted average for the year for 6-7 year bonds from 1984.7/ Weighted average for the year for 10-14 year bonds from 1984.

Table VI.4: FINANCIAL INSTITUTIONS: NUMBERS AND ASSETS, 1987

No. Assets

Resorve Bank of FiJi 1 299.2 14.4National Bank of Fiji 1 96.7 4.6Foreign Commercial Banks 4 644.1 26.1Development Bank 1 188.9 6.4Finance Company 1 8.1 0.1Fiji National Provident Fund 1 669.6 81.7Life Insurance Companies 8 144.6 */ 6.9General Insuranco Companies 6 29.1 1.4Housing Authority 1 101.2 4.9Home Finance Company 1 45.1 2.2Credit Unions 896 13.7 b/ 0.7Thrift and Credit Societtes 184 1.4 0.1Land Purchase and Housing Societies 39 6.6 0.3Unit Trust of Fiji 1 5.6 c/ 0.3

Total 588 2082.7 100.0

Source: Reserve Bank of Fiji.

a/ Figures as of 1986.b/ Figures for 166 credit unions.c/ Figures as of June 80, 19ee.

Table VI.6: COMMERCIAL BANK LENDING BY PRIORITY SECTORS, 198a-89

1988 1984 1985 1986 1987 1988 1989

Highest priority A 1/ 18.8 12.9 12.6 14.0 14.1 18.6 17.7Agriculture 10.6 10.6 10.1 11.2 11.4 11.6 16.5Governments 2.6 2.2 2.2 2.5 2.1 1.4 1.2Mining A Quarrying 0.4 0.2 0.8 0.8 0.6 0.6 1.0

Medium priority B 81.6 81.6 56.1 $6.2 86.4 84.7 81.1Manufacturing 12.6 14.2 11.7 12.4 11.6 14.8 14.8Duty free trad 4.8 4.6 9.6 7.6 6.6 4.7 8.6Hotels & restaurants 8.7 4.4 4.1 4.6 6.8 6.8 8.6Building A construction 5.5 8.6 4.1 4.2 4.6 4.5 4.1Transport A communications 4.8 4.0 8.6 4.0 8.8 2.0 2.8Individuals o- - 2.1 2.6 2.8 2.2 1.6Utilitts 0.4 0.0 0.6 0.7 0.6 0.7 0.5

Lowest priority C 54.7 65.5 51.8 49.6 50.6 51.6 51.2Wholesale rstail trade 26.4 28.5 25.7 28.8 21.6 21.5 19.4Individuals 15.8 14.6 14.1 16.1 15.5 18.0 19.0Roal estate 8.9 5.2 4.8 4.9 4.5 5.2 5.8Professional services 1.6 1.6 1.9 2.8 2.7 2.7 8.1Financial lnstitutions 2.0 1.4 1.4 0.6 0.6 0.7 0.6Others 8.6 4.2 8.4 8.4 5.4 8.6 8.2

Total lending 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Resorve Sank of FIjI.

I/ Priority categories ao defined by the Government of FIJI.

Table VII.1: EXCHANGE RATES: 1980-90

1980 1981 1982 1983 1984 1986 1988 1987 1988 1989 1990

Annual Average

F;j; I/SDR 1.1 1.0 1.0 1.1 1.1 1.2 1.3 1.6 1.9 1.9 2.0

Fiji $/US$ 0.8 0.8 0.9 1.0 1.1 1.2 1.1 1.2 1.4 1.6 1.6

Japanes yen/Fiji 8 277.4 258.6 267.3 233.8 219.7 207.0 148.9 118.2 89.6 93.0 97.8

Fiji $/Australian 8 0.93 0.98 0.95 0.92 0.95 0.81 0.76 0.86 1.12 1.18 1.16

FTIl S/Pound Sterling 1.90 1.73 1.683 1.64 1.44 1.49 1.66 2.01 2.65 2.43 2.64

X Change

Fiji S/SDR -1.41 -5.34 2.1G 6.61 2.07 6.64 13.47 19.13 21.50 -1.09 6.78

Fiji $/USS -2.17 4.87 9.20 9.06 6.40 6.61 -1.79 8.08 16.90 3.71 -0.16

Japanes yen/FijI 3 6.76 -6.80 3.43 -12.57 -6.01 -6.80 -28.07 -20.69 -24.21 3.81 6.12

FIjI 8/Australian 3 -0.28 6.26 -8.88 -3.27 8.71 -16.06 -5.98 12.92 80.79 4.80 -1.58

Fiji S/Pound Sterling 7.27 -9.02 -6.74 -5.49 -6.28 8.42 11.50 20.76 27.06 -4.54 8.67

Source: I[F, IFS.

Teble V1I.2: BALANCE OF PAYMENTS, 1982-90(USS million at current price.)

1982 1988 1984 1986 1986 1987 1988 1989 1990Est.

Exports, f.o.b. (Domestic) 194.6 178.4 183.6 167.1 218.8 268.6 811.8 869.2 436.6Sugar 134.8 110.1 101.6 97.0 118.1 149.7 188.7 140.8 171.7Other 80.2 66.8 82.0 70.1 96.7 118.9 178.1 218.9 263.8

Imports, f.o.b. (Retained) 383.1 880.6 848.4 842.2 a84.6 276.6 858.2 460.1 605.8

Trade Balance -188.6 -204.2 -169.9 -176.1 -120.7 -8.0 -41.4 -100.9 -170.3

Services (net) 78.0 116.6 121.0 189.9 118.2 11.6 50.1 79.4 121.6

Private Trensfors (net) -3.0 -2.1 -4.1 -10.4 -5.8 -18.8 -8.6 -13.0 -28.8

Current Account -118.6 -89.8 -44.1 -46.5 -7.8 -16.8 6.1 -34.6 -76.4

Official Transfers (not) 20.6 28.7 18.6 88.0 14.8 10.1 83.7 84.6 41.1

Current Account(incl. Off. Trenef.) -98.1 -68.1 -25.6 -12.6 7.0 -5.2 88.8 0.1 -84.3

Official Capital (net) 42.4 40.6 11.8 0.4 -9.7 -26.6 -18.4 -41.4 -29.1

Private Capital, MLT (not) 38.7 81.0 18.6 81.6 81.7 14.4 40.7 88.9 94.8

Short Term Capital (not) 1.8 8.6 2.1 -24.0 -0.4 -32.2 14.6 6.8 -8.6

Capital Account 77.4 80.2 31.8 8.0 21.6 -48.4 41.9 0.8 67.2

Errors A Ommissions -18.4 -21.4 1.0 6.2 19.4 18.8 17.6 -12.2 28.5

Overall Balance -29.1 -8.2 7.2 1.6 48.0 -80.3 98.8 -11.3 46.4

Memorandum Items:_________________

Current Account/GDP (X)(excl. Off Tranef.) -9.6 -8.0 -8.7 -4.0 -0.6 -1.3 0.6 -2.9 -6.6

Gross Reserves 128.7 122.6 130.0 146.6 170.7 181.6 232.3 211.6 256.0Months of retained

Imports 4.0 3.9 4.6 6.1 8.1 5.7 7.9 6.6 6.1

Source: Data provided by FiJi authorities and staff estimates.

Tablo VII.3: INVISIBLE RECEIPTS, PAYMENTS A TRANSFERS, 1982-90(USS million at current pricoe)

1982 1983 1984 1086 1986 1987 1988 1989 1990Est.

Services (net) 76.0 116.0 120.6 139.9 118.2 11.6 50.1 79.4 121.6

Receipts 289.7 294.9 297.4 816.8 810.1 287.7 272.7 849.8 422.0

Fre;ght, Insurance AOther Transportation 78.6 69.2 76.0 65.2 65.8 49.8 68.1 80.9 109.8

Travel 148.8 188.6 160.8 147.0 168.8 117.5 127.7 179.9 214.8

Investmont Income 15.7 18.5 11.6 8.0 12.2 13.0 16.1 15.2 16.8

Government, n.ie. 81.9 31.5 87.2 42.5 41.7 89.8 44.1 48.2 42.1

Other 17.4 47.1 22.8 58.1 26.6 18.1 22.7 80.1 88.5

Payments 211.7 178.9 177.0 175.9 191.9 226.2 222.8 269.9 800.5

Freight, Insurance AOther Transportation 88.9 ;1.9 67.1 65.9 63.6 75.9 89.6 114.8 187.5

Travel 17.9 16.7 17.6 17.6 24.0 52.9 84.6 40.8 44.2

Investment Income 58.8 48.6 49.0 46.8 49.5 49.7 47.8 51.8 47.8

Government, ni.e. 25.6 18.4 16.8 16.6 16.8 11.7 14.7 20.9 21.6

Other 25.6 28.4 26.6 81.0 88.0 86.0 88.4 42.1 49.4

Transfers (not) 17.6 24.9 14.6 22.6 9.5 -8.8 80.1 22.2 14.6

Official (net) 20.5 28.7 18.6 88.0 14.8 10.8 83.7 29.1 41.1

Receipts 22.3 27.8 19.4 88.8 15.9 10.6 84.1 29.6 41.7

Payments 1.8 0.6 0.8 0.8 1.1 0.8 0.4 0.6 0.6

Private (not) -8.0 -1.9 -4.0 -10.4 -6.8 -19.1 -3.6 -8.9 -26.6

Receipts 21.2 20.5 16.2 18.2 22.8 18.1 21.1 27.6 26.7

Payments 24.2 22.8 22.2 28.6 27.6 87.8 24.6 84.4 62.8

Services A Transfers (not) 96.6 140.9 185.0 162.5 127.7 2.7 80.2 101.6 186.0

Source: Data provided by Fiji authoritios and staff estimates.

Table VII.4: VOLUME OF PRINCIPAL DOMESTIC EXPORTS, 1982-90(Thousand tonnoe) a/

1982 1988 1984 1986 1986 1987 1988 1989 1990Est.

Sugar 411 848 879 410 824 480 409 400 414

Coconut Oil 15 15 15 11 14 7 4 9 10

Gold (000 Grams) 1428 1287 1060 1688 269 2992 4129 4214 8000

Cement - 2 4 8 3 8 4 21

Fish (Prepared,Preserved, Conned)(000 kg) 2652 6079 4492 8088 4670 4768 0965 7219

Ginger (000 kg) 2983 2829 2486 2056 289B 2884 2421 2676

Molasses 167 98 155 140 126 127 184 148 142

Bakery Products (000 kg) 787 1008 1018 867 901 678 880 1268

Cigarettes (000 kg) 8 9 8 5 6 4 10 12

Points (000 litres) 198 229 162 217 208 212 219 141

Veneer Shsets (000 m2) 2729 8a61 4008 4009 8701 8975 6286 8559

Source: Data provided by Fiji authoritles and staff estimates.

a/ Unless otherwise indicated.

Tabl- VTI.6: VAWE OF EXPORTS BY TYPE OF PRODUCT, 1982-90(USS million at current prico, f.o.b.)

1982 1988 1984 1986 1986 1087 1988 1989 1990Est.

Sugar 134.1 110.1 101.6 97.0 118.1 149.7 188.7 140.8 171.7

Garments .. .. .. 6.8 7.1 16.4 67.9 88.2

Coconut Oil 6.6 10.4 17.1 6.6 8.7 2.4 2.4 8.8 4.1

Gold 16.7 16.6 18.9 18.9 84.1 40.7 67.0 61.4 49.4

Fish Products 10.1 14.6 18.9 11.9 16.1 20.2 83.7 80.0 85.2

Forestry Products 1/ 8.7 8.9 6.7 6.2 7.0 18.8 18.6 21.7 26.0

Molasses 6.6 8.1 6.2 6.6 7.0 8.6 8.0 6.7 7.4

Othor 17.7 17.4 18.9 20.9 19.0 26.7 86.0 87.7 59.8 2/

DOMESTIC EXPORTS 194.8 176.2 183.2 167.1 213.8 268.8 811.8 859.2 436.6

Re-exports 92.6 68.0 78.0 69.9 62.2 60.0 68.7 70.1 60.1

TOTAL EXPORTS 287.0 242.2 269.2 287.0 276.0 828.8 870.6 429.8 486.6

Source: Date provided by Fiji authoritioe and staff estimates.

1/ Includes logs, *own timber, venoer and plywood.2/ Includes export of an aircraft in the amount of US514 million.

Tuble VII.6: UNIT VAWLES OF PRINCIPAL EXPORT PRODUCTS, 1982-90(USS/Tonne) a/

1982 1988 1984 1985 1986 1987 1988 1989 1990Est.

Sugar 826.4 820.9 268.0 286.4 864.4 848.4 889.2 861.1 416.0

Coconut Oil 440.6 698.6 1187.2 622.6 240.8 866.4 640.8 888.4 418.4

Cold (JSS/gram) 11.7 18.4 11.6 11.4 12.6 14.8 15.6 18.8 18.7

C e nt 0.0 62.4 91.2 77.4 56.8 78.0 80.8 68.6

Ginger (US$/kg) 1.0 0.8 0.7 0.9 0.9 0.8 0.9 0.9

Molasses 84.7 88.6 89.8 40.1 65.7 67.8 69.7 46.6 51.8

Bakery Products (US8/kg) 1.2 1.1 1.1 1.1 1.2 1.8 1.4 1.2

Cigarettes (US$/kg) 14.8 12.0 16.8 18.2 8.6 14.1 10.8 9.8

Points (USS/litro) 2.6 2.2 2.8 2.0 2.6 2.7 8.1 2.8

Veneer Shootn USS/m2) 0.7 0.6 0.7 0.6 0.6 0.6 0.6 0.4

Source: Data provided by Fiji authorities and staff estimates.

a/ Unless otherwise Indicated.

Table VII.?: SUGAR EXPORTS, 1983-90

1988 1984 1986 199 1987 1988 1080 1990Est.

(USB million at current prices, f.o.b.)

Europoan Co munity 67.3 61.7 68.1 81.9 98.8 90.1 89.9 107.eNew Zealand 5.6 0.6 7.6 7.9 0.0 12.6 6.2 11.2nalaysia 17.2 20.8 17.7 17.2 24.8 16.1 21.0 26.1

China 656 2.6 4.0 3.8 11.0 12.0 -- 4.8Other n/ 24.3 26.5 4.9 7.8 8.1 9.0 24.2 28.8

Total 110.1 101.6 97.2 118.1 149.7 188.7 140.8 171.7

Thousand Tonnes

European Coamunity 176 177 179 169 169 186 176 176Now Zealand 22 2 85 40 89 56 22 80Malaysia 51 66 60 64 114 67 108 11IChina 48 20 56 80 62 50 -- 15Other a/ 62 116 80 21 45 49 94 76Of which: US (18) (84) (--) (14) (22) (8) (24) (19)

Total 848 880 410 324 429 408 899 416

Unit Values (USS/tonne)

European Coiunity 827 292 862 485 682 484 614 616New Zealand 264 278 214 198 206 228 286 287Malaysia 888 807 294 269 218 225 194 228China 128 126 72 127 177 240 -- 287Other a/ 467 280 69 848 180 184 267 807

Weighted Average 820 270 287 865 849 841 851 418

*/ Includes exports to the US and the Pacific Islands, and about USS 8and USI 1. to Singapore In 1988 and 1986 respectively.

Source: Data provided by Fiji authorities and staff estimates.

Table VII.8: VISITOR ARRIVALS BY COUNTRY OF RESIDENCE, 1988-90 I/(thousands)

1988 1984 1986 18 6 1987 1989 1989 1990 2/

Australia 86.0 101.4 89.5 86.8 65.4 76.8 97.0 56.6

New Zealand 24.0 26.8 19.6 22.7 16.2 21.6 28.1 16.4

United Statee 26.0 87.8 49.6 69.7 47.0 42.1 84.4 20.2

Canada 18.0 16.6 18.9 28.7 16.8 16.9 16.6 10.8

Japan 14.4 14.9 12.6 11.8 6.5 3.4 18.8 11.6

United Kingdom 6.9 8.6 7.7 10.0 8.5 8.6 11.4 9.1

Continental Europe 8.8 11.8 12.7 16.1 14.7 20.5 28.9 14.6

Pacific Islands 10.6 18.2 11.9 12.8 11.2 14.2 18.1 8.9

Othor 4.7 5.8 6.8 6.7 4.6 6.8 7.8 4.6

Total 191.6 286.2 228.2 267.8 189.9 208.2 250.6 150.8

Source: Date provided by Fiji authorities.

:/ Excludes cruise ship passenger.2/ January-July.

Tabl- VU.9: VALUE OF IMPORTS BY SITC CLASSIFICATION, 1"2-90(USS million at current prlces. c.I.f.)

1982 1983 1964 1936 1986 1967 1908 1989 1990Est.

Food 76.9 76.8 69.0 69.4 68.6 66.8 77.6 86.6 96.7

Beverage. A Tobacco 4.8 8.6 8.8 8.7 8.1 2.6 8.6 6.1 a/

Crude Materials 4.0 6.1 8.2 2.9 2.6 2.6 8.0 5.6 6.7

Mineral Fuels 146.6 112.6 98.9 100.1 72.5 60.9 61.9 109.4 87.9

Oils A Fats 6.6 6.7 8.7 9.1 6.2 6.4 8.1 7.1 9.6

Chemicals 87.6 8.4 40.9 8s.7 86.5 32.2 46.2 64.4 64.1

Manufactured Coods 84.7 90.0 84.0 87.4 91.8 88.2 108.4 146.4 172.6

Machinery 68.0 91.6 79.9 79.6 102.6 72.6 97.1 164.1 286.7 b/

Miscolloneous Articloe 50.0 46.6 47.8 48.4 89.8 82.9 40.1 61.8 75.8

Miscellaneous Transactions 18.4 18.4 14.6 11.4 14.4 14.1 14.8 8.8 c/

TOTAL 610.1 484.9 449.8 440.8 486.0 878.9 460.6 648.6 788.4

Source: Data provided by FIJI authorities and staff estimate.

a/ Included In Food.b/ Includes the Import of an alecraft In the amount of US866 million.c/ Included In Mlcellaneous Articles.

Table VI.10: DIRECTXON OF TRADE, 1982-89(FS million at current prices)

Origin of mports 1/ Destination of E:sports 2/

19812 1983 1984 1986 1986 1987 1968 1989 1M 1983 1984 1985 1986 1987 1988 1909

Australia 184.7 188.6 160.4 177.3 167.7 183.6 193.8 290.6 29.1 28.1 38.1 86.5 53.4 72.5 116.0 116.7New Za Iand 74.S 80.7 78.5 86.3 88.0 78.8 124.6 162.0 26.7 12.2 11.0 17.8 20.9 23.6 89.7 67.1Japan 67.7 82.6 78.8 76.5 71.3 56.4 67.2 180.6 6.2 5.9 7.8 6.4 5.4 12.4 26.3 88.9EEC 86.0 40.0 43.5 46.9 608 36.9 71.0 66.9 68.2 72.1 82.2 84.0 110.8 142.9 156.1 152.0

Of which: UK 19.8 24.9 24.6 24.5 20.8 20.7 24.1 27.2 60.0 60.8 80.2 83.0 108.7 138.8 152.8 145.4United States 17.5 19.1 19.7 20.8 28.6 24.4 82.0 48.3 26.4 20.7 28.1 12.8 14.8 20.9 16.0 29.5Pacific Islands 2.1 1.8 2.2 8.8 6.0 2.9 8.1 2.2 88.0 38.9 42.5 44.3 27.9 48.2 59.2 61.9Asia 81.4 66.3 64.0 66.9 53.7 96.4 106.5 181.2 86.1 36.3 6.1 7.9 10.7 26.9 84.8 9.1Other 12.7 ".4.1 31.8 29.6 27.5 85.5 56.6 88.0 88.9 32.2 64.9 62.8 58.6 87.1 70.4 104.2

Total 475.6 498.2 487.0 508.0 498.6 484.9 658.7 939.2 267.6 246.4 280.6 27m.4 312.4 a84.4 618.1 679.6

Source: Dat provided by Fiji authorities.

1/ C.I.P. vales.2/ Includes r-exports.

Table VIII.1: EXTERNAL PUBLIC DEBT OUTSTANDING (INCLUDIN UNDIS8URSED)(as of Dec. 81 1989)

(USS million at current prices)

CREDITOR TYPE DISBURSED UNIISBURSED TOTAL

WLTILATERAL LOANS 188.6 46.6 229.0

Asian Dev. Bank 56.6 26.5 82.1EEC 13.0 0.5 18.6Europ an Invest. Bank 48.0 0.0 46.0IFC 2.6 0.0 2.6IBRD 68.2 16.5 84.8

BILATERAL LOANS 66.8 8.0 74.9

Australia 11.1 0.0 11.1China 8.2 0.0 8.2Nauru, Rep. of 16.9 0.0 16.9Netherlands 1.6 0.0 1.6United Kingdom 84.1 8.0 42.1United States 1.0 0.0 1.0

SUPPLIERS CREDITS 18.2 0.0 18.2

Australta 6.7 0.0 5.7Japan 0.2 0.0 0.2Multiple Lenders 12.4 0.0 12.4

EXPORT CREDITS 1.8 0.0 1.8

United Kingdom 1.8 0.0 1.8

FINANCIAL INSTITUTIONS 16.8 0.0 1653

Japan 0.2 0.0 0.2Multiple Lenders 10.4 0.0 10.4Singapore 4.7 0.0 4.7

TOTAL 285.6 568.6 89.2

Source: IBRD.

Table VIII.2: SERVICE PAYMENTS, DISBURSEMENTS & OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT, 1982-89(USS million at current prices)

1982 1983 1984 1986 1986 1987 1988 1989

TOTAL EXTERNAL DEBT 402.0 487.4 418.4 448.7 440.9 466.2 466.6 898.2

Long-Term Debt 806.1 897.8 878.2 410.2 418.0 487.9 481.2 888.4Public A Publicly Guarenteed 2C6.6 292.8 279.4 802.2 811.6 884.2 830.2 206.6Private Nonguaranteed 99.6 106.0 98.8 108.0 101.6 108.7 101.0 97.8

Use of IMF Credit 14.9 14.1 18.2 14.5 7.9 6.7 4.0 0.8

Short-Term Debt 22.0 26.0 22.0 19.0 20.0 21.5 81.4 14.0

PUBLIC A PUBLICLY WUARANTEED LONG-TERM DEBT

Debt Outstanding A Disburued 265.6 292.3 279.4 302.2 811.6 884.2 880.2 285.6Official Creditors 209.8 229.6 210.2 220.1 241.4 280.2 276.1 260.3Multilateral 100.2 136.6 180.9 144.0 165.2 193.9 194.0 188.6

IBRD 68.6 70.8 69.1 68.4 71.0 80.1 71.9 66.2IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Bilateral 108.6 93.1 79.8 76.1 76.2 89.8 82.1 66.8Private Creditors 66.7 62.7 69.2 82.1 70.1 64.0 64.1 86.8

Supplier* 6.4 8.4 19.4 25.0 21.8 16.6 27.2 20.0Fionacial Markets 49.8 64.8 49.8 67.1 48.8 88.6 27.0 16.8

Disbursements 68.8 66.6 48.7 88.9 18.4 18.1 43.6 7.8Official Creditors 66.0 41.8 20.9 6.1 16.8 17.7 29.7 7.3Multilateral 27.7 40.0 16.7 8.9 10.6 13.9 29.7 7.8IBRD 18.8 20.2 8.6 0.0 0.2 0.5 7.7 6.6IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Bilateral 28.3 1.9 4.8 2.2 6.8 8.8 0.0 0.0Private Creditors 0.8 18.7 22.8 27.7 1.6 0.8 18.7 0.0Suppliers 0.1 4.7 9.8 16.4 1.6 0.8 13.7 0.0Fianacial Markets 0.7 9.0 18.0 12.8 0.0 0.0 0.0 0.0

Amortization 11.9 14.6 26.7 81.2 81.8 86.6 86.7 41.6Official Creditors 9.2 8.6 12.8 14.4 17.6 20.1 28.8 24.1Multilateral 8.4 6.1 6.6 8.7 11.0 12.7 16.7 16.8

IBRO 2.6 8.8 4.8 5.6 5.9 6.9 9.2 9.2IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Bilateral 5.8 8.4 6.2 6.6 6.6 7.4 7.6 7.8Private Creditors 2.7 6.0 14.0 16.8 18.8 16.4 13.4 17.4

Suppliers 2.4 2.5 7.9 10.7 4.8 5.2 2.1 6.3Fianacial Markets 0.8 8.6 6.1 6.1 9.0 11.2 11.3 11.2

Interest Payments 22.8 28.0 24.8 24.6 26.2 26.0 24.8 28.9Official Creditors 14.1 16.6 17.9 17.6 19.0 20.8 21.1 19.6Multilateral 6.2 8.0 9.9 10.7 11.9 18.1 18.4 12.8IBRD 8.5 4.8 6.2 6.0 6.7 6.2 6.2 6.5IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Bilateral 7.9 8.6 8.0 6.9 7.1 7.7 7.7 6.7Private Creditors 8.2 6.8 6.8 7.0 6.2 6.2 3.7 4.4

Supplicrs 0.7 0.7 1.4 1.7 1.6 1.7 1.0 2.0Fianacial Markets 7.6 6.6 6.0 6.8 4.6 8.6 2.7 2.4

PRIVATE NON-GUARANTEED DEBT

Debt Outstanding A Disbursed 99.6 106.0 98.8 108.0 101.6 103.7 101.0 97.8

Disbursements .. .. .. .. .. .. .. 12.8

Amortization .. .. .. .. .. .. .. 16.0

Interest Payments .. .. .. .. .. .. .. 7.8

Source: IBRO.

Table VIII.8: ANNUAL COMMITMENTS PER CREDITOR SOURCE, 1902-89(USS million at current prices)

1982 1988 1984 1986 1986 1987 1988 1989

OFFICIAL SOURCES 27.7 7.6 9.6 88.9 4.9 0.8 68.4 26.9

Multilateral 19.8 7.6 8.2 25.7 4.9 0.8 56.4 17.7

of which: IBRD 0.0 0.0 0.0 6.5 0.0 0.0 23.4 8.1

Bilateral 9.4 0.0 6.6 11.2 0.0 0.0 0.0 8.2

PRIVATE SOURCES 28.9 6.1 18.6 8.6 2.0 0.0 18.7 0.0

Suppliers 8.9 0.0 18.6 8.5 2.0 0.0 18.7 0.0

Financial Inutitutions 26.0 6.1 0.0 0.8 0.0 0.0 0.0 0.0

TOTAL 56.6 18.7 28.2 46.7 6.8 0.8 70.1 25.9

Memorandum Items:

Multilaternl(X Concers.) 12.4 21.8 0.0 0.0 9.5 100.0 28.0 64.2

Bilateral(X Concens.) 0.0 0.0 14.8 45.7 0.0 0.0 0.0 0.0

Source: IBRO.

Table IXl: MANUAA1TtING UTPUT ANW EWlt ^N, 191

Industry Value Added E Dloxnnt(11000) (X) (persons) (X)

Food, bevergee, tobacco 69,937 68.2 6,726 47.7Slaughtering, *te. 689 0.0 97 0.7

Dairy products 8,740 8.8 800 2.1

Fruit, ve tablo & fish 66,684 60.2 406 2.9

processiongVYgetable and animl oil 2,688 2.8 97 0.7

Grain milling -40,480 -85.9 284 2.0

Bakerlos, blcults, *tc. 4,487 4.0 466 8.8

Sugar processing 17,718 16.7 4,026 28.6

Confectionery, *tc. 1,488 1.8 270 1.9

Other foodstuffs 266 0.2 51 0.4

Animal foed 644 0.6 284 1.7

Beverages A tobacco products 12,173 10.8 498 8.6

Carsmnte 10,669 9.4 8,882 24.0

Wood and paper products 14,608 12.9 2,186 16.1

Sawmills and plywood 7,681 6.7 1,210 8.6

Other wood products 161 0.1 11 0.1

Furniture 2,057 1.8 624 8.7

Paper products 2,807 2.6 180 1.3

Printing 1,840 1.6 210 1.6

Chemical I building producte 18,094 16.0 828 6.8

Points, etc. 1,118 1.0 71 0.6

Cleaning *aterials 8,088 7.2 160 1.8

Other chemicals 2,508 2.2 86 0.6

Rubber products 8069 0.8 108 0.7

Plastic products 2,402 2.1 168 1.2

Ceoment A building products 8,111 2.8 216 1.6

Other manufactures 9,646 8.6 1,089 7.4

Motal furnituro, *te. 146 0.1 27 0.2

Structural metal products 98S 0.8 181 0.9

Othor "mtal products 8,668 8.8 289 1.7

Machinory (incl. repairs) 2,264 2.0 19 1.4

Ship building and repair 1,229 1.1 150 1.1

Other transport equiopmnt 866 0.8 69 0.4

Jew llery 262 0.2 40 0.8

Other products 789 0.7 194 1.4

TotaI 112,742 100.0 14,104 100.0

Source: Bureau of Statistics, Census of Industrios. 1988.

Table IX.2: INDICES OF NDUSTRIAL PRODUCTION, 198-9D1986=100

1988 1984 1985 1986 1987 1988 1989 1990 /

Mining, Manufacturingand Utilites- Including sugar 79.1 98.8 68.0 100.0 69.7 96.2 108.7 108.7- Excluding sugar 90.1 96.6 91.9 100.0 98.2 91.1 98.2 107.6

Mining (gold) 48.7 62.8 65.8 100.0 92.6 149.8 147.8 147.4Utilities 82.6 89.8 92.8 100.0 98.4 106.7 118.9 119.8Manufacturing 80.1 96.2 83.1 100.0 68.8 67.1 96.8 96.2

- Food products 69.5 96.8 74.9 100.0 98.1 88.4 101.6 81.6Milk 109.8 121.0 114.5 100.0 108.6 108.5 116.4 92.0Canned fish 70.4 78.7 67.3 100.0 146.8 167.4 191.4 186.4Coconut oil b/ 120.6 118.8 96.7 100.0 76.9 46.6 68.9 78.7Milled rice 127.8 96.6 104.2 100.0 100.7 62.1 66.0 59.8Sugar 64.6 96.7 68.0 100.0 79.9 72.8 91.8 147.2Beer 119.8 116.9 111.4 100.0 92.1 97.8 109.4 108.5Soft drink 94.4 90.4 98.8 100.0 102.0 118.8 185.6 96.8

- Garments n.e. n.s. n.a. 100.0 n.a. 176.2 257.1 816.6- Wood products 88.9 98.0 101.8 100.0 112.8 109.8 90.2 97.2- Paper products 86.7 89.7 90.9 100.0 78.0 70.2 78.8 87.0- Chemical products 98.9 96.0 88.9 100.0 72.7 84.4 80.8 81.7- Csemnt 119.1 106.0 101.1 100.0 64.0 47.9 62.9 86.9- Metal products 110.9 104.2 108.5 100.0 68.9 56.6 57.6 77.8

Preliminary estimates, based on first three quarters.b Data for 1988-87 refer to coconut and edible oils.

Source: Bureau of Statistics.

Table ZX.8: UANUFACTURDNO: GROWOH AN STRUCIURL HOANOE 1981-0

Year Total Sugar Other Other Self-Food, etc. Manufacturing Employmnt

(1) Antel recth

1990 6.1 0.0 0.0 14.9 0.01969 11.7 27.0 8.7 7.8 0.61908 -0.6 -9.6 0.4 0.0 -0.81987 -11.4 -20.1 10.8 -19.7 1.01986 19.4 47.2 16.8 2.7 2.01986 -12.9 -28.7 -10.6 -0.8 1.61984 17.1 78.9 0.6 -1.0 2.01088 -10.1 -48.2 4.2 18.9 2.11982 -2.7 8.4 -4.0 -8.0 1.9

(2) Dbetbibut10n (X of total)

1990 100.0 81.8 28.1 88.0 2.71989 100.0 82.9 29.6 84.8 2.81908 100.0 28.9 81.6 86.2 8.11967 100.0 81.7 81.4 88.9 8.11980 100.0 85.2 26.2 U8.9 2.71985 100.0 28.6 26.4 42.9 8.21984 100.0 86.0 24.6 87.6 2.71988 100.0 28.6 29.0 44.8 8.11982 100.0 87.8 26.0 86.0 2.81981 100.0 86.1 25.8 87.0 2.6

Note: Data are basod on constant 1977 prices; 1990 dataare preliminary.

Source: 8ureau of Statistics, Current Economic Statistics,various Issues.

Table IX.4: OWNERSHIP SHARES IN MANUFACTURING, 1988(% of each industry's value added)

Industry X of Private Covernment Foreign TotalManufacturing

Total

Slaughtering, etc. 0.6 9.8 90.2 0.0 100.0Dairy products 386 100.0 0.0 0.0 100.0Fruit and vegetable processing 2.1 100.0 0.0 0.0 100.0Fish canning, etc. 7.4 94.3 0.0 5.7 100.0Vegetable and animal oils 2.6 99.4 0.0 0.6 100.0Grain milling 2.1 100.0 0.0 0.0 100.0Bakeries, biscuits, etc. 4.2 94.8 0.0 6.2 100.0Sugar processing 18.2 0.0 99.0 1.0 100.0Confectionary, etc. 1.3 98.0 0.0 2.0 100.0Other foodstuffs 0.7 96.5 0.0 4.6 100.0Animal feed 0.6 88.4 0.0 31.8 100.0Beverages 7.2 74.3 0.0 25.7 100.0Tobacco products 4.6 70.0 0.0 30.0 100.0Garments 9.3 87.9 0.0 12.1 100.0Sawmills £ plywood 7.2 68.8 0.0 41.4 100.0Other woodproducts 0.1 100.0 0.0 0.0 100.0Furniture 2.0 100.0 0.0 0.0 100.0Paper products 2.6 100.0 0.0 0.0 100.0Printing 3.9 96.4 0.0 3.8 100.0Chemical products 9.6 88.6 0.0 11.4 100.0Cement A building products 2.8 76.7 0.0 23.3 100.0Metal goods 4.6 89.0 0.0 11.0 100.0Non-electric machinery 1.1 100.0 0.0 0.0 100.0Electrical repairs 1.1 79.2 0.0 20.8 100.0Transport equipment 1.6 87.2 0.0 12.8 100.0Other manufactures 1.4 91.2 0.0 8.8 100.0

Source: Bureau of Statistics, unpublished data from the Census ofIndustries, 1988.

Table IX.6: THE SIZE DISTRIBUTION OF MANUFACTURING ESTA3LIS*iMENTS, 1988(number of establishments by firm size)

Industry < 20 20-99 100 + Totalemployees employees employees

Dairy products 6 3 1 9Canned fish 1 E 2 8Coconut A other oil 8 4 1 13Biscuits A flour 23 9 2 84Sugar refining 1 1Other food products 14 2 2 13Beverages A tobacco 8 4 2 12Garments 80 80 9 119Wood products 49 11 4 84Paper products 21 6 1 27Chemical products 18 13 29Cement A construction products 4 1 1 fMetal products 82 1S 77Other manufactures 23 3 28

Total 812 106 28 443

Source: Bureau of Statistics, unpublished data.

;o. "a. A,.d~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~IBRD 20258

N H F R N ~~IV I SIO0N

Nn,keERTDS- OEMS R,ko ER

N'EMRkA

0 mb..~~~~~~~~~~~~~~~~~~~~SSAR.Rl JER,v a .I

-5'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7

17PMOiv kSAiAeV

c E~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ANAELR

N L~~~~TTAA E A S T E R N D IVI0 1111'IROISI ONIIII

cjc SEMASE 00 TTPI-ELlf CE AHETAA AS OIEHEIAL LSTELCRE IE

A PINCIPAL RESORTAREA

M VISE SCHEME~~~~~~~~~~~~~~S

I 20~~~~~~~~~~~~~~IRIIIAD -II61 -

5/) RIJI MA'S ROARS~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~E-DIF

KADAVU aa'NEW~. TMAV

1178- 'o C, 179-~~~~~~~~~~~~~CIearaRISR