RBF way off the mark on inflation

[posted 4 Dec 2009, 1145]

The Reserve Bank of is way off the mark in its inflation forecasts which is likely to be running closer to an unprecedented high of 15.2% and not the RBF-claimed 7%.

Likewise, to claim that devaluation of the Fiji dollar has resulted in benefits to the economy is a horrendous misrepresentation. In fact, devaluation has not benefited the economy. Nor has it enhanced Fiji’s Foreign Reserves.

The practice worldwide is to express Reserves in one of the globally accepted international currencies. The US dollar is the most commonly used currency in this respect. Devaluation of the Fiji dollar by 20% last April resulted in the depreciation of our currency vis a vis the US dollar. Thus, our reserves received an artificial boost but the in actual fact there was no change in our foreign reserves position when measured in US dollars or in the currencies of our major trading partners.

All our imports are paid for in foreign currency, largely in Australian, NZ, US dollars or the Japanese Yen. The net effect of the devaluation, therefore, is that more Fiji dollars will now be needed to settle our import bills in these foreign currencies. Devaluation will also add to the burden of servicing our foreign currency debts. Over a longer period, it will have done more harm than good to the economy.

The argument that devaluation has increased our competitiveness in the international market place is of little significance if we look at what we export. Hardly any of our exports would have benefited from the devaluation. Not even the tourism sector. With its heavily discounted rates, tourism is not likely to bring in any enhanced earnings. Indeed, tourism receipts for 2009 are estimated by official sources to be significantly below that of 2008.

On the other hand, devaluation has inflicted greater hardship on the local people. It has resulted in galloping inflation as prices of virtually every thing went up significantly, hitting the poor amongst us the hardest. As a direct consequence of the devaluation rub off, traders and vendors of local goods and services also jacked up their prices. These increased prices are way above any increase one would expect from a 20% devaluation.

It is obvious that the business community has taken undue advantage of the devaluation to send prices skyrocketing

The claim therefore that inflation is “currently running at around 7% and will moderate at around 2% by the end of 2010” is absolutely ridiculous. Ask anyone on the street and he/she will tell you that prices of almost everything have soared beyond belief since devaluation.

A recent survey by the Consumer Council of Fiji revealed that prices of many items in daily use in every household had gone up by 100% and, in some cases, by as much as 200%.

So where does the 7% inflation rate fit in? In the past three months bus fares and electricity rates have gone up. So has the price of fuel. Food, energy and transport are the major components of the Consumer Price Index. When prices have doubled or even trebled how can the RBF talk about 7% inflation rate? It is laughable.

With the removal of price controls as announced in the 2010 Budget, inflation is going to worsen. A weak economy and a subdued export sector will exert more pressure on the dollar and likely further erode its purchasing power.

So to be more accurate inflation is more likely to be running in double digits rather than the 7% and 2% projected by the Reserve Bank.

It would be a lot more palatable if the RBF were to admit the truth rather than engage in vain attempts to paint a bright picture of a bleak scenario. s