ADB cautions Fiji on escalating debt levels

[posted 10 March 2011,...]

The Asian Development Bank has cautioned Fiji on its escalating debt level which stood at 58% of the GDP at February end.

In its February 2011 issue of the Pacific Economic Monitor, the Bank says: “Reducing debt levels (currently nearly 58% of GDP) is a challenge confronting the government. This requires tight control over consideration of new debt and active debt portfolio management.”

But within days of the warning, the government announced it had borrowed a further $500 million to pay off $300 million worth of global bond raised in 2006. This bond issue is repayable in September this year.

The “over borrowed” amount of $200 million was because of investor interest in submitting to the bond issue, says Permanent Secretary of Finance Filimone Waqabaca.

This latest borrowing at a reported interest rate of 9% is quite expensive and will push the debt level closer to around 65% of the GDP. “This is clearly unsustainable and will add substantially to the already heavy debt burden on the community,” said FLP Leader Mahendra Chaudhry.

The high interest rate (9%) is an indicator that the bond is in the risk rated category. Annual interest payment alone will come to around $45 million and the cost to the tax payer by the time the Bond is paid off will come to $775 million.

Other highlights on Fiji’s economy from the ADB’s Pacific Economic Monitor issue of February 2011:

Outlook: ADB projected a 0.5% growth for 2011 compared to the government forecast of 1.3%. This was attributed largely to slow world growth in 2011 which could affect tourism projections.

The short term outlook was heavily dependent on developments in the tourism sector and the sugar industry. Tourism (visitor arrivals) were influenced by marketing efforts and faced a risk of loss of market share because of the increasing focus on tourism in other Pacific Island states. The report also noted the tendency in Fiji to view tourism revenue through the “tracking of visitor numbers”. It noted that “years of discounting appear to have become a permanent shift” that will be difficult to reverse.

Reforms in the sugar industry were expected to be slow “given government capacity constraints and the time needed to consult many stakeholders, an essential measure if the reforms are to be successful”, the report said.

Inflation: Inflation as of January 2011 stood at 5.9% and food prices rose by 3.8%.

Investments: “Indicators point to continued low investment levels,” the report said. Indicators were the: the 1.1% decline in new lending for investment purposes, the annual 0.5% decline on imports of investment goods, and the fact that the Reserve Bank had to intervene twice in 2010 to mop up excess liquidity by raising the statutory reserve deposit requirement for commercial banks to a level of 10%.

Poverty: The ADB said Fiji’s rising poverty levels at 35-40% of the population was “a primary concern”. It said job creation, the “sustainable remedy to poverty” was proving to be elusive. But noted that government had provided for some targeted social welfare actions such as food vouchers and low cost housing.