CASE STUDY

RESERVE BANK OF FIJI

ECONOMIC REVIEW

Read the review report given below and answer the questions that follow.

The coronavirus (COVID-19) pandemic has severely disrupted global economic activity causing

what is now termed the "great lockdown," with countries implementing various travel and border

restrictions. The pandemic-driven economic contractions have resulted in countries, including

Fiji's trading partners introducing several fiscal and monetary measures in an effort to mitigate the

economic fallout. More recently, despite concerns of a second wave of infections, most countries

have gradually eased lockdown restrictions on reports of a drop in new COVID-19 cases.

However, the lifting of global restrictions is expected to differ in speed and magnitude, yielding

uneven economic recovery within, as well as, across countries.

The suspension of global activity has continued to dictate price movements in the commodity

markets. As at 28 May, Brent crude oil prices picked up to US$35.72 per barrel (from US$25.27

per barrel in April), owing to reduced global production, a weaker dollar and prospects of

economies lifting lockdown restrictions. Gold prices rose further to US$1,736.80 per fine ounce

on 28 May (from US$1,694.20 in April) due to higher demand for the precious metal as a safe

haven asset. In April, the Food and Agriculture Organisation Food Price Index declined by 3.0

percent on account of more pronounced contractions in sugar prices.

On the domestic front, similar to a number of other countries, the Fijian economy is projected to

record a large contraction this year, and partial indicators to date corroborate this. While the

economy is anticipated to note some recovery in 2021, this is highly contingent on the resumption

of global travel before year-end.

On sectoral performances, latest indicators highlight persistent weakening in major industries.

Cumulative to April, pine wood supply (-28.0%), woodchip (-18.4%) and sawn timber (-43.0%)

contracted on account of subdued global and local demand. Local gold production contracted (-

8.3%) in the year to April, owing to power supply constraints, adverse weather conditions and

COVID-19 related supply chain disruptions. The closure of international borders led to visitor

arrivals contracting significantly by 43.5 percent up to April.

Subdued demand as well as lower household and business confidence can also be seen in

consumption and investment indicators to date. Cumulative to April, domestic cement production

(-31.3%) and sales (-20.4%), and new lending for building & construction (-29.9%) recorded

marked declines over the year. In the same period, contractions were also noted in commercial

banks' new lending for consumption purposes (-4.4%), net VAT collections

(-23.4%), as well as registrations for new (-40.2%) and second-hand (-64.0%) vehicles.

In step, overall labour market conditions have worsened with further announcements of layoffs.

The notable uptake of the Fiji National Provident Fund's (FNPF) COVID-19 Withdrawal Scheme

corroborate an increase in unemployment levels. As at 27 May, 88,939 COVID-19 Withdrawal

applications have been lodged with the FNPF. These applications mainly include FNPF members

in the tourism, taxi and small and micro enterprises sectors that have experienced reduced hours,

lowered income or have been laid-off temporarily or permanently.

Monetary aggregates reflect current economic conditions. In April, domestic credit growth slowed

by 4.2 percent (from 7.9% in April 2019) on account of reduced lending to private sector business

entities and private individuals. In the same period, both the commercial banks' new lending and

deposit rates fell annually.

Excess liquidity in the banking system stood at $718.6 million in April on account of RBF's

purchases of infrastructure bonds and higher foreign reserves along with the reduction in currency

in circulation, while statutory reserve deposits increased over the month. As at 28 May, excess

liquidity stood at $807.8 million.

Over the month in April, the Fijian dollar (FJD) strengthened against the Euro (3.7%), US dollar

(USD) (2.1%), Japanese Yen (JPY) (0.9%) and the New Zealand dollar (NZD) (0.2%) but

weakened against the Australian dollar (AUD) (-3.8%). Annually, the FJD appreciated against the

NZD (4.6%) and AUD (3.7%) but fell against the JPY (-8.2%), the USD (-3.8%) and the Euro (-

1.1%).

Consequently, the Nominal Effective Exchange Rate (NEER)1 index remained relatively stable in

April, falling marginally over the month (-0.07%) and year (-0.4%), indicating a general

weakening of the FJD. Meanwhile, the Real Effective Exchange Rate (REER)2 index was slightly

higher over the month (0.8%) but remained lower over the year (-3.9%), denoting a gain in trade

competitiveness largely on account of the persistent negative domestic inflation since October

2019.

Cumulative to March, Fiji's merchandise trade deficit (excluding aircraft) narrowed by 9.9 percent

to $657.7 million mainly due to a larger contraction in imports (-$137.7m) relative to the fall in

exports (-$65.5m).

The Reserve Bank's dual monetary policy objectives, of stable inflation and adequate foreign

reserves remains intact. Annual headline inflation remained in negative territory for the seventh

consecutive month in April (-1.3%), underpinned by lower prices of yaqona, vegetables, kerosene

and diesel. However, on a monthly basis, consumer prices rose by 1.3 percent (from -0.4 percent

in March) due to slightly higher prices noted in food & non-alcoholic beverages and alcoholic

beverages, tobacco & narcotics categories, to some extent reflecting the impact of Tropical

Cyclone Harold. As at 28 May, foreign reserves stood at $2,212.2 million, sufficient the cover 6.9

months of retained imports. Current reserves level have been underpinned by import compression

due to both low domestic demand and commodity prices, and higher offshore Government

borrowing, which will more-than-offset weakened export receipts.

Against this backdrop and outlook, the existing accommodative monetary policy stance was

deemed appropriate and complemented Government's efforts to stabilize the economy. Therefore,

the Reserve Bank kept its Overnight Policy Rate unchanged at 0.25 percent in May.

Source: https://www.rbf.gov.fj

Questions:

1. COVID-19 has shown that Tourism Industry is instrumental for economic growth and

development globally. Fall in visitor arrivals impacted each and every countries growth and

development. "While the economy is anticipated to note some recovery in 2021, this is highly

contingent on the resumption of global travel before year-end".

In your view, discuss 3 ways hotels can continue its operation during this great lockdown.

(3 Marks)

2. Due to narrow export base and limited resources, Fiji has been experiencing increasing trade

deficits. However, "Cumulative to March,2020 Fiji's merchandise trade deficit (excluding

aircraft) narrowed by 9.9 percent to $657.7 million". In your view, discuss how merchandise

trade contracted. (3 Marks)

3. "In April, domestic credit growth slowed by 4.2 percent (from 7.9% in April 2019) on account

of reduced lending to private sector business entities and private individuals. In the same

period, both the commercial banks' new lending and deposit rates fell annually" Commercial

banks have given vacation package to customers who are affected by COVID-19. Discuss

impacts on commercial banks profitability. (5 Marks)

4. "The pandemic-driven economic contractions have resulted in countries, including Fiji's

trading partners introducing several fiscal and monetary measures in an effort to mitigate the

economic fallout". In your view, discuss what shall be the focus area(s) for Fijian economy

to normalcy and identify 2 policies which would support the focus area(s).

(6 Marks)