Fiji's Key Policy Responses as of June 03, 2021

Source: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#F FIJI

Background. The Fijian authorities have been highly effective in controlling the spread of COVID-19. The early imposition of travel restrictions limited imported infections. The authorities reacted to the first confirmed case with a broad set of measures, including massive screenings of the population, the closure of the international airport, restrictions on domestic travel and public gatherings, closures of schools and certain types of businesses (e.g. cinemas, gyms, etc.), a nationwide curfew and lockdowns of affected areas halted the spread of cases in the country. There were only few confirmed border cases up until March 2021. In April 2021, the country witnessed its second outbreak of COVID-19 virus, this time with a highly infectious variant. This has increased the total number of confirmed cases to 508 with 4 deaths. The authorities have reimposed a strict lockdown in order to limit the spread of the pandemic. Under the COVAX initiative, the Fijian authorities are in the process of acquiring COVID-19 vaccines for the eligible 20 percent of population and have received 36,000 doses as of May, 2021 and are allocated to safeguard frontline health workers. Moreover, donor countries such as India provided 100,000 doses of vaccine in late March; the New Zealand government announced to provide 250,000 vaccines during 2021. Moreover, additional doses are also expected from the Chinese government. Fiji plans to acquire 1.2 million doses of COVID-19 vaccines for its population of around 0.9 million, out of which 136,000 adults have received the first dose of vaccination as of June 01, 2021.

Reopening of the economy. The authorities started relaxing containment and mitigation measures at the national level on April 26th. Phase 2 of Fiji's COVID-safe Economic Recovery Plan, announced on June 21, led to the gradual easing of some restrictions (e.g. national curfew, limitations on public gatherings) and the reopening of schools and certain recreational facilities under strict conditions. The reopening of the economy under Phase 2 has been tied to the launch of CareFIJI, a contact-tracing mobile application. On Oct 15, the tourism ministry launched Care Fiji commitment program to promote tourism and to increase awareness among the visitors about pandemic related safety measures. It also removed mandatory 14days quarantine requirements for visitors from COVID contained countries. Further, Tourism Fiji announced the first ever virtual Fijian Tourism Expo on November 25, 2020, to promote tourism and business activities in the country. The Expo is aimed at bringing together potential investors from Australia, New Zealand and leading industrialists in Fiji. However, with the second outbreak of the pandemic, the government has enforced strict lockdown in major cities in western and central part of the main island and cancelled all repatriation flights to Fiji.

FISCAL The authorities have announced two major fiscal stimulus packages in response to the COVID-19 pandemic, one on March 26 and one on July 17. The first package entailed up to FJ$1 billion (8.7 percent of GDP) in supplemental expenditures on public health, lump sum payments through the Fiji National Provident Fund (FNPF), tax and tariff reductions, and loan repayment holidays (up to F$ 400 million of the total envelope) aim at protecting public health, supporting the economy and ensuring food security. The second fiscal package was announced as part of the FY2020-21 budget for the fiscal year beginning in August. The stimulus mainly consists of sizeable tax and tariff cuts. Fiscal and import excise duties on over 1,600 items were reduced or eliminated. Similarly, the budget includes cuts to the service turnover tax, environmental tax and departure tax. The budget also entails a total of F$100 million for unemployment assistance and a subsidy to Fiji Airways of F$60 million to incentivize first 150,000 tourists in new fiscal year.

The government has also implemented several additional measures in between the two stimulus packages, including an Agricultural Response Package to ensure food security was also announced. It includes the scaling up of the existing Home Gardening program and a new Farm Support Package which aims at boosting the production of short-term crops through seeds and materials distribution. The government also introduced several additional allocations amounting F$50.9 million for the development of sugar sector. In addition, the government expanded its unemployment assistance, guaranteed the debt of Fiji Airways and announced a concessional loans initiative for MSMEs impacted by COVID-19, approving loans of in the amount of F$ 23.5 million (as of Oct 12, 2020). The government's initiatives aim to improve the investment ratio, which has fallen to 12.8 percent against an average of 20 percent in the last three years. The authorities also announced a new hiring subsidy program under which the government will pay the minimum wage of F$ 2.68 per hour and the remainder will be paid by the employers.

MONETARY AND MACRO-FINANCIAL The Reserve Bank of Fiji reduced the overnight policy rate to 0.25 percent from 0.5 percent on March 18 to counter the economic impact of COVID-19. The RBF also: (i) expanded the SME Credit Guarantee Scheme to assist small entities, (ii) raised its Import Substitution and Export Finance Facility by FJ$100 million to provide credit to exporters, large scale commercial agricultural farmers, public transportation and renewable energy businesses at concessional rates, (iii) raised its Natural Disaster and Rehabilitation Facility to FJ$60 million (renaming it the Disaster Rehabilitation and Containment Facility) to provide concessional loans to commercial banks for them to on-lend to businesses affected by COVID-19, and (iv) purchased FJ$280 million of Government bonds in the first half of 2020 to help finance the Government deficit.

EXCHANGE RATE AND BALANCE OF PAYMENTS Fiji's currency is pegged to a basket of currencies amid limited capital mobility. The Fijian dollar depreciated by 9 percent against the U.S. dollar between January 1 and March 20, 2020, before gradually appreciating since then, rising above its end-2019 level. The Reserve Bank of Fiji tightened exchange controls on April 3 and June 11 to ensure that adequate foreign reserves can be maintained. It reported foreign exchange reserves stood at F$3,132.5 million as of May 31, 2021. The reserves increased on account of fresh loans from ADB and World Bank and a grant by the European Union. The ADB has announced to provide US$ 2million to Fiji from its Asia Pacific Disaster Response Fund (APDRF) to respond to pandemic crisis in the country. In late March, the World Bank approved US$145 million (FJ$ 299 million) to support pandemic and cyclone relief. Moreover, the Japanese government provided an emergency loan of F$200 million to strengthen Fiji's public health system against the pandemic. Recently, the Australian government also provided a F$ 55.1 million grant for budgetary support. The Fijian Government and the United States signed a Trade and Investment Framework Agreement (TIFA) to promote trade and investment ties between the two countries.

Questions:

(i) Using graphical illustrations, explain the impact of the RBF's reduction in the overnight policy rates on consumer spending and on commercial banks.

(ii) On May 31, 2021, the Reserve Bank of Fiji announced a high level of foreign exchange reserves. Explain what sort of problems will the new loans from ADB, World Bank and European Union create for the Reserve Bank of Fiji and on public deficit and debt?

(iii) As part of the government's fiscal policy response to COVID-19, tariffs reduction was introduced. What sort of impact would tariff reduction have on employment?