In 2005, the Asian Development Bank (ADB) approved a new policy covering cost sharing and expenditure eligibility for bank financing. Central to the implementation of the new policy is the determination of country cost sharing ceilings based on a macroeconomic assessment. This paper presents the findings of such an assessment.
The period following the 2000 coup is the most expansionary 5 year period since independence. The budget deficit was 6% or more of GDP from 2001 to 2003 and has remained high subsequently. A trend deficit of the order of 4% of GDP is expected over the foreseeable future. As general government debt has reached 52% of GDP and the Government’s contingent liabilities are a further 22% of GDP, such an expansionary fiscal stance is of concern.
Fiji’s budget deficits are largely funded domestically and support a high wage and salary bill. Such deficits fuel domestic demand and ultimately impose pressure on the balance of payments. Likely outcomes are ever tighter monetary policy and exchange rate adjustment (and/or the tightening of Fiji’s foreign exchange controls). Fiscal correction is required if such macroeconomic instability is to be avoided.
The recent experience suggests that acceptable overall fiscal outcomes can now only be achieved by undesirable cuts in government investment, maintenance and expenditure on goods and services. Key sources of the fiscal pressure are the large and growing wage and salary bill and weak revenue collections. There has been little recent success in correcting these problems.
Sensible options for fiscal correction include lifting compliance with the tax system, cutting-back on the use of tax concessions, improving the recovery of Government charges, making cost savings through efficiency gains within Ministries, linking civil servant pays to productivity and lifting the financial returns from public enterprises. Such options would need to be backed-up by the ongoing efforts of the Government to improve public administration including raising transparency and accountability.
Projections based on an extrapolation of trends suggest the current fiscal position is unsustainable. A sustainable debt position could be achieved if the budget deficit is reduced to no more than 2.5% of GDP. Such deficits could see the ratio of general government debt to GDP plateau at 55% by 2015. A deficit of no more than 2.5% of GDP achieved through wage restraint would see a reasonable share of the public investment program funded by internal revenue.
Evidence has been sought in support of the view that the fiscal position is sustainable. The strongest argument in favor of this view is that debt has been used to fund capital expenditure. In broad terms the level of borrowing has matched capital expenditure. But the investments are unlikely to generate the Government revenue required to service the debt and instead are adding to the fiscal burden. It is preferable that internal revenue make a greater contribution to capital expenditure.
