Dialogue Fiji Submission on the Fiji National Budget 2021-22

Page 1


Submitted to:

Ministry of Economy Suva, FIJI.


I. Introduction Dialogue Fiji, a civil society organisation based in Suva, Fiji, wishes to make this submission towards the formulation of the 2021-22 Fijian National Budget. In June 2020, the Minister for Economy delivered a bold budget in an extremely uncertain and difficult time. The budget had an unprecedented deficit level and was premised on expectations that circumstances would improve by the next fiscal year. The budget was successful in stimulating domestic demand and keeping the economy afloat through an appropriate level of state spending, and helped maintain inflation and foreign reserves at adequate levels. Given the circumstances, the economy was doing relatively well despite losing its key sector. The turning point, however, was the breach in protocols at a quarantine facility which started Fiji's second wave of COVID-19, clogged the domestic economy through lockdowns, and relegated to the distant future, hopes of being included in travel bubbles and of rejuvenating the crucial tourism sector. This has set the stage for the Minister of Economy to stand up in parliament next month to deliver a national budget in an even more uncertain and difficult circumstances. Given the lack of availability of current economic data, and the difficulty of making future projections given the degree of uncertainty, it is challenging to make a budget submission that can provide useful and valuable insights, analyses and recommendations to government to formulate the country's next budget. However, Dialogue Fiji, holds the view, that given our unique views, interactions and perspective as a civil society organization, we will still be able to provide some useful information and suggestions for consideration by government. We hope that our recommendations, which are based on sound evidence and reasoning, will be given due consideration by policy makers.



II. Future Outlook The second outbreak of COVID-19 in Fiji has put an already depressed economy on life support. The prolonged slump in economic activity and loss of productivity is having a heavy toll on the national economy. The outbreak has significantly reduced consumption demand, drastically reduced outputs from most sectors of the economy and is having a huge impact on government finances as revenue collections decline and expenditures rise. The outbreak has seriously affected prospects of economic recovery and growth in the next fiscal year. The prospects for recovery of the tourism sector, the mainstay of the Fijian economy, has been seriously impacted. The significantly more transmissible and more lethal delta variant threatens opening of travel bubbles. It has already led to the suspension of existing bubbles in the region. Vaccine uptake appears to have stagnated from mid June as fewer people are turning up to receive first shot of the vaccine, especially in the Central Division, which ironically, is the epicenter of the prevailing outbreak. Government should consider imposing vaccine passports for any movement outside homes as unvaccinated people pose greater threat to rest of society. Research shows that unvaccinated people are 40% - 60% more contagious when infected . Slow vaccine uptake will delay economic recovery, lead to loss of lives, endanger safety of health care workers, increase mortality rates from other illnesses as covid cases crowd out hospitals, lead to permanent closures of some businesses and permanent loss of a high number of jobs. Vaccination remains the only tool in government's arsenal to contain the outbreak as there is widespread, uncontrolled community transmission and the Ministry of Health no longer has capacity to adequately test all suspected cases and securely isolate all confirmed covid cases and their contacts. Therefore, every citizen should cooperate to ensure that an unprecedented health crisis and ensuing economic disaster can be averted. Knowing that at least 90% vaccination is the only thing that can contain this outbreak, reopen businesses and bring some semblance of normalcy, any citizen that is now delaying the achievement of that, despite the availability of working vaccines, is being highly inconsiderate, selfish and hostile to the rest of society. In the best-case scenario, assuming that vaccine hesitancy can be overcome, Fiji should be able to vaccinate every eligible person by the end of September. Given the transmissibility of the delta variant, 100% coverage and adherence to covid safe measures (masking, physical distancing, etc.) can bring back new daily cases to single digits by the end of October. There is now widespread consensus that herd immunity will not be achievable with the existing vaccines given the emergence of more vaccine resistant variants like Delta, and secondgeneration vaccines will become necessary. This, for us, means that we will not go back to being a COVID contained or a COVID free country until that happens. That will also have implications for the reopening of our borders.



For the first six months of the 2021-22 financial year, tourism earning is not expected to start flowing in. This means that economic recovery would be hindered. However, if Fiji is able to become COVID contained again, and achieve adequate levels of vaccination coverage, the reopening of borders or even the inclusion into the travel bubbles of Australia and New Zealand will radically improve the economic outlook. Record levels of visitors are expected as an increasing number of Australians and New Zealand have become fatigued from the lockdowns and are eager to holiday in a tropical destination. Fiji is expected to become a top choice as travel to Asia will not have resumed. In the meantime, foreign exchange earnings through personal remittances and offshore borrowings, direct budget support and development aid to state and non-state actors would remain key to protecting our foreign reserves and driving the economy. The future outlook, therefore, is highly incumbent on our ability to contain the outbreak, reopen the domestic economy and enter into the Australian and New Zealand travel bubble.



III. Key Budgetary Measures for Mitigation and Recovery State Spending Economic recovery will be incumbent on the state injecting money into the economy. This will ensure that there would be sufficient spending power of people to sustain demand when nonessential businesses open up after a prolonged term of closure. State will need to borrow offshore, or rely heavily on international aid to sustain a large deficit budget. This approach would also protect stability of foreign reserves and enable Fiji to continue importing goods demanded by the domestic market. Any measures that will threaten the integrity of the Fijian dollar and erode the value of hard-earned savings in the country need to be approached with caution. Despite the temptation, government should use quantitative easing measures such as printing of money as a last resort. the state will need to continue spending at previous levels (that is, pre-2019 levels) however it should cut all unproductive expenditure. This includes capital projects such as building of police stations, swimming pools, offices or residences of ministers or other state officials, etc. These expenditures do not result in a proportionate increase in productive capacity of the economy. In addition, government needs to review expenditure which results in money being siphoned off the economy. This includes large contracts to offshore companies which then transfer out of the economy a large chunk of the money in the form of profits. Instead, the state should spend in a way that i circulates within the economy, and trickles down to the grassroots.

Reduction in Infrastructure Maintenance Expenditure A large component of the state’s operational expenditure is the maintenance of public infrastructure, in particular roads. It is suggested that the government should seriously consider reestablishing the Public Works Department (PWD) to carry out maintenance of Fiji’s roads. This is desirable due to the following: ● Fijians who have lost their jobs due to the pandemic can be engaged in the PWD. Most PWD jobs would be low skill jobs which require minimum upskilling. By doing this, the government can continue to exercise greater control over employing these Fijians with adequate levels of remuneration. ● The Fiji Roads Authority has technical capacity to oversee the operations of the PWD and ensure quality assurance. ● Public-private partnerships can be developed with local contractors to ensure exchange of expertise and equipment. This would not require PWD to invest substantially in equipment and machinery and also enable local private players to develop their own capacity through public contracts. Where necessary, overseas contractors can also be engaged in the short term.



Unproductive Expenditure and Reduction in Cost of Civil Service Despite the need for the state to spend at a certain level to drive growth in a state driven economy, it is important to identify scope for reduced spending that can yield the same economic output with maximum cost-effectiveness. It has become critical to do this, given the precarious state of government finances. The national budget can be reduced by up to $0.5billion by cutting down on unproductive expenditure. Given the nature of such expenditure, this reduction is not expected to have a contractionary effect on the economy but instead increase efficiency and ensure better use of scarce resources. Such a reduction will also reduce pressures on government finances and help avoid the need for revenue measures that further burden Fijian taxpayers and businesses. Given the impact of the salary bill on the national budget, the government should consider a pay cut for civil servants, employees of statutory organisations and state-owned enterprises. This pay cut, however, should not be across the board. The government should, for an initial 6 months, place a salary cap of $100,000 for everyone paid from the state coffers. In addition, a 5%-10% pay cut should be considered for those earning over $50,000 per annum. Those earning below $50,000 should not be subject to any pay reductions. Civil service wages have been a key factor driving the economy since last year. Through civil services wages, the government has been injecting money into the economy which has been sustaining domestic demand and this will continue to be of benefit. Whilst an effective policy, it has its drawbacks. Lower and middle income earners tend to spend most of the money they earn which ensures that the money circulates in the economy, trickles down further and helps the economy grow. Those on super salaries, however, may save a sizeable proportion of their earnings for future use, which means that its immediate impact on economic growth is limited. At a time when the state needs to ensure that every dollar that it spends contributes immediately to rejuvenating the economy, it makes sense to reduce wages for very high-income earners. $100,000 would be considered an appropriate threshold given Fiji's average wage rate and cost of living.

Revenue Measures: Taxation Given the economic realities, we strongly oppose any suggestions to increase VAT or any other taxation measure that will burden ordinary Fijians. In addition, the government should not consider any taxation measures that will burden businesses which are already struggling in an extremely difficult environment, regardless of how pressing the need to increase government revenue may become. Any increases in VAT or tariff on common goods that Fijians consume will exacerbate poverty, and eventually increase the burden on the state's welfare schemes leading to an overall negative outcome for the state. 5


Increase in VAT or duty will also negate government's measures in the last budget to boost aggregate demand by reducing prices. Cohesive policy making is needed more than ever as we face the greatest economic crisis in our history. A cohesive set of policies and the discipline to see that it can be sustained over a period of time is critical to achieving a more robust economy after we ride out this crisis.

Diversification of the Economy Whilst diversification of the economy is necessary to increase its robustness and resilience, it is difficult to achieve in the short term. We believe that government should continue to engage with a range of stakeholders to diversify our economic sectors, however, it may not be prudent to allocate a high level of financial resources to achieving this in the current budget. The current budget needs to focus on measures that will provide an immediate return to the economy. Therefore, focus should be on growing existing sectors which have potential for immediate expansion. Whilst agricultural sector has the greatest potential to expand due to a range of factors, there remain critical hurdles such as land tenure issues which remain unresolved and unaddressed for years. In addition, Fiji has failed to attract foreign investment into the sector which can bring in new skills and technology, and lead to the establishment of agricultural business which can do production at commercially viable and internationally competitive scales. Presently, there is only a handful of investors who are willing to invest in agriculture at a scale which significantly contributes to economic growth mainly as a result of land tenure insecurity. Given the economic realities, government needs to now exhibit willingness to engage in a national dialogue with relevant stakeholders and influencers (such as opposition political parties) on the land issue. CSOs, such as Dialogue Fiji, can play an important role in facilitating this for the following reasons- (i) they are local actors with an acute awareness and understanding of local needs and dynamics, and (ii) they command trust across ethnic and political divides, unlike political actors such as government which lack trust and support beyond its supporters. Crises and times of adversities can provide an important catalyst for people to come together, and for the resolution of long-standing conflicts. For all reasonable people in our society, it is now clear that the best interest of everyone lies in the common good.



List of Recommendations Deliver an expansionary (deficit) budget and retain appropriate levels of state spending. Budget deficit to be financed through offshore borrowing and direct budget support from donors. Implement a salary cap of $100,000 on all salaries paid from the state coffers. Implement a 5%-10% pay cut for those earning above $50,000. Re-establish the Public Works Department to re-skill and absorb laid off workers into the workforce, and to reduce outward transfers from the local economy due to engagement of offshore contractors. Minimize unproductive expenditures with the target of reducing these by $0.5 billion dollars. These include putting on hold expenditure (including capital expenditure) which do not yield proportionate productive outputs. Allocate up to $50m for rebuilding of homes damaged by TC Yasa. This injection of capital will also boost the Northern economy and create jobs in the construction sector. Negotiate another round of repayment holiday for home mortgages with banks, to save homes. Negotiate a 6-month moratorium on repayments for loans to SMEs, with lending institutions. Establish/Support soft loan facilities for affected businesses. Make an allocation of $150 per week for income support to every worker who has lost their jobs for an initial period of 4 months (August to November). Eligibility of recipients to be determined from FNPF records. Develop mechanism to provide support to informal sector workers with significantly reduced or lost incomes. Review grants to state owned enterprises in non-critical sectors such as media (e.g. FBC, Walesi). For the longer term, consider selling off state owned media companies as Fiji has a well-developed media industry and does not require a significant transfer of the state’s financial resources every year to run media companies. PFM literature show that privately owned media companies tend to be more efficient. As needed, government can procure airtime/space for public service broadcasts through a competitive tender process. Invest revenue from sale of EFL shares in increasing capacity for electricity production from sustainable sources. Despite the budget deficit and cash flow issues, government should set aside this revenue for future investment into EFL as its majority shareholder, and not extract it for other use now. 7


List of Recommendations (continued) Increase the Ministry of Health’s budget allocation to 5% of GDP to ensure appropriate levels of resources are available to reduce mortality rate due to the pandemic. Avoid revenue generation measures such as increase in VAT, other taxes or duty on commonly consumed goods, to avoid burdening ordinary Fijians and/or businesses struggling due to the pandemic. Avoid implementing increases in cost of accessing government services. Remove the 20 cents per litre tax on fuel imposed last year. This tax was imposed at a time when the global crude oil prices had reached record lows but has since increased more than two-fold (~US$30/barrel in June, 2020 to ~US$70/barrel in June 2021). The higher fuel price is pushing up the cost of doing business and having an inflationary effect on consumer prices which affects demand negatively. Impose a vaccine certificate for any movement outside homes to increase uptake of vaccines.



Conclusion The 2021-22 budget will be critical for making the appropriate allocations to battle the ongoing COVID-19 outbreak, address its socio-economic impacts and support economic recovery in its aftermath. Despite the challenges, government will need to continue to sustain measures to boost aggregate demand and provide support to affected Fijians and struggling businesses. Containing the prevailing COVID-19 outbreak remains key to minimizing economic damage and getting back on the road to recovery. Re-opening of the tourism sector is crucial to economic recovery and there are some positive elements that inspire confidence. Firstly, there have been significant efficiency gains which has made our tourism sector more competitive, if the pricing offered to local customers are any indication. Secondly, the Asian markets remain closed to the Australian and New Zealand tourists which reduces competition for our tourism industry. The government needs to devise a set of effective policies and judiciously allocate financial resources to address needs of different economic sectors. There are high expectations from government as individuals and businesses have limited options for support.


Submitted by: Dialogue Fiji 9 Rose Place Rewa Street Suva, FIJI. Ph: 777 8379 Email: nilesh@dialoguefiji.com Website: www.dialoguefiji.com