GROWTH in the Fijian economy increased to 2.25 per cent in 2012, supported by income tax cuts, and low interest rates, said the International Monetary Fund in its latest review on Fiji.
After its executive directors finished consultations with the government last month, the IMF said in its report growth was going to continue in 2013 and with the promise of elections in 2014, it predicted investor confidence in the economy would continue to grow.
In its assessment, IMF said it was particularly important to expand Fiji's capacity to utilise effectively an expected increase in foreign and domestic investment following a successful transition to democratic parliamentary government in 2014.
However, unemployment remains stubbornly high at nearly 9 per cent, with youth unemployment and underemployment at significantly higher rates.
Emigration pressures continue especially among the higher skilled, the IMF stated.
It observed that fiscal policy was rightly balancing the need to strengthen the fiscal position against the need to increase growth-enhancing public investment.
It welcomed plans to reduce fiscal deficits, while increasing capital spending to clear infrastructure backlogs.
The report said Fiji's financial sector was stable and international reserves had stabilised to a comfortable level.
And inflation declined as imported commodity and food prices moderated.
The IMF said macroeconomic policies were broadly appropriate as Fiji's fiscal policy continued to balance the need to strengthen the fiscal position against the need to increase public investment to support growth.
According to the report, the 2013 deficit target of 2.8 per cent of GDP was on track to be met, with strong VAT revenue collections and somewhat slower-than-planned expenditures in the first half of 2013.
IMF noted that key policy challenges remained to sustainably raise economic growth, reduce poverty, and increase resilience to shocks.
The report said to achieve higher growth and reduce unemployment, faster and deeper structural reform was urgently needed.
It welcomed the reform of the Fiji National Provident Fund, while noting that potential risks arising from the option of lump sum payment would need to be managed carefully.
While welcoming the overall soundness of the financial sector and the rebound of credit growth from low levels, it called for enhanced monitoring of sectors with rapid credit growth.
In the event inflationary pressures emerge, the directors advised using open market operations to reduce excess liquidity and, if needed, tighten policy rates.
They noted the continued gradual appreciation of the real exchange rate and called for periodic reviews and adjustment if necessary.
The IMF also saw merit in more flexible exchange arrangements and encouraged the authorities to eliminate remaining exchange restrictions and to continue to strengthen the Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) regime.
It welcomed the recent progress in structural reforms. However, to raise Fiji's potential growth, it called on Fiji to reduce its vulnerability to shocks, and alleviate poverty, it saw a need for deeper and faster reforms.
The IMF said priority should be given to improving the investment climate by streamlining government regulations, relaxing price controls while protecting the most vulnerable, increasing the efficiency of land use, and upgrading the infrastructure.
It said efforts were also needed to increase the energy supply and ensure the viability of the sugarcane industry.