OPINION: Budget: Is Fiji’s debt level sustainable
7 August, 2020, 10:33 pm
It is no doubt Covid-19 pandemic is once in a century phenomenon. Countries around the world are in dire desperation to cope with the pandemic and its economic aftermath, hence, expansionary responses by governments everywhere around the world.
Government responses, however, differ by country and by region depending upon the intensity of the pandemic and economic downturn.
Largely, in democratic countries, government responses are well-considered and measured whereas in non-democratic countries, governments are unilateral, arbitrary and authoritarian to decide and dispense public resources (no questions asked).
In democratic systems like ours, governments come under stiff scrutiny and attack from the Opposition, independent institutions and individuals.
The flurry of attacks and the intensity of those arguments were chiefly about the government’s disposition on certain issues and expenditure allocations. The tenability of the government position on those expenditures were fiercely contested in the past two weeks.
The two opposition parties have performed their sacrosanct duty of responding to the National Budget 2020-21 putting difficult questions to the Minister of Economy and the Prime Minister.
The key issues raised by the Opposition have been:
1) the quantum and variance of expenditures in the Budget;
2) the policy deliberation of those expenditures to reflect the government intentions;
3) the size of the impending deficit; and
4) the size of the accumulated national debt, that squarely implicates the government’s previous revenue and expenditure policies.
These are legitimate concerns and the government is liable to answer them with humility and grace, and indeed amend the policies with time for the best outcome.
Well, this chaotic interrogation, which lasted for more than a week is indeed the beauty of democracy that people appreciate and participate. The spirit of this interrogation must continue to liven the people and indeed should pass the test of time.
Name-calling, teasing, finger-pointing, growling and shouting are only “part and parcel” of the traditions of parliamentary democracy.
It can however be far better and effective than it actually is if the systemic engagement by the government can improve.
Glogal mobility and prospect of recovery
Those who keep trace of global news know that despite months of intense discussions and input by institutions, not much is certain about when the world will return to normalcy.
Countries are bracing for structural adjustments and governments are putting in plans for long haul.
The cases of infections around the world are escalating with hardly any sign of slowing down and it seems the possibility of any vaccine for the disease is least likely anytime soon.
The best-case scenario could be February 2021. Only then would the world expects any semblance of international mobility or relaxation of cross-border restrictions.
The point is that, global economic scenario will be far worse if any vaccine break-through is not realised soon. Therefore, any projection of economic growth or recovery in 2021 is likely to be only symbolic.
Fiji’s projected 14 per cent growth by the government is only possible in the best-case scenario. Even so, the basis of this projection is doubtful.
Right now even the World Bank, IMF and the ADB projections about growth and recovery cannot be trusted as reliable.
This is the fundamental reason why every country needs to brace itself to survive economically on its own accord.
Even continued funding (or promise to do so) from the international institutions such as IMF, World Bank or ADB is no indicator of performance or viability.
The fact is, such external funding may not even be helpful if domestic productive capacities are not sustainable. Governments therefore should design policies to sustain and enhance domestic capacities in the short-medium term.
This requires intense economic planning (design and execution) of production and distribution mechanisms. New and innovative sector growth models may be needed. For example, new sectors within agriculture, tourism, construction and personal/business services may be explored and funded through public resources.
More so, Fiji’s economic case is far more serious than bigger economies such as Australia and New Zealand, since significant component of the Fijian economy is tourism-related coupled with small domestic markets.
Thousands of jobs have already been lost and people are struggling to cope with their day-day lives. We see people resorting to begging and even robbery due to lack of options.
This is largely a global phenomenon, but governments are in upswing spending mood to address local crisis.
Thus, Fiji’s National Budget is understandably very expansionary with net deficit to GDP ratio of 20.1 per cent and expenditure more than twice (220 per cent) that of total revenues. Probably, the highest in the world in this regard.
The problem, however is that growth in 2021 may not be possible while economic challenges will definitely continue in the short run (in 2020) because of restrictive mobility across and within borders leading to economic recession and into depression similar to the 1930s.
The magnitude of this contraction would be enormous and require continued government input.
Budget deficit to continue in 2021
In the current pandemic environment, the Fijian economy as all other small developing countries, need to have both economic robustness and fiscal space for policy effectiveness.
Thus, Opposition parties forwarding arguments regarding continued fiscal stress in 2021, which they argue would be terribly difficult to sustain.
Even a moderate 5 per cent deficit (to GDP) in 2021 would push the debt level close to 85 per cent. The current Budget expenditures are clearly indicative of this, hence a cause for concern.
Moreover, since our national debt level is already on the higher side (prior to Covid-19), the budget should have accompanied a policy document that gave clear policy direction to the government bureaucracy, indicating the necessity for accountability and effectiveness of the expenditures.
On the contrary, the Budget expenditure planning and monitoring mechanisms are not clear.
On a positive note, however, Fiji has not faced much issues from international lenders since the 1970s. Historically, Fiji did not have any serious issues regarding access to international funds like IMF and World Bank. Thus, IMF does not identified Fiji as Heavily Indebted Poor Country (HIPC) or a high-risk debtor.
On the downside however, IMF has cautioned Fiji Government recently on the lack of austerity measures on public expenditures and the need to consolidate fiscal balances. In February 2020 (on the basis of 2019 findings), the IMF stated the Following:
“…Policies should aim to sustain growth and make it more inclusive as fiscal policy support is withdrawn and external imbalances narrow. Reducing fiscal imbalances is essential to rebuild buffers to respond to natural disasters and to maintain public debt sustainable.
“Fiscal consolidation should focus on reining in current spending given limited scope for further revenue mobilisation and the need for capital spending to improve resilience to climate change.
“Improvements in the business environment and in governance are essential to raise potential growth and needed private investment, and to enhance productivity and competitiveness…..”
Despite IMF’s position that in Covid-19 environment governments need to be expansionary, it also cautioned governments to target the expenditures well to energise productive sectors. IMF approach to funding development has indeed changed significantly.
The rules have become more accommodating so that countries can apply for funds, access and use the funds for development during the current crisis.
This applies to virtually all developing countries since the global restrictions on international mobility are compelling constraints for development and a huge one for small vulnerable states.
Fiji falls in this special category where IMF through its Pacific office provides it favourable support.
Therefore, IMFs favourable statement on Fiji should not be taken for granted. It is ultimately the duty of the Government to ensure its debt sustainability irrespective of the current problems.
Fiji’s economic doldrums are indeed perilous that need specific treatment. The question is whether the government has used the National Budget 2020-21 to undertake appropriate policies.
The Opposition has put the Government on notice for allocating funds haphazardly and without concerted commitment to manage the economy in the current circumstances.
This needs to be addressed with sincerity and with close reference to what the IMF prescribes about accountability, audit requirements and austerity measures.
Fiji will need extended generosity from IMF for continued funding in 2021-22 period hence it needs to comply closely to the rules. In its recent statement, the IMF has indicated this very clearly. The statement reads as follows:
“… governments around the world are playing a bigger role in the economy to combat the pandemic and provide economic lifelines to people and firms.
“This expanded role is crucial but it also increases opportunities for corruption.
“To help ensure the money and measures are helping the people who need it most, governments need timely and transparent reporting, ex-post audits and accountability procedures, and close cooperation with civil society and the private sector.”
Fiji’s expenditures in the name of fiscal stimulus have actually gone overboard and without clear objectives and direction.
The Opposition MPs have called the National Budget “debt-escalating”, “doomsday”, “irresponsible” and so on that has irked the Prime Minister and the Minister of Economy quite a bit.
The Minister of Economy, however, has stated that international institutions have provided Fiji their support for the 2020-21 National Budget but together with the budgetary support, IMF has also provided conditions to the government.
The statement said the following: “a key priority should be to rebuild fiscal buffers in a growth-friendly way to create space to respond to future natural disasters and to ensure public debt sustainability”.
It further asked the government to consolidate fiscal expenditures with focus on reining the spending since there was limited scope for further revenue mobilisation. It said there was need for capital spending to improve resilience to climate change.
Is Fiji’s current debt level sustainable?
According to IMF data in Figure 1, the average debt-GDP ratio for 2020 is likely to but would be at around 60 per cent of GDP.
The problems is that Fiji’s debt ratio has already reached 83 per cent, which renders our public debt unsustainable. This means any external borrowing in future would be extremely restrictive.
The test for debt sustainability can be confusing. Therefore, let us not get mired in its definition. To be forthright, we need to make some comparisons using global data.
A number of indicators can be analysed, but foremost, the debt to GDP ratio as a measure of sustainability is a good starting point. This indicator tells us first hand whether the national debt remains manageable or not. That is what Figure 1 signals – Fiji’s debt level is already in red zone (beyond 60 per cent mark).
Now if we further analyse this issue of sustainability with more comparisons, Fiji features extremely badly. The average debt-GDP ratio say for low-income countries on average is far lower at around 45 per cent of GDP (See Figure 2). So it is concluded that Fiji would not have much fiscal space for policy manipulation come 2021.
As shown earlier, if the National Budget deficit happened to be at 5 per cent because of projected policies in 2021, the debt-GDP ratio would be closer or higher than 85 per cent, which is not tenable by this measure. Our debt level would likely be twice that of low-income countries globally on average – a position we would likely occupy after 21.2 per cent contraction.
Another way of analysing sustainability is by tracking the growth trends of the key productive sectors. Key-sectors productivity growth rates may provide significant clue for prospective future growth of the economy.
Figure 3 shows that the key sectors of the economy have been growing at minimal rates of around 3 per cent during the past five years.
This is growth rate is less than half that of many medium sized African economies that have been growing at more than 6 per cent on average of the same period.
Only Manufacturing and Construction sectors are showing significant growth, which have now slowed down significantly.
The declined started in 2019 and the aggregate growth was 1.3 per cent contraction. This is a strong precursor for the economy not to expand by 14 per cent and 6.5 per cent respectively in 2021 and 2022.
Another key indicator of lack of growth is Fiji’s investment trends. The data shows that investments in Fiji for the past five years have been tragically low.
The data in the Budget Supplement states that from 2015 to 2018, investment averaged around 19.0 percent of GDP, of which private sector investment averaged around 12.0 per cent of GDP while public sector investment hovered around 6.0 per cent in the same period.
This is grossly low in comparison with IMF data for middle-income countries.
The data for emerging markets on global average is 19 per cent for the private sector and around 9 per cent for the public sector. On average Fiji’s investment was 10 per cent lower for 2018-19.
With the current level of Fiji’s investments (19 per cent), the economic can grow at a maximum rate of 3 per cent if the Harrod-Domar rule of growth calculation is applied.
However, if global trends and IMF projections are followed, Fiji would hardly be able to grow at 3 per cent.According to the IMF, the emerging markets would grow on average at 5.9 per cent after an average contraction of 3 per cent in 2020.
For Fiji, with economic contraction of 21.7 per cent in 2020, aggregate growth is least likely to be 5.9 per cent in 2021 if the fundamentals such as infrastructure investments, exports facilitation, tourist arrival, road conditions and overall investments do not improve quickly.
This requires serious commitment of the government towards infrastructure investments. Government expenditure for roads under R category needs to be committed through concerted planning and implementation, which is tragically missing from the government’s scheme of things.
In conclusion, the evidence overwhelming for the Fijian economy to slip into deeper crisis and for Fiji to qualify for IMF assistance would be extremely difficult and only under strict austerity measures.
Therefore, the deficit of 20.2 per cent of GDP is unsustainable and need to be reconsidered. This is what the opposition argued as not acceptable.
n Dr Sunil Kumar is a senior lecturer School of Economics, USP. The views expressed are his own and does not reflect the views of his employer or this newspaper.