FIJI has very little room in its national budget in which to absorb unexpected costs to government operations, otherwise known as economic shocks, such as a sudden cyclone or higher fuel prices. This has been pointed out by the International Monetary Fund (IMF) after its recent Article IV Mission to Fiji, where it is projecting moderate growth of around 2½ per cent in 2026 and average annual inflation to increase to over two per cent, given new headwinds emanating from the war in the Middle East.
And it is suggesting that Value Added Tax (VAT) rate be restored to its earlier rate (15 per cent) and for the size of Government to remain as it is as part of measures to rebuild fiscal buffers.
VAT was reduced from the earlier rate of 15 per cent to the current 12.5 per cent in the last Budget, which resulted in the reduction of $250million in tax revenue.”The budget passed last year leaves the government with very little room to handle unexpected needs for extra spending,” IMF economist Alasdair Scott, who led the Fiji assessment, said in a statement issued at the conclusion of the visit.
“While the economy now faces higher fuel prices, in the future it could also face natural disasters or new global shocks.”
Fiji’s immediate fiscal policy challenge therefore is the rebuilding of fiscal buffers, which it can do through growth-friendly reductions in deficits, while managing higher costs of living.
“This could be facilitated by a reform package of revenue mobilisation—building on excellent progress on compliance by the Fijian Revenue and Customs Service (FRCS), but also including restoring the VAT rate to its previous rate—and expenditure rationalisation,” Mr Scott said.
“To support those most vulnerable to fuel price increases, targeted social assistance is the best option. Untargeted subsidies or price caps would be very expensive for the government and would provide less help to the most vulnerable.
“The needed fiscal adjustment could be made growth-friendly by increasing public spending on development and infrastructure.
“The quality of public spending is also crucial, and further increases in the size of the government should be avoided.”
