JOB GROWTH TO JUDGE THE 2010 FIJI BUDGET

Dr Satish Chand

October 2009 Issue

Prime Minister and Minister of Finance, Commodore Frank Bainimarama, is due to present the Fiji budget next month.
Much like the previous two budgets, this one will once again be presented to the media rather than the Parliament.
There will undoubtedly be little room for debate which is disconcerting considering the document's importance in spelling out government programmes and their accompanying expenditures for the coming year. It also provides the means to funding the planned outlays.
Lobbying for handouts from the budget has already begun. This is not surprising. What is surprising, however, is that the budget may leave ordinary consumers short-changed. It is their interest that I take up here. I argue for jobs and against tariffs on basic consumables.

Protectionist pressures looming
The Fiji Employers Federation (FEF) and the Fiji Chamber of Commerce (FCC) have demanded a 'temporary protection' of 30 percent for basic manufactured products such as soap, biscuits, coconut oil, and bio-diesel. This, the proponents argue, is to be provided to 2012, followed by 5 percentage point reductions every two years to 15 percent by 2018.
The lobbyists claim that jobs will be protected from the temporary protection. History does not provide support to these claims, however. The Multi-Fibre Agreement (MFA) was instituted by the US in 1957. It was to be phased out in five years, but lasted 40! 
The proposed protection will save a few jobs, but at the cost of raising the price of common consumables. Take the case of soap as an example. An average family spends approximately $200 on soap (and soap powder) a year, thus a 30 percent rise will add $60 to the annual budget of every household. And since soap is a necessity, there aren't many options to either substitute it for another good or to cease purchasing it all together. Soap manufacturers are likely to do well with a tariff hike of this nature.
There are some 200,000 households in Fiji. If each is forced to spare $60 to the manufacturers as a result of the proposed tariff hike, this will amount to a transfer of $1,200,000 to the manufactures. Exactly how many jobs will be saved from this handout? How sustainable are these jobs? What guarantee that the protection will be phased out by 2018, if at all? And why should the population at large pay to protect a few jobs and an even fewer number of manufacturers?
Ordinary consumers pay the price of protection. When a 30 percent tariff is slapped on imports, prices rise by the full 30 percent! This is true for domestically produced goods as their prices are matched to those for their import-equivalents. For example, a 30 percent tariff on biscuits will mean a similar rise in the price of imported and domestically-produced biscuits. It is as simple (and costly) as that.
The economic case for protection in Fiji is flimsy at best. Large countries use protection in highly selective circumstances such as when they can affect world market prices for their product, or to support large local industries (such as major aircraft manufacturers) in establishing a toehold in the global marketplace.
Protectionism in Fiji is largely driven by domestic lobbies. A win for them is a loss for ordinary consumers in terms of higher product prices.
Even if a few jobs are saved, the majority of the population loses out by losing money. If tariffs are raised in this budget, it will be evidence that the lobbies have won. What is more worrisome still is that the lobbyists have the RBF as an unlikely ally.

Import substitution advice from the RBF—wrong once more!
The Reserve Bank of Fiji is arguing for reduced imports, thus supporting the protectionists? call. The RBF sees reduced imports as a means to addressing the burgeoning trade deficit. The Bank is demanding that exports be raised, not realising that protecting imports will weigh exports down too.
Import tariffs raise costs of production and thus act as a tax on exports. As an example, a 30 percent tariff on all inputs combined with a 30 percent wage rise will more than undo the impact of the recent 20 percent devaluation of the Fiji dollar. The bank has a role, but not in furthering the cause of the protectionist lobby.
The Reserve Bank of Fiji Act, 1983 stipulates that the responsibilities of the RBF include: (i) regulating issue of currency and supply of foreign exchange; (ii) promoting monetary stability; (iii) ensuring a sound financial structure; and, (iv) 'foster[ing] credit and exchange conditions conducive to the orderly and balanced economic development of the country'.
The bank is left wanting on each of the above-enumerated. Foreign exchange controls remain in place, inflation has spiked, credit conditions—while easing—remain subdued, and current account imbalances persist.

Revive savings, and in Fiji dollars
The overall health of the financial sector lingers in doubt. The RBF presided over the collapse of the National Bank of Fiji a decade ago. Taxpayers then had to fork out some $220 million in the rescue of NBF, and no one to-date has been brought to account for this debacle. There is another disaster looming. If media reports are any guide, the Fiji National Provident Fund is having cash-flow problems. Member withdrawals have been restrained. If this is due to a temporary dip in cash flow, then fine. If it is a problem originating in the balance sheet of the Fund, however, then the problem will fester. As the largest investor and the sole custodian for mandated savings of thousands of workers, a sick fund will leave many retirees in the lurch. And a failed fund will be a disaster for the domestic financial sector as a whole.
The fund has been a captured source for deficit finance for the government for a considerable while. Will the government lean on the fund once again? Past policies of the RBF have hurt the fund, repeatedly.
Restrictions on foreign investments, for example, have forced the fund to invest onshore. Directions given by the RBF to repatriate funds onshore have narrowed down its portfolio to Fiji dollar denominated assets. And the 20 percent devaluation of last April has taxed cash deposits.
Devaluations of the dollar hurt savers and savings. The higher inflation due to the devaluation has meant less goods and services for any given amount of Fiji dollar denominated savings. Debtors have gained as they return dollars worth less in purchasing power compared to those borrowed before the devaluation. And Government, as the major borrower from the Fund, has benefited from this exchange. This is a major disincentive for savings, particularly in Fiji dollars.

The policy priorities for the budget
Now is a difficult time for the economy. Thus, considerable care has to be taken in ensuring that the books are balanced whilst not short-changing the disadvantaged in the process. "Do no harm to the vulnerable to the disadvantaged" would be a good starting point for the 2010 Budget.
And in my view, the budget should focus on:
(i) maintaining macroeconomic stability;
(ii) investing in public infrastructure; and,
(iii) in inducing job growth.
Ultimately, the number of jobs created will be the barometer of success. Progress on (i) and (ii) will create the conditions for (iii). Let the job-count for 2010 judge this budget.