Weight of the dollar debate

The impact of the depreciating Australian and NZ dollars on the number of visitors from those countries to Fiji has attracted much attention in re cent months.

A relationship must, of course, exist. But the strength of this inverse relationship is not well understood. Given the cur rent structure of costs and prices this relationship may not be as strong as some commen tators think.

In 1985 the Fiji dollar, on average, weakened against the Japanese yen by 6 per cent compared with 1984. But visi tor arrivals from Japan dropped by 15 per cent in the same period.

Similarly, arrivals from the UK dropped by 10 per cent despite the weakening of the Fiji dollar against the pound by about 3 per cent.

In 1984 the Fiji dollar had appreciated against the New Zealand dollar by 9 per cent. At the same time there was an increase in visitor arrivals from New Zealand of 11 per cent.

In other words, there is a combination of factors besides exchange rate variations that impact upon a tourist’s decision on whether to visit Fiji or another country.

The actual weighting of each factor is, of course, not easy to unravel.

Other factors affecting the drop in visitor arrivals from Australia in 1985 include; • Natural disasters in the first quarter; • The state of the Australian economy; • Competition from the Aus tralian tourist industry itself and; • A general feeling that Fiji is no longer attractive as a duty free shopping destination.

It is reported that, for the first time ever, Australia is out to promote its tourism industry on an extensive scale. There has been a significant increase in tourist accommodation and facilities.

To devalue or not to devalue? The debate throughout the tourism industry continues. In this thoughtful article, the Reserve Bank of Fiji’s research officer, Ane Vaubula, rehearses the arguments and has facts that lead her to a definite conclusion.

This not only offers Austra lian and overseas visitors a wider choice but has tended to create a boom in Australia’s tourism-related businesses.

In addition, huge sums are being invested in the industry by both federal and state gov ernments to encourage Austra lians to “See Australia first.”

Towards the end of 1985 the Australian dollar depreciated against most currencies includ ing the US dollar, the yen, the pound, the Singapore dollar and the NZ dollar.

This implies that if Fiji had lost competitiveness as far as Australian tourists were con cerned, others had too.

At the same time Fiji faces competition from up-coming Pacific tourist destinations such as Tahiti and the Cook Islands.

Statistics show that there has been a downturn in the num bers of both Australian and New Zealand tourists travelling abroad.

But New Zealand arrivals in Fiji picked up in the last two months of 1985.

The exchange rate is, first of all, a price. It is the price for which a country is ready to exchange its product for those of qther countries. A country may like to have a very high exchange rate because it would mean that it has to pay only very little in terms of exports, for a given amount of import.

But this desire must be ba lanced by the need to make sure that total imports will not be too high and total internatio nal trade not too small.

In reality this is a difficult

thing to do due to factors which include the large number of foreign currencies and huge short term capital movements which blur trade balance.

What can be done is to make general judgements while tak ing into consideration as many elements as possible after attaching priorities to them.

While fixing and monitoring the movements in the exchange rate of the Fiji dollar, the Re serve Bank of Fiji also examines the exchange rate differential between Fiji and the countries whose currencies are included in the Fiji dollar basket.

The combined effects of prices and exchange rates (real exchange rates) is thus more meaningful to examine. An analysis of the real effective rate of the Fiji dollar according to the weight in the Fiji dollar basket shows a slight deprecia tion (on an annual average basis) in the Fiji dollar in 1985 compared to 1984.

Another point worth noting is that many Fiji Hotels purchase imported items including drinks, linen, etc and are also heavily indebted in foreign cur rencies.

A depreciation in the Fiji dollar will result in increased debt service burdens as well as costs for the imported items like foodstuffs in the market (rough ly about 50 per cent of our consumption basket is im ported. ) In conclusion, even if we are faced with a situation where devaluation is absolutely un avoidable, devaluation, in itself, to boost tourism is dangerous unless supported by other mea sures.

For example, Fiji will have to invest a lot of money in its tourism industry if it is to com pete with Australia. The country will also need to put appropri ate incomes, fiscal and monet ary policies in place if the objectives pursued through ex change rate policies are to be achieved.