The Pacific Meltdown

Cover Story

By Sophe Foster Mildebrand

IT was a move that brought immediate panic to businesses and the people of Fiji. In the early hours of 20 January 1998, Fiji’s minister of finance, Jim Ah Koy, and the Reserve Bank of Fiji, implemented a 20 per cent devaluation of the Fiji Dollar.

Six months down the track, the devalu ation is still giving the government pain.

The loss of buying power through devalu ation is still sorely felt by consumers and retailers alike. There are constant com plaints about the increased cost of living with trade unions vehemently opposed to any sort of wage control - which the gov ernment says is necessary to maximise the benefits of devaluation. In a confidential paper titled Guidelines for Wage Negotiations and Arbitration following the 1998 Currency Devaluation, Mr Ah Koy said the decision to devalue the Fiji curren cy was “taken against a background of a very weak domestic economy, deteriorat ing global conditions and a deterioration in the competitiveness of Fiji’s goods domes tically and abroad.

In 1997 it was confirmed that the Fiji economy was in recession after it had con tracted by one per cent. Domestically, the economy “appeared to have stalled with partial indicators suggesting there was no growth in output in 1997”.

“At the time of the devaluation, there was considerable excess capacity in the economy with substantial unemployment and under-utilised capital. The weak econ omy meant that Fiji was particularly exposed to adverse economic develop ments, both domestically and abroad. Fiji’s high cost structure meant that Fiji was par ticularly exposed to shifts in relative prices of our exports through exchange rate changes,” he said. The problem is alarm ingly'dose to the Asian currency crisis which ESCAP’s Director of the

Development, Research and Policy

Analysis Division, Mr Azizul Islam, says had two prime causes. “These were the

sharp slowdown in export growth giving rise to a rapid deterioration in the current account and liberalisation of the capital account. These were the villains of the piece, the other elements were essentially accomplices,” he said.

“Some grgue that the most important cause of the crisis was the pegged or high ly stable exchange rate. This argument has some validity provided it is recognised that what was important was the combination

of pegged exchange rate with increasingly

liberal capital account regimes. Of the 116 currency crises (defined as 25 per cent or more of depreciation in a year) between 1975 and 1996 close to half were under

flexible regimes,”

Mr Islam said. Under such tremendous pressure, Fiji was left in quite a predica ment. However, that story can be applied to just about any Pacific Island country.

Contracting economies, decline in exports, virtually no growth, rampant unemploy ment and worsening overseas debt burdens are characteristic.

Even while the outlook for world eco nomic growth continues to deteriorate fol lowing the repercussions of the Asian cur rency crisis, the Pacific has entered an eco nomic meltdown. In discussing Thailand’s problems, at a high-level seminar in June on Managing Capital Flows: National and International Dimensions, the Deputy Prime Minister of Thailand, H.E. Mr.

Supachai Panitchpakdi, warned that the economic shock of the Asian currency cri sis may spill over globally “and menacing ly, more than anything the world has ever seen in the past 40 years, and for the first time, a financial crisis in developing economies could cause a deep impact on the capital markets in the industrialised world.”

He, said “the restoration of confidence shpuld be our top priority so that the influx of international capital can resume”.

However, while struggling to entice a greater share of the capital flow, the Pacific is reeling from the effects of the Asian cur rency crisis spill-over. If Pacific companies found it hard to compete against cheap

Asia exports before, the low exchange rates in Asia made those products all the more harder to compete against. Most Pacific economies have had to increase interest rates to stabilise their currencies or devalue currencies to stay in the race. On top of that, lenders, such as the World Bank, the IMF and the ADB, are cracking down on them hard and fast to ensure that they get their money. Never considered strong economies in the first place, the Pacific is now caught up in a mess that it cannot get out of alone.

Dependence on overseas funding is get ting heavier whether it is from the World Bank, the IMF, the ADB, or various aid packages from countries like Australia, France, USA and Japan. Along with these huge loans have come stricter and stricter requirements from the various Banks that have effectively given economic control of the Pacific to overseas lenders.

Today, these banks wax lyrical over measures that absolutely have to be imple mented in order for them to get their money back. It is this helplessness in the face of Bank demands that has come under heavy criticism of late. In PNG, where the government had to introduce more taxes to finance their debt burden, anti-Bank senti ments are high, the logging industry is in danger of being shut down because of such taxes imposed on them.

In Vanuatu, a Comprehensive Reform Programme is going ahead with the setting up of a new business unit to look into all the failed investments of the government.

The unit will also look at ways to revitalise the so-called failed investments that may be put on sale in future to help clear debts.

Amongst these is a plan to convert a 71 million vatu (U 55541,000) government ship “Prince II” into the country’s first sea man’s college.

The Fiji government introduced Value Added Tax to help finance its debt burden.

However, it is having trouble collecting all the VAT revenue because of lack of skilled personnel and insufficient mechanisms for control. The Vanuatu government is plan ning to implement VAT in August amidst

outcry from the country’s chamber of com merce and industries. The chamber says the new taxation system is a threat to local businesses and that many local industries would close down under it. The lifting of the import duties would encourage more imported goods into the country and con sumer expenditure is expected to escalate.

In the Solomon Islands, importers now have to pay an additional five per cent sur charge on all goods brought into the coun try. Solomons’ finance minister Manasseh Sogavare ordered that the five per cent sur charge, over and above all other existing duties, be imposed with effect from May 29. Senior Collector in the Customs Division Edmond Heau says the surcharge is to be applied across the board.

Fiji’s problems are exacerbated by a continuing drought in the country’s west ern division where it is estimated that more than 80,000 people will need some form of relief. Fiji’s west has had no substantial rain since last September and the drought will reduce this year’s sugar crop by more than 50 per cent. Preliminary surveys con ducted for the Fiji government have found most people who need financial assistance are sugar cane farmers and their families.

Some have indicated they would also need food and water.

The Fiji government has agreed to pro vide financial assistance by way of loans from a Sugar Industry Stabilisation Fund but the prospect of a 50 per cent reduction in sugar returns will break cripple Fiji.

To counter all these crises, Asian or otherwise, in almost every Pacific country, the public service, which is the biggest employer, will be chopped to reduce gov ernment expenditure and free up funds to repay debts.

In Vanuatu and the Marshall Islands, the public service is due to be chopped by at least 10 per cent. For Fiji, that figure could be higher because of a growth spurt in the public sector in the past decade. The Cook Islands has already undergone massive changes in the size of its civil service in the wake of their economic collapse. Mr.

Adrianus Mooy, Executive Secretary of ESCAP said that as economies pass through a painful process of readjustment, the lives of millions of ordinary people are being affected adversely.

“As we can see, so many of our fellow citizens in the worst-affected countries are having to face the distress of unemploy

ment and of heightened job insecurity.”

UN Secretary-General Kofi Annan said last month that: “We must remember that beyond this is the threat of social strife, breakdown of law and order and loss of self-esteem.

Macro aggregates do not capture the trauma that individuals and families must undergo as a result of crises of this nature.”

Cushioning the blow from redundancies and business failure in the Pacific is diffi cult because of the breakdown of the tradi tional extended family networks with increasing urbanisation, and a region-wide lack of a social welfare system.

Mr Annan said “We must look at the way in which risks and rewards are bal anced in the operation of the current inter national financial system.

The question to be addressed is whether we can find ways to preserve the benefits of open financial markets while reducing the risks of crises and designing tools to deal with them that will be less costly in human terms.”

In the lead-up to the 21 st century, there is only one sure thing. The economic melt down will be break the backs of many gov ernments, and many more businesses. ■