Pacific Islands: Fiji New Caledonia Samoa Solomon Islands Tonga Vanuatu

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1 COUNTRY REPORT Pacific Islands: Fiji New Caledonia Samoa Solomon Islands Tonga Vanuatu 2nd quarter 1998 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.171) Tel: (1.212) Tel: (852) Fax: (44.171) Fax: (1.212) /2 Fax: (852) london@eiu.com newyork@eiu.com hongkong@eiu.com Website: Electronic delivery EIU Electronic Publishing New York: Lou Celi or Lisa Hennessey Tel: (1.212) Fax: (1.212) London: Jeremy Eagle Tel: (44.171) Fax: (44.171) This publication is available on the following electronic and other media: Online databases Microfilm FT Profile (UK) NewsEdge Corporation (US) World Microfilms Publications (UK) Tel: (44.171) Tel: (1.781) Tel: (44.171) DIALOG (US) Tel: (1.415) CD-ROM LEXIS-NEXIS (US) The Dialog Corporation (US) Tel: (1.800) SilverPlatter (US) M.A.I.D/Profound (UK) Tel: (44.171) Copyright 1998 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author s and the publisher s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

3 1 Contents 3 Summary The region 5 Outlook for Review Fiji 9 Political structure 10 Economic structure 11 Outlook for Review 12 The political scene 13 The economy New Caledonia 18 Political structure 19 Economic structure 20 Outlook for Review Samoa 24 Political structure 25 Economic structure 26 Outlook for Review Solomon Islands 29 Political structure 30 Economic structure 31 Outlook for Review Tonga 35 Political structure 36 Economic structure 37 Outlook for Review 37 The political scene

4 2 Vanuatu 40 Political structure 41 Economic structure 42 Outlook for Review 43 The political scene Other island states 46 Marshall Islands 47 Federated States of Micronesia 48 Kiribati 49 Tuvalu 49 Nauru 51 Quarterly indicators and trade data List of tables 14 Fiji: tourism statistics 14 Fiji: consumer prices 51 Fiji: quarterly indicators of economic activity 52 Samoa: quarterly indicators of economic activity 52 Solomon Islands: quarterly indicators of economic activity 53 Tonga: quarterly indicators of economic activity 53 Vanuatu: quarterly indicators of economic activity 54 Pacific Islands: direction of trade 54 Pacific Islands: main commodities exported List of figures 11 Fiji: gross domestic product 11 Fiji: Fiji dollar real exchange rate 13 Fiji: visitor arrivals 26 Samoa: gross domestic product 26 Samoa: Tala real exchange rate 31 Solomon Islands: gross domestic product 31 Solomon Islands: Solomon Islands dollar real exchange rate 37 Tonga: gross domestic product 37 Tonga: Tonga dollar real exchange rate 42 Vanuatu: gross domestic product 42 Vanuatu: vatu real exchange rate

5 3 June 1st 1998 Summary 2nd quarter 1998 The region Outlook for : This year will be a difficult one for the regional economies, although there promises to be greater political stability than in Review: According to the ADB, economic performance across the region was mixed in Another report has indicated a poor outlook for the economies of the former US trust territories, and Micronesia fears a reduction in air services. The Pacific Island economies are keen to retain the benefits provided by the Lomé Convention. The South Pacific Forum is considering creating an aviation bloc. Fiji Outlook for : Economic problems are mounting, but the government has little room for the manipulation of economic policy to prevent a further contraction in The government will also face political challenges in the run-up to the 1999 election. Review: The political landscape is evolving as new parties are formed. The economy is faring badly: inflationary pressures have been building and sugar production is down, as are tourist numbers. The Fiji trade unions have called a strike. There have been developments in the aviation industry. New Caledonia Outlook for : There is considerable optimism following the signing of the Nouméa Accords, and links with France may shelter the economy from the worst effects of the regional economic slowdown. Review: Agreement has been reached on the political status of the island, which will be voted on in a referendum this year. The accords have introduced the concept of shared sovereignty, and provide for the extensive devolution of powers. The northern smelter project has progressed. The trade deficit has widened, and tourist numbers have fallen. Samoa Outlook for : There is speculation over the future of the prime minister. Economic growth may be boosted by the reforming budget the government intends to introduce. Review: The prime minister is involved in a commission of inquiry, and has taken out a defamation case against the local newspaper. The government has shrugged off the continuing protest movement. A successful economic performance in 1997 has been followed by further growth in the first part of Solomon Islands Outlook for : The government will have to work hard to retain public support over the next few months, as the external economic environment continues to deteriorate. Review: The prime minister has sought to increase political stability. He has also detailed the substantial challenges facing the economy, which he says have been caused by previous governments. The government has sought to

6 4 rectify matters through fiscal policy and external aid. There have also been continued reforms of the logging industry. Tonga Outlook for : The economy may prove resilient to the regional economic slowdown, although the contraction expected in Japan s economy during 1998 could have adverse consequences for Tonga. Review: The king has approved senior appointments to the government, although a new foreign affairs minister still has to be confirmed. There have been some changes in economic policy. The trade deficit rose in 1997 but Tongatrade is seeking to attract European business, and tourism looks healthy. Vanuatu Outlook for : The new government should bring stability and promises major reforms. Economic growth will not pick up substantially during the forecast period. Review: The Vanua aku Pati (VP) emerged victorious from the election, and Donald Kalpokas became the new prime minister. Mr Kalpokas has promised to implement economic and political reforms. An agreement with the ADB has been signed, leading to a US$22m loan. Other Pacific Islands Editor: All queries: The Marshall Islands are to receive a further instalment of an ADB loan. The nuclear trust fund may provide a nest-egg when the Compact of Free Association with the US ends. Pro-gambling legislation has been overturned, and the drought continues. A US$32m budget in the Federated States of Micronesia has been proposed. Advice on securing financial assistance from the US has come from internal and external sources. The US is providing drought assistance. A constitutional convention has proposed changes to the constitution of Kiribati. Elections have returned the outgoing prime minister in Tuvalu. Fishing activity has picked up in Nauru. The country has received a visit from the International Olympic Committee. Paul Cavey Tel: (44.171) Fax: (44.171)

7 The region 5 The region Outlook for This year will be a difficult one for the regional economies although there promises to be greater political stability The economies of the Pacific region will be very hard hit by the Asian economic downturn. The economic contraction expected in Japan will reduce the size of a key export market, and the economic difficulties being experienced across the region will have a negative effect on tourist numbers. The dramatic fall in oil prices will bring some benefits for the islands, which are generally heavily dependent on imported mineral fuels. However, these benefits will be more than offset by rising domestic prices caused by falls in the values of local currencies. The outlook for commodity prices, which are important for the export sector of the region, will also work against the islands: the EIU s general index of food, feedstuffs and beverage prices is expected to fall by 3% in 1998, and the index of hard-commodity prices will fall by 13.8%. These economic clouds cast a shadow over a marked improvement in the political climate across the region. The Nouméa Accords on the future of New Caledonia seem to offer a real prospect of resolving the political impasse which has existed for the last couple of years, to the surprise of many observers. There are also hopes that the new government in Vanuatu will be more successful in implementing a programme of economic reform. A formal end to the secessionist violence in Bougainville has relieved the financially beleaguered government of the Solomon Islands of a major pressure. Review The ADB reports a mixed economic performance in 1997 and the Bank of Hawaii expects this to continue In its Asian Development Outlook, published in March, the Asian Development Bank (ADB) reported a mixed economic performance by the Pacific Islands economies during According to the bank, GDP in Fiji and the Solomon Islands contracted by 1% in Smaller states also suffered: economic growth in both the Marshall Islands and the Federated States of Micronesia (FSM) was a negative 5%. However, Samoa, Vanuatu and Tonga all achieved growth rates of 3%. There was also a modest turnaround in the economy of the Cook Islands, where GDP growth was 0.5%, following contractions of 5.7% in 1995 and 5.3% in In another regional assessment, the Bank of Hawaii described the economies of the Western Pacific as a mix from stagnant to booming, and estimated that the US-dollar denominated economies American Samoa, the FSM, Guam, the Marshall Islands, the Northern Mariana Islands and Palau could achieve an overall growth rate of between 2% and 5% in Growth in Guam was being improved by the tourism industry; the economy of the Commonwealth of the Northern Mariana Islands has benefited from its special status allowing the

8 6 The region employment of low-cost Asian labour for garment manufacture; and Palau has been booming, with nominal GDP growth averaging 24% annually in The Bank of Hawaii reported that growth in the French territories of New Caledonia and French Polynesia should also be between 2% and 5% in 1998, as will economic growth in Samoa. Growth in French Polynesia will be driven by French-funded infrastructure spending, started in order to compensate the islands for the loss of revenue caused by the French nuclear testing programme in 1995 and 1996, and tourism and privatisation will boost growth in Samoa. The bank does not expect a recovery in Fiji until 1999 when the new constitution is in place. The former US trust territories may face a harder time and Micronesia fears a reduction in air services Aid flows may not have fallen after all The Pacific Islands make their voices heard at the ADB In April the Micronesian Seminar published a paper examining the outlook for the Marshall Islands and FSM. The Jesuit-supported research and training organisation forecast rising unemployment, staff cutbacks in federal and state government, and mounting emigration to the US. The report saw no sustainable development alternatives to aid, and said that existing and planned development projects would not offset the loss of funding derived from the Compacts of Free Association with the US, which expire in The Council of Micronesian Chief Executives is planning to send a delegation to the headquarters of Continental Airlines in Texas to try to avert proposed cuts to services to Micronesia. The council comprises the leaders of Kiribati, Nauru, the Marshall Islands, the Federated States of Micronesia, Palau, Guam and the Commonwealth of the Northern Mariana Islands. The airline had announced that it intended to reduce its services to the Marshall Islands from three per week to two, although the government, concerned about the effects on tourism and private-sector growth, succeeded in having the cutbacks deferred until at least September. Senior policy advisers to member governments have been directed to develop specific proposals and incentives for Continental: the government of Guam, where Continental s Micronesian operations are based, promised to help to reduce the airline s operating costs. A recent paper has challenged the conventional view that economic assistance to the South Pacific has dwindled following the end of the cold war, and the consequent reduction in the strategic importance of the region. The paper, by Australian National University s South Pacific specialist Greg Fry, suggests that aid flows to the region, with the exception of those from the UK, were maintained or increased following the cold war. Support from the US rose as did Japanese aid, which doubled between 1987 and Economic assistance from the EU has also increased. The Pacific Island states have also derived financial benefits from the competition between Beijing and Taipei for diplomatic recognition. Mr Fry, delivering his paper at a conference on security in Hawaii in March, noted that total bilateral official development assistance (ODA) to independent countries in the South Pacific was US$502.6m in 1995, compared with US$424.6m in In March the president of Nauru, Kinza Clodumar, asked the ADB, following its adoption of specific policies on fisheries, to give increased recognition to the importance of aquaculture and the marine economy. Mr Clodumar, speaking

9 The region 7 at the 31st annual meeting of the board of governors of the ADB in Geneva on behalf of the 12 Pacific developing member countries (PDMCs) of the bank, said that the small island economies had been hard hit by the financial crises in Asia, which have hurt both tourism and export markets. Mr Clodumar pointed out that this downturn threatened the economic growth potential of the island economies, thereby endangering the success of reform measures being adopted with the encouragement of the ADB. (The bank is co-ordinating assistance to reform programmes in Vanuatu, the Marshall Islands, the Federated States of Micronesia and Cook Islands.) Mr Clodumar asked for technical assistance that focuses on improving local government and the delivery of services, in order to promote economic growth at the local level. Pacific Island states are keen to preserve Lomé Convention benefits although this may prove difficult The EU will finance the upgrading of airports and Forum governments approve an aviation action plan The EU is reviewing its relationship with the African, Caribbean and the Pacific (ACP) states under the Lomé Convention (the Pacific members are Fiji, Kiribati, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu). The existing agreement, which expires in 2000, gives special aid and trade benefits to ACP members. The Pacific Islands are keen not to lose too many of these benefits, with local governments pointing to the unique circumstances of the Pacific Islands as justification for continued privileges. In March, in a meeting with EU representatives, the secretary-general of the South Pacific Forum, Noel Levi, said that the advantages that the Pacific Islands derived from the Lomé agreement underpinned many of the ACP s economies. The Forum tried to persuade the European delegation that a vulnerability index for island states should be used when assessments of the ability of the small island states to respond to economic changes brought on by globalisation were being made. The Forum is also trying to use this opportunity to extend Pacific ACP status to the Cook Islands, FSM, Nauru, Niue, Palau and the Marshall Islands, as well as the existing eight member states. However, although the Forum may be able to achieve this, the Pacific countries may face greater competition: the EU has offered to extend Lomé preferences to all least developed countries, which would force the Pacific to compete for benefits with much larger economies in other regions. The EU is funding a three-year, US$5.1m project to train aviation officials in the region, and supply airport equipment in order to modernise small island airports. The initiative applies to the eight Pacific ACP countries In late April and early May 120 delegates from Forum countries, adjacent territories, international organisations, airlines and air-service providers met in Suva, Fiji, to discuss the local aviation sector. At the end of the meeting, local ministers responsible for aviation approved an aviation action plan, providing for joint management of regional airspace and the liberalisation of regional air services. Carriers are to be allowed greater flexibility on ownership, control, leasing, code sharing, pricing, charter access, fifth freedom rights and freight services. Ministers also agreed to harmonise aviation regulations, work towards common standards on aviation security and to establish a collaborative regional programme to oversee aviation safety matters. Furthermore, the plan called on

10 8 The region the Forum secretariat to undertake a study of current air services and agreements, in collaboration with the International Civil Aviation Organisation, to prepare a joint strategy which could be used in aviation negotiations with other countries and regions. Year-round cruise business may result from a new venture Norwegian Cruise Line, the world s fourth-largest cruise operator, has joined with an Australian company, Norwegian Capricorn Line, to operate cruises to the Pacific Islands, Australia and New Zealand. The service will start from the end of the year, using an 800-passenger cruiser. This will be the first large cruiser dedicated to the region. Initial ports of call will be Vila, Santo and Aneitium in Vanuatu; Nouméa, Lifou and the Isle of Pines in New Caledonia; Honiara in the Solomon Islands; Milne Bay and Samarai in Papua New Guinea; and Lautoka and Yasawa Islands in Fiji. Vila and Nouméa are slotted for 22 calls each during the Norwegian Star s first year, Santo and Lifou 11 calls each, the Isle of Pines 10, Lautoka 6 and Honiara and Aneitium 5 each.

11 Fiji 9 Fiji Political structure Official name Form of state The executive Head of state National legislature Regional government Legal system Republic of Fiji Parliamentary The president, chosen by the Great Council of Chiefs, appoints the prime minister who selects the cabinet The president, Ratu Sir Kamisese Mara Bicameral parliament comprising the appointed upper house or Senate (34 members) and an elected House of Representatives (70 members); the 1990 constitution ensures an indigenous Fijian majority in parliament. There is universal suffrage for all citizens over 21. Recent constitutional changes will alter the composition of the legislature following elections in 1999, removing the guarantee of a Fijian majority Local administration is on a divisional basis with separate councils for urban areas. There is a separate local government system for the indigenous Fijian population Magistrates courts, High Court and Court of Appeal with the Supreme Court at the apex National elections February 1994; next election due by February 1999 National government Main political parties Major-General Sitiveni Rabuka became prime minister in June 1992 and formed a coalition government comprising the Soqosoqo ni Vakavulewa ni Taukei and the General Voters Party; re-elected in February 1994 Fijian Political Party (Soqosoqo ni Vakavulewa ni Taukei, SVT); Christian Fellowship Party (Veitokani ni Lewenivanua Vakarisito Party, VLVP); National Federation Party (NFP); Fiji Labour Party (FLP); General Voters Party (GVP); Fijian Association Party (FAP) Prime minister & minister with special responsibility for constitutional reform & multi-ethnic affairs & regional development Deputy prime minister & minister of education & technology Major-General Sitiveni Rabuka Taufa Vakatale Key ministers Agriculture, fisheries & forests Militoni Teweniqila Attorney-general Etuate Tavai Commerce, industry & public enterprises Isimeli Bose Communications, work & energy Ratu Inoke Kubuabola Fijian affairs Ratu Finau Mara Finance Jim Ah Koy Foreign affairs & external trade Berenado Vunibobo Health Leo Smith Immigration, women & culture Seruwaia Hong Tiy Labour & industrial relations Vincent Lobendahn Lands & mineral resources Ratu Timoci Vesikula Local government & environment Vilisoni Cagimaivei National planning Filipe Bole Transport & tourism David Pickering Youth, employment opportunities & sport Jonetani Kaukimoce

12 10 Fiji Economic structure Latest available figures Economic indicators GDP at current factor cost a (F$ m) 2,171 2,269 2,351 2,524 2,568 b Real GDP growth a (%) c Consumer price inflation (av; %) Population (m) b 0.83 b Exports fob d (US$ m) n/a Imports fob d (US$ m) n/a Current account d (US$ m) n/a Reserves excl gold (US$ m) Total external debt (US$ m) n/a Debt-service ratio, paid (%) n/a Exchange rate (av; F$:US$) May 29th 1998 F$2.008:US$1 Origins of GDP 1996 % of total Components of gross domestic product 1994 % of total Agriculture, forestry & fishing 19.4 Private consumption 65.3 Mining 3.3 Government consumption 16.6 Manufacturing 14.8 Gross investment 10.7 Construction 4.5 Change in stocks/statistical discrepancy 6.1 Electricity & water 4.1 Exports of goods & services 58.9 Transport & communications 12.6 Imports of goods & services 57.5 Wholesale & retail trade, restaurants & hotels 16.5 GDP at market prices Other services 32.3 Total incl imputed service charge Principal exports fob 1996 a US$ m Principal imports cif 1996 b US$ m Sugar Manufactured goods Garments Machinery Gold 58.1 Food Fish 37.6 Mineral fuels Timber 32.5 Total incl others Total domestic exports incl others Main destinations of exports 1996 a % of total Main origins of imports 1996 a % of total Australia 27.0 Australia 44.3 New Zealand 12.1 New Zealand 14.7 UK 14.0 US 9.3 Pacific Islands 9.3 Japan 5.2 US 8.2 Singapore 5.0 a National figures. b EIU estimate. c Official estimate. d IMF balance-of-payments figures.

13 Fiji 11 Outlook for Economic problems mount but there is little room for manipulation of economic policy and the government will face political challenges After a poor 1997, this year will bring little improvement in Fiji s economy. The Asian financial crises, and subsequent sharp downturn in growth rates across the region, are having serious adverse consequences for Fiji; these problems have been exacerbated by poor weather conditions, including the worst drought on record, and cyclone damage in late The government cannot rely on external factors moving to its advantage. The deputy governor of the Reserve Bank of Fiji (the central bank), Sada Reddy, therefore foresees a further contraction in GDP this year, following a 1.6% decline in There is also little room for the government to manipulate domestic economic policy to limit the extent of the contraction. Monetary policy will have to focus on quelling the inflationary effects of the 20% devaluation of the currency, rather than being used to boost demand. Fiscal policy is possibly even more constrained: the government s budget deficit reached a worrying 9.2% last year. The government will therefore be unable to do much to improve the rate of investment in Fiji. The need for investment has been clearly illustrated by the drought, which has highlighted the urgent need to expand water storage and conservation, and improve reticulation. However, the parlous state of the government s finances will simply not allow such investment to be undertaken at the moment, especially when the government is under pressure to provide financial aid for the crisis-stricken sugar industry. The political environment will further constrain the government. The decision to employ a select committee to look at the land leases issue (many leases are coming up for expiry, which has been one of the prime reasons behind the low rate of investment in Fiji), although possibly the best solution in the circumstances, will yield only slow results. There has already been industrial action in response to the government s restrictive wages policy, and although the trade unionists bowed to requests from the leader of the Fijian Labour Party, Mahendra Chaudhary, to postpone further action, more strikes are possible. Even if the economic circumstances allowed it, the government is unlikely to take decisive action for fear of antagonising particular groups within the Fiji: gross domestic product % change, year on year Fiji: Fiji dollar real exchange rate (c) 1980= Fiji (a) Asia excl Japan 160 F$:DM F$:US$ (b) (a) National sources. (b) Official estimate. (c) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics; World Economic Outlook. 60 F$:

14 12 Fiji electorate in the run-up to the election next year. Such unwillingness on the part of government to act too decisively will not improve the poor economic outlook. Review The political scene A new Fijian party and one for the province of Ba The changing political landscape includes new alliances With the first parliamentary election under Fiji s new constitution (enacted in July 1997) less than a year away, there has been a marked increase in political activity in Fiji. In March Methodist Church ministers formed a new party, the Veitokani ni Lewenivanua Vakarisito Party (VLVP, or Christian Fellowship Party), saying that the prime minister, Major-General Sitiveni Rabuka, had failed adequately to protect indigenous Fijian and Christian interests (the new constitution provides for an improved racial balance in Fiji s political system). The VLVP appears to represent the wing of extreme Fijian nationalism that led to the 1987 military coups: at that time the Methodist Church was a hotbed of nationalist intrigue, and many ministers openly advocated Fijian racial supremacy. Although the present president of the Methodist Church, the Reverend Dr Ilaitia Tuwere, favours a break between politics and religion, saying that politically minded church ministers should resign from church positions and become full-time politicians, the controversial Fijian nationalist, and former president of the Methodist Church, Reverend Manasa Lasaro, is a leading VLVP figure. The VLVP claims that it has support inside the military, although it says that it will respect the constitution. Another party was officially launched on April 4th. The main objective of the Party of National Unity (PNU), surprisingly given the organisation s name, is to increase the representation of the Ba province in the national parliament. The PNU was formed by chiefs of the province and launched by the High Chief of Ba, Ratu Josefa Iloilo. Although provincially based, the PNU may nevertheless be able to benefit from a broader constituency: chiefs from Ra province are sympathetic to the formation of the party and are understood to be interested in joining, and the neighbouring province of Nadroga has also indicated its support. The PNU has in fact tried to increase its influence further. Just a day after its official launch, the party s secretary-general, Apisai Tora, held a meeting with the Fijian Labour Party leader, Mahendra Chaudhary. It seems that the two parties are likely to join forces to fight the next election: after the meeting, the two leaders said that there was no impediment to the two parties forming a coalition. The coalition may be broader still, as the Fijian Association Party, led by the former finance minister Josevata Kamikamica, is also expected to join. Further changes in the party structure occurred on April 29th, when the Fijian Nationalist Party (FNL) and the Vanua Tako Lavo party announced a merger agreement, to be formalised in June. The new entity will be called the Nationalist Tako Lavo Party.

15 Fiji 13 Fiji courts China On April 7th the government announced that it would open an embassy in Beijing. China and Fiji have had diplomatic relations since The decision to open a full mission in China may have been motivated by a desire to win support for Fiji s aspirations for membership of the Asia-Pacific Economic Co-operation (APEC) forum. It is also to reaffirm the Fijian government s commitment to the One China policy in the light of its decision in 1997 to open a trade and tourism mission in Taiwan. (Beijing claims that Taiwan is a part of China, and therefore insists that countries should only have diplomatic relations with the mainland.) The government s decision followed a landmark visit to Suva in February by China s defence minister, Chi Haotian. The economy The economy contracted by at least 1% in 1997 The poor performance has continued in the first part of 1998 According to the Asian Development Bank (ADB), in its latest survey of the region, published in March, Fiji s economy contracted by 1% in 1997, compared with growth of 3.1% in 1996 (the Reserve Bank of Fiji, the central bank, believes that the economy contracted by 1.6% in 1997). Contributing to this contraction was lower sugar production, weak activity in the building and construction industries, a disappointing performance in the garments industry and soft world gold prices. The bank observed that investment also remained low, illustrating the general weak state of the economy and poor investor confidence. It reported that the deterioration in the fiscal balance experienced in recent years had continued: in 1995 the budget deficit was only 0.7% of GDP, but in 1996 it was 5.7%, and last year it reached 9.2%. This deterioration was attributed partly to public funding for a programme to restructure the National Bank of Fiji, and contributed to a rise in the government debt/gdp ratio, from 41% in 1996 to 48% in According to the central bank, there was also a deterioration in Fiji s external position last year: with a F$2.5m (US$1.7m) deficit on the current account, compared with a F$86.2m surplus in The economy is unlikely to recover during 1998, as Fiji will continue to suffer from the effects of the Asian financial crises. The sharp economic slowdown in the region is already having an effect on the tourism industry. Following the buoyancy of much of 1997 (the number of visitors during the year grew by Fiji: visitor arrivals, 1 Qtr 1998 Vistor arrivals, '000s Australia UK United States Japan New Zealand Continental Europe Pacific Islands Canada South Korea % change, year on year Source: Bureau of Statistics, Statistical News.

16 14 Fiji 5.9%; 1st quarter, page 15), the number of arrivals fell by 8.1% year on year in the first three months of Although visitor numbers from Australia and the US increased, the number of tourists from Japan fell by 33.2%, and the number from South Korea fell by 86.6%. This is contributing to the malaise in the local hotel industry, which is complaining of occupancy rates being at record lows. Fiji: tourism statistics (visitor arrivals) 1 Qtr % change Australia 18,079 18, New Zealand 9,360 7, US 9,798 10, Japan 11,916 7, Continental Europe 8,795 7, UK 10,747 12, Pacific Islands 4,919 5, Canada 4,987 4, South Korea 3, Rest of Asia 1,746 1, Total visitors incl others 84,435 77, Source: Bureau of Statistics, Statistical News. Inflation is also rising There are also signs that inflation has begun to rise. Although the average inflation rate for the first four months of 1998 was lower than in the same period of 1997, the 4.8% rate of inflation recorded in April was considerably higher than the 3.8% recorded in April Inflation in the first three months of last year was pushed up somewhat by crop damage caused by Cyclone Gavin in March. Price rises can be expected to continue in 1998 following the 20% devaluation of the Fijian dollar in December 1997, which is only now beginning to feed through in the form of higher prices for imported goods. Fiji: consumer prices (% change, year on year; period averages) All items Housing Jan Feb Mar Apr Jan-Dec, n/a 2.5 n/a Jan-Apr, Source: Bureau of Statistics, Statistical News. and attempts to restrict price rises have caused industrial action On April 2nd, in response to these inflationary pressures, the government announced that it would use the Counter-Inflation Act to limit wage increases to just 3% in 1998 and (This law gives the government additional powers to regulate wages and prices when high inflation is a threat). The government added that it would seek to amend existing legislation to remove cost-of-living adjustments as a basis for wage increases, making productivity the sole criterion.

17 Fiji 15 Unsurprisingly, the trade unions were upset by these plans, and threatened a strike for April 23rd. Although the prime minister initially denounced the strike as irresponsible, he subsequently yielded to worker pressure, and on April 17th said that the order would not be implemented, pending tripartite talks between the government, unions and employers on other aspects of wages policy (including union accusations that the official measure of inflation grossly underestimated the real extent of price rises). However, this offer did not fully appease the workers, and 40,000-50,000 of them stopped work on April 23rd. The drought does not help matters and hurts sugar production The government seeks aid for the mining sector In addition to the problems associated with the Asian financial crises, the country is experiencing its worst drought since rainfall records began in The rainfall which usually arrives in the October to April wet season never came, and water use restrictions were imposed from May 1st. The situation has been exacerbated by poor water storage and reticulation systems. The principal engineer of the public works department, Paul Wilisoni, said in April that the problem was likely to continue for some time. This could have a detrimental effect on the public finances: Mr Wilisoni said that maintaining water carts and tankers was costing F$20,000-27,000 (US$9,960-13,446) a week. The weather is likely to lead to a further deterioration in sugar production, Fiji s most important crop. Production in 1997, hit by cyclones, industrial action and uncertainty over land leases, amounted to only 3.3m tonnes, below the usual 4m tonnes. The Fiji Sugar Commission (FSC) has said that production this year is only 1.75m tonnes, around 60% below the usual level. On May 3rd the commerce minister, Isimeli Bose, said that crop damage caused by the drought was about F$10m (US$5m); however, this was before the full effects of the drought became known, and so losses are likely to be greater still. The FSC and the Ministry of Agriculture, Fisheries and Forests is working with a parliamentary select committee to formulate detailed proposals to support farmers and crop rehabilitation. Fears for jobs and for an important sector in the national economy, at a time of falling world prices, motivated the cabinet s approval in May of loans to the Emperor gold mine ($1m) and the Mount Kasi gold mine ($200,000). Repayment terms of 8% annually over 15 years apply. Parliament is expected to confirm the release of these funds. Inward investment is preferable to government funding. The minister of lands and mineral resources, Ratu Timoci Vesikula, led a mission to the March Prospectors and Developers Association convention in Canada, hoping to attract investment in mineral exploration and mining. and announces support for the textiles, clothing and footwear industry The government, together with the textiles, clothing and footwear (TCF) industry, has developed a plan aimed at ensuring the industry s survival in the medium and longer term. This is of importance to Fiji s economy: in 1996 the industry accounted for around 23% of exports. The impetus for the plan seems to have come from the lessening of trade preferences and tariff protection that is likely over the next few years. The increased competition for Fiji s garment exports resulting from the sharp depreciations of currencies across Asia is also likely to have influenced the government.

18 16 Fiji Details of the plan were announced by the president, Ratu Sir Kamisese Mara, when he opened a F$10m (US$5m) production complex at Nadawa, Nasinu, on April 20th, for United Apparel Ltd. The plan embodies four strategies: to improve the industry s business environment; to improve efficiency, productivity and competitiveness; to improve human resources and skills; and to improve market access and penetration for the industry s products. The president said that it was up to entrepreneurs to take advantage of new opportunities, and that company level reforms were important. The government, for its part, would seek to establish conditions for private-sector growth and investment, and to reduce the costs of doing business as well as to produce simpler, more transparent trade rules. A joint task force is to oversee implementation of the plan, and report to a subcommittee of the cabinet. A tax amnesty begins Qantas increases its stake in Air Pacific and indirectly provides local jobs Government agreements provide a further boost to the aviation sector and a new company takes over the management of airports The announcement that a tax amnesty would begin on May 1st, in the light of the parlous state of Fiji s government finances, is a pragmatic rather than a political decision. It is hoped that a moratorium on penalties on overdue tax liabilities of up to 300% will encourage repayment of arrears. The finance minister, Jim Ah Koy, has said that non-payment of taxes is costing the government up to F$100m (US$49.8m) a year. In May the government reduced its ownership of Air Pacific, the national flag-carrier, from 75% to 51%, selling a stake to Qantas. This significantly deepened the relationship between the two airlines, which dates back to the 1980s. Qantas paid F$3.60 (US$1.79) per share, which amounts to F$26m overall. The information minister, senator Filipe Bole, said that Qantas had made the best offer in a local and international tender that also attracted bids from Air New Zealand and American Airlines. The Fiji Aviation Workers Union reacted negatively to the sale, criticising the government for losing out on profitability that could have been reinvested in Fiji. On March 10th the United States company National Processing Company, announced plans to open a US$4m data processing centre in Fiji later this year to provide data entry and scanning services for Qantas. The project is expected to create more than 200 jobs for local employees. Co-operation between Qantas and Air Pacific in the form of code-sharing was expected to increase anyway following a March agreement between Australia and Fiji, allowing Air Pacific rights to operate between Australia and destinations other than Fiji. In early May a similar agreement was reached with New Zealand, allowing Air Pacific freedom to fly passengers out of New Zealand and across the region, extending the carrier s routes by allowing it to schedule flights out of New Zealand to destinations such as Honolulu, Los Angeles and Papeete, in French Polynesia. From July 1st Airports Fiji Ltd will take over full responsibility for running most of the country s airports from the Fiji Civil Aviation Authority. One of the company s first big decisions will the awarding of a contract for the upgrading of Nausori airport, 20 km from Suva. This will include the construction of an 80-metre extension to the runway so that, from August, it can be used by Air

19 Fiji 17 Pacific s new generation B jets. Nausori, and the country s other important airport, Nadi, will be run as commercial businesses under new legislation putting various government functions on a profit-making footing. Airports Fiji Ltd will also run up to 14 unprofitable outer island airports under contract to the Fijian government. The airport company will be capitalised at F$30m (US$14.9m) and expects to earn revenue of about F$34m a year. but the aviation industry is not immune to the economic problems Despite the successful sale of a stake in Air Pacific, the airline, in common with other Asian and Australian carriers, is facing increased commercial pressures: just two weeks before the sale to Qantas, Air Pacific announced a pre-tax profit of F$11m (US$5.5m) for , F$3m less than for the previous year. From March 1st two domestic airlines, Air Fiji and Sunflower Airlines, with the approval of the Air Transport Licensing Authority, raised their fares by 7.5%. In a joint statement, the companies said that the 20% devaluation in January had increased their costs, especially for fuel, insurance and maintenance.

20 18 New Caledonia New Caledonia Political structure Official name Form of state The executive Head of state Territory legislature Local government Legal system French Overseas Territory of New Caledonia and Dependencies Largely autonomous territory within the French state, except in such areas as foreign relations, defence, justice, currency and credit The government delegate, High Commissioner of the Republic in New Caledonia, Wallis and Futuna, currently Dominique Bur President of France, Jacques Chirac A combination of French metropolitan government and local autonomy. The Territorial Congress, comprising the combined elected membership of the three Provincial Assemblies (15 members from the Northern Province, 32 members from the Southern Province and 7 members from the Province of the Loyalty Islands). Members are elected for terms of six years by universal suffrage. The Nouméa Accords, signed in May 1998, provide for the extensive devolution of powers to New Caledonia. The accords are to be put to a referendum at the end of 1998; a further referendum on complete independence will follow in years time. In addition to the three Provincial Assemblies, there are 32 basic local government units known as communes French style, augmented by mandatory consultation with the Advisory Council on Custom (Conseil coutumier territorial comprising 40 members drawn from the eight custom areas) in matters of customary law and land law. Magistrates preside over the decentralised lower courts. The Court of Appeal is based in Nouméa and there is access to the higher appeal court of France in certain matters National elections July 1995; next elections due in July 2001 Main political organisations The two main groupings are the Rally for Caledonia in the Republic (RPCR), which is affiliated with the Rally for the Republic (RPR) in France, and comprises the Centre for Social Democrats (CDS) and the Republican Party (PR); and the Kanak Socialist National Liberation Front (FLNKS), comprising the Caledonian Union (UC), the Party of Kanak Liberation (PALIKA), the Kanak Socialist Party (PSK) and the Melanesian Progressive Union (UPM). The One New Caledonia for All (UNCT) group has significant support in Nouméa, as does the National Union for Independence in the north. The Oceanian Democratic Rally (RDO) represents a large segment of the population of Wallis and Futuna and the Kanak Socialist Liberation (LKS) is strong in the Loyalty Islands President of the Northern Province President of the Southern Province President of the Loyalty Islands President of the Territorial Congress Vice-president Deputies to the French National Assembly Representative to the French Senate Léopold Jorédié (FLNKS) Jacques Lafleur (RPCR) Nidoïsh Naisseline (LKS) Pierre Frogier (RPCR) Richard Kaloï Jacques Lafleur (RPCR) Maurice Nénou-Pwataho (RPCR) Simon Loueckhote (RPCR)

21 New Caledonia 19 Economic structure Latest available figures Economic indicators GDP at current prices (CFPfr bn) n/a n/a n/a Real GDP growth (%) 0.7 n/a n/a n/a n/a Consumer price inflation (av; %) n/a Population a ( 000) b 200 Exports fob (US$ m) c n/a Imports cif (US$ m) c n/a Exchange rate (av; CFPfr:US$) May 29th 1998 CFPfr :US$1 Origins of gross domestic product 1990 % of total Components of gross domestic product 1990 % of total Agriculture 4.9 Private consumption 77.3 Mining & metallurgy 14.0 Government consumption 9.4 Construction & energy 11.0 Fixed investment 32.9 Miscellaneous industries 6.4 Change in stocks 1.5 Transport & communications 7.5 Exports of goods & services 29.6 Commerce 31.0 Imports of goods & services 47.7 Other services 25.2 GDP at market prices GDP at market prices Principal exports fob 1993 US$ m Principal imports cif 1993 US$ m Ferro-nickels 212 Foodstuffs 148 Nickel ore 76 Transport equipment 147 Foodstuffs & animal products 9 Machinery & electrical equipment 145 Metal & metal products 1 Minerals 84 Total incl others 376 Total incl others 854 Main destinations of exports 1996 c % of total Main origins of imports 1996 c % of total Japan 30.6 France 45.1 France 28.9 Australia 17.9 US 12.2 Singapore 6.8 Australia 6.9 New Zealand 6.4 Taiwan 6.1 Japan 3.7 a EIU estimates. b Census result. c Derived from trading partners records.

22 20 New Caledonia Outlook for There is considerable optimism following the political agreement and links with France may shelter the economy Agreement on the political status of New Caledonia has been reached with remarkable speed and goodwill, and has contributed to considerable optimism. The transfer of powers and the progressive adoption of a Kanak (Melanesian) identity will be accompanied by substantial financial support from France, a process unmatched in the history of regional decolonisation. With a huge natural resource base and reasonably well-developed human resources, New Caledonia is well placed to take a prominent role in the Pacific community. There may also be increased investment from the private sector in France, as companies seek to capitalise on the potential of a (still) European beachhead in the Asia-Pacific Economic Co-operation (APEC) forum and Association of South-East Asian Nations (ASEAN) region. Nevertheless, the scale of the task ahead cannot be underestimated. The optimism following the signing of the Nouméa Accords, particularly among French settlers, may subside as the realisation that independence for New Caledonia has not really been delayed for years, but is actually under way. Executive power will also be distributed in proportion to popular support, forcing the various political groups to work together. The handling of employment and trade relations, responsibilities that will be localised in the first phase of New Caledonia s new status, will be an important test. These powers will be devolved at a time when prices for New Caledonia s most important export, nickel, are depressed: the EIU estimates that world nickel prices will fall by 15.5% in However, somewhat paradoxically, New Caledonia s strong links with France may insulate it from the worst effects of the regional economic slowdown: in the first quarter of 1998 the numbers of tourists from France visiting New Caledonia continued to increase. Review Agreement is reached on the political status of the island which will be voted on in a referendum this year On April 21st the French government, and pro- and anti-independence parties from New Caledonia, reached an agreement on the territory s long-term political future. The speed at which this agreement was reached surprised many observers: talks only restarted on February 16th after a two-year break, and at the beginning of April the leader of the anti-independence party, the Rally for Caledonia in the Republic (RPCR), Jacques Lafleur, was refusing to attend further talks in Paris because he could not see how the negotiations could move forward. However, talks did eventually resume in Paris, and when the negotiations moved to the New Caledonian capital, Nouméa, in April, Mr Lafleur made unexpected concessions, allowing a deal to be struck. The Nouméa Accords, as the agreement is known, were signed on May 5th in the New Caledonian capital by the French prime minister, Lionel Jospin, the French Secretary of State for Overseas Territories, Jean-Jack Queyranne, and the heads of the anti- and pro-independence factions, Mr Lafleur of the RPCR and Roch Wamytan of the Kanak Socialist National Liberation Front (FLNKS)