The Ministry of Finance, Strategic Planning, National Development and Statistics this week released its Medium-Term Fiscal Strategy (MTFS) for the period financial year 2025-2026 to financial year 2027-2028. It outlines revenue and expenditure measures aimed at reducing the fiscal deficit to manageable levels that can be realistically financed and at a reasonable cost. At the outset, the ministry states five key fiscal anchors that can be instrumental in setting broad fiscal targets and objectives until 2028. These are:
1) Budget deficit: Reduce budget deficit to around 3.0 per cent of GDP and move towards a primary surplus (fiscal deficit, excluding interest expenditure) in the medium term;
2) Public debt: Maintain Government debt as a percent of GDP (excluding contingent liabilities) on a downward trend to around 75 per cent of GDP in the next three years;
3) Expenditure: Maintain recurrent/operating expenditures at levels that do not exceed Government’s operating revenue;
4) Borrowing: Borrow only for major capital or investment spending; and.
5) Capital-operating mix: Target the capital-operating mix ratio at 30:70 to allow adequate funding for infrastructure development.
The Medium-Term Fiscal Strategy (MTFS) states that while the growth outlook for 2024 and 2025 have been revised upwards to 3.8 per cent and 3.4 per cent, respectively, the baseline projections for 2026 and 2027, under 3.0 per cent, indicate that Fiji’s long-term growth potential remains sluggish and well below the target set in the National Development Plan.
“Apart from this, the downside risks to the outlook have increased following the outcome of the US elections as inward policies of the Trump administration particularly around trade tariffs could disrupt global trade and reignite inflation,” states the MTFS.
“Therefore, it is important that the Government focuses on growth-enhancing policies, expedite critical reforms hindering private sector investment, and improve the quality of public spending. The capacity for additional fiscal stimulus in the medium term is limited, given the significant increase in Government expenditure in the last two years, as such a private sector led growth will be crucial.”
The strategy outlines the following policy principles which will guide the revenue strategies in the medium term:
1) Widen the tax base by gradually removing exemptions and other distortions and bringing provisions in place to collect revenues from E-commerce transactions;
2) Improve tax compliance and collection of tax arrears by implementing digital tools and streamlined tax reporting methods, such as e-filing and simplified tax systems, to simplify compliance and broaden the tax net;
3) Continue efforts to make the tax regime and tax administration simpler to encourage voluntary compliance;
4) Review the VAT regime to move towards a single rate when the time is appropriate, including expenditure strategies to support the vulnerable.
5) Introduce targeted tax policies in potential inelastic markets to generate sufficient revenue required for developmental goals;
6) Regularly report and budget tax expenditures on exemptions and concessions to promote transparency and build support for rationalising such incentives;
7) Review the Export Income Deduction incentive with a view to remove Fiji out of the EU blacklist;
8) Introduce environmentally focused taxes and incentives, such as carbon taxes or incentives for sustainable businesses aligning with NDP;
9) Strengthen the property tax system by assessing properties regularly and reducing tax evasion in this sector could provide a significant revenue boost; and
10) Review non-tax revenues on a cost recovery basis while also ensuring that the vulnerable and disadvantaged are protected.
Macroeconomic risks
The Ministry of Finance, Strategic Planning, National Development and Statistics states the Medium-Term Fiscal Strategy 2025-2028 has taken into account indicators like domestic and global growth, inflation, interest rates and exchange rate.
It states macroeconomic risks remain which could affect the overall economic outlook for Fiji. These include a slowdown in growth for our major trading partners, particularly Australia and New Zealand, could undermine tourist arrivals and export demand. There is also danger from geopolitical tensions and escalating conflicts that could result in volatile commodity prices increasing our cost of imports and consequently domestic inflation. “The possible inward-looking policies of the incoming Trump administration to stimulate the US economy could lead to a stronger US dollar and given Fiji’s high exposure to US denominated debt which is currently at 22.1 per cent of external debt), the appreciation of the USD will eventually place a larger burden on Government finances through increased debt servicing costs.”
Further to this, given Fiji’s heavy reliance on imported goods for domestic consumption and raw materials, a stronger USD will typically raise cost of imported goods and cost of production for imported raw material which may further exacerbate domestic inflationary pressures, widen Fiji’s current account deficit and pose pressure on our foreign reserves, states the strategy. On the domestics front, the ministry says the loss of skilled workers in the last two years, and the consequent impact on productivity levels, increase in social problems largely related to drugs poses additional risks to Fiji’s growth trajectory.
“Any slowdown in growth would impact tax revenues and overall Government finances and its ability to implement the much-needed infrastructure projects.”
Financing risks
The ministry has outlined a number of financial risks, stating a total of $2.3 billion of Government’s debt portfolio is denominated in the USD of which at least $2 billion is pegged to the Secured Overnight Financing Rate (SOFR). SOFR stands at 5.24 per cent as of November 13, 2024.
“The high federal fund rates put an upward pressure on the SOFR to over 5 per cent placing a burden on our overseas debt servicing cost, particularly the 17.0 per cent of government’s debt portfolio that are pegged to the SOFR. The federal rates are slowly improving with the additional federal funds rate cut for the year of around 4.5-4.75 percent.”
Contingent liabilities
It says that at the end of July 2024, Government total contingent liabilities stood at $1.6 billion. This poses risks to public finances as around 60.1 per cent of contingent liabilities are Government guarantees of public corporation debt.
“Public corporations such as Fiji Sugar Corporation Ltd and Fiji Development Bank have already been assessed as high risk. This poses substantial fiscal risk and cost to Government should the contingent liabilities materialises.”
Natural disasters and climate change
The ministry reiterates that Fiji is highly susceptible to climate change and natural disasters, particularly tropical cyclones, flood and drought which pose massive fiscal threats to the economy. The MTFS states such incidents have multifaceted effects and place a considerable burden on government’s finances, through immediate cost associated with emergency response and recovery to long term fiscal impacts. Apart from this, tax revenues usually decline in the event of natural hazards creating fiscal challenges for Government.
