Analysis of Debt to GDP Ratio in Fiji

This report summarizes the analysis of debt to GDP ratio in Fiji over the last 10 years, exploring the relationship between debt and economic growth. It discusses the impact of factors such as foreign aid and provides recommendations for managing public debt. The study highlights the need for a better understanding of the long-term economic implications of increasing debt.

Analysis of debt to GDP ratio over the last 10
years - A case study of Fiji

ABSTRACT
This report summarised about the analysis of debt to GDP ratio over the last 10 years of
Republic of Fiji. This includes the several topics such as foreign aid, debt to GDP ratio from last
ten years and how economy performs throughout the years. The debt- to- GDP relationship is
dynamic, varied across counties and influenced by macroeconomic factor. Although there is no
clear universal level beyond which debt-to-GDP is a big constraint on growth, based on
information from the last ten decades, they have shown that rapidly increasing public debt
pressures slow it down the growth in long term.
The relationship among debt growth and economic growth has drawn a strong interest in
recent times, spurred by a huge increase in public debt in developed economies due to the
financial crisis and ensuing Eurozone debt crisis. Economists appear to accept that, throughout
the short run, the rise in public debt resulting from fiscal contraction increases aggregate demand
that is expected to help to make economies strong. On the other hand, the longer-term economic
effect of public debt creation is susceptible to more spirited argument where views are not
united. Some contend for an adverse long-term relationship among the two where others
challenge any long-term correlation between low or moderate levels of government debt. There
is a clear need for a better understanding of long term economic implications of increasing public
debt.
Careful empiric study of such a relationship that is used a board of 40 advanced and
emerging market economies and four centuries of evidence. There are many mechanisms by
which persistent debt accumulation can damage economic development, such as "crowding out"
private sector investment, high interest rates for long-term , more stringent future taxes, and
potentially poorer investor confidence and uncertainties.
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ABSTRACT....................................................................................................................................1
INTRODUCTION...........................................................................................................................3
Literature Review............................................................................................................................4
Methodology..................................................................................................................................10
Data analysis..................................................................................................................................12
Result.............................................................................................................................................14
Conclusion and Policy recommendation.......................................................................................15
REFERENCES..............................................................................................................................17
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INTRODUCTION
Fiji's economy has been growing by only 0.5 per cent in 2019, with growth of 3.5 per cent in
2018 , down from 5.6 per cent, 4.7 per cent and 5.4 per cent in 2014, 2015 and 2017, respectively
and development in 2016 was weaker compared to Cyclone Winston. Pre‐COVID‐19, the growth
forecast for 2020 was 1.7% and for 2021 2.9% (Bertana, 2020). Of course, such
predictions especially for 2020 and definitely for 2021 already have been decreased due to the
effects of COVID‐19, with −4.3 per cent growth displayed for the existing year since May
2020. Although even placing COVID‐19 aside, as this survey does, the nation's recent growth
output indicates weak development prospects.
Only at end of 2019, the Reserve Bank of Fiji (RBF) predicts a trend growth to about 2.9 to
3% from 2021 onwards. With poor growth and declining revenues, fiscal contraction proposed
in the 2019–20, Budget which released in June 2019 with substantial spending cuts was
unavoidable due to high government debt over the last 5 years. Previous budgets were used as a
polling tool, but need for fiscal consolidation has been evident since 2015 (Arčabić and et.al.,
2018) The government has now been expected to cut away on vital expenses for education,
health and infrastructure, areas that the government has indeed constantly recognised as
objectives. Considering the low-growth scenario, the government’s obstacle to revenues is not
really a gradual one, but a systemic one.
The higher growth of about 5% reported a few years ago has been heralded with a 'new
standard' for Fiji. Previous to COVID‐19, hospitality appeared to play a major role in the
maintenance of economic development (Borja and et.al., 2018). Operation in other significant
sectors including such sugarcane, wood, silver and coal, nevertheless, has stayed restricted.
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Besides that, as government policy has also been pressured to minimize expenditure, the relation
of government expenditure to development has reduced.
The key cause of a downturn, it is that the Fijian economy has also been affected by poor
business and shareholder sentiment, both economically and politically. Business trust began to
decline in June 2018, just instead of the November 2018 general elections. After elections, there
has been no turnaround of confidence. Indeed, companies listed dropped to its weakest since
2009 per year later, as well as the RBF acknowledged that perhaps the weaker market in 2019
represented sluggish consumption behaviour and investment expansion, primarily due to poor
business and shareholder sentiment. Restoring business trust would not be simple and for
mentioned reasons, it will be impossible before the next elections in 2022, and though there is
zero assurance. With COVID‐19 facing a serious blow to tourists and no space for fiscal
expansion, the opportunities for development in Fiji are presently not promising.
Literature Review
Issue 1: According to Narayan and Narayan (2019), the stability of budget deficit in Fiji is
analysed throughout the sense of the intertemporal budget constraint theory, whereby
government earnings is estimated on basis of public spending (Buckwell and et.al., 2020). An
error-correction system test for co-integrating shows that government earnings and spending are
being co-integrated, which offers some evidence that claim Fiji's budget deficit is manageable
in long run. It is suggested that further government spending on capital expenditure would ensure
a larger revenue stream and decrease the potential of an explosion throughout the budget deficit.
As per the article of Fiji Budget 2017-18, the 2017-2018 budget of Fiji is full of broad
spending commitments aimed at attracting support as 2018 election. The budget project has a
high budget deficit of 4.5 per cent of GDP (with an actual deficit of 7.8 per cent of GDP). Budget
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winners involve civil servants that see wages (overall) rise by unprecedented 18% within a year;
beneficiaries of social security grants and tertiary grants, both of which were extended and
workers who might gain from such a raise throughout the income tax rate (from $16,000 to
$30,000). The Bainimarama-Sayed-Khaiyum government was never away from budget deficits.
However, this budget, implemented in the midst of positive economic conditions, is especially
noteworthy in this respect (Charan, Kaur and Singh, 2018). The budget documents project a
budget deficit of $499.5 million. Expenditure is estimated to be $4.35 billion, while overall
revenue is predicted to be $3.85 billion. However, these estimates need to be taken with a grain
of salt. Since 2012, the country has not yet fulfilled its budget projected revenue.
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If they will not include income from one-off asset sales in overall revenue forecasts because
there are good reasons to not do. These asset sales would minimise potential government
revenues. The fundamental deficit projection is now almost $900 million, or 7.9% of GDP. Other
reason to believe the 4.5% deficit forecast would be that the asset sales expected in previous
budgets have not materialized.
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Issue 2: As per the article of Shoren Devi (2017), it has been analysed the overall
performance of Fiji in terms of export or import. International trade is characterised as exchange
of goods, services and capital among partnering regions and countries (Currenti and et.al., 2019).
Information regarding import and export is an input for the measurement of this details and
it is used in particular, for the measurement of the balance of trade and GDP again for country.
Whenever a country's imports surpass its exports, the nation is considered to have a trade
imbalance, whereas a trade surplus exists when value of all its exports increases that of imports.
The latest revised figures compiled by the Fiji Bureau of Statistics placed the overall value
of products imported in October 2017 at $465.4 million, although the total value of exports was
$210.4 million. As compared to October 2016, import and exports increased by $74.1 m (18.9%)
and $62.4 m (42.2%) respective. The October 2017 trade deficit was $255.0 million compared to
$196.8 million a month earlier (September).
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Figure 1Fiji's overall performance, 2018.
In compared to 2016 October, the import divisions showed substantial increases. Mineral
materials rise from $44.9 million (72.7%) to $106.7 million due to higher imports of oil such
as diesel (Curto and et.al., 2019). Base metal and objects up to $15.5 million (55.6 per cent) to
$43.2 million resulting in increased imports of steel and iron. Industrial equipment and electrical
equipment and parts respectively up 10.8 m (17.9%) to $71.2 m leading to excessive imports of
mobile phones for mobile networks and other wireless connections. Prepared goods, drinks and
tobacco raised by $5.7 m (31.9 per cent) to $23.6m due to high imports of liquor. The import
category recorded a significant decrease. For example vehicles, aircraft and related transportation
equipment down $11.2 m (18.3 per cent) to $50.2 m leading to reduces vehicle imports.
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For the period of October 2016, domestic export segments with substantial increases were
packaged foods, alcohol, spirits and tobacco up $25.3 m (53.9 per cent) to $72.1 m resulting in
high sugar exports (Dimitraki and Kartsaklas, 2018). Wood, cork and plaiting materials raise
$10.9 million (771.0 per cent) to $12.3 million because of high export of wood pellets. There
have been no major declines in domestic export classes in compared to October 2016. In
the month of October 2017, Fiji’s main domestic export destinations are same. United Kingdom,
up $12.6 million (57.1 per cent) to $34.8 million related to enhanced sugar exports. Australia rise
with $1.6 million (7.4%) to $23.3 million due to higher gold export. United States of
America increases their export with $2.7 m (13.7%) to $22.0 million because of high exports of
bottled water etc.
Issue 3: As per the IMF report 2020, Republic of Fiji faces the key issues and it discussed in
staff report of 2019 Article IV Consultation. Economic growth slowed dramatically in 2019
because of low government spending, stronger domestic financial situation, poor sentiment, and
global rate of change (Feleki, Vlachokostas and Moussiopoulos, 2018). The decline continued
from several years of comparatively strong growth, supported by recovery spending following a
major cyclone in 2016, which resulting in increasing external and fiscal inequalities. Fiscal
deficit is currently at risk and outside vulnerabilities remain relevant. Fiji has significant
investment needed to improve its resistance to climate change impacts.
Primary focus of government is to restore fiscal reserves to encourage growth and to make
space to react for potential natural disasters and also maintain sustainability of public debt (Hanh
and Boonstra, 2019). Fiscal consolidation must concentrate on limiting current expenditure due
to the limited space for further mobilisation of revenues and a need for capital expenditure to
boost climate resilience.
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Enhancements in the business climate and governance are important to boost growth
potential and capital investment and increase efficiency and productivity. Another goal ought to
be to fix the gender disparity in workforce participation in order to guide current development
and make it much more diverse.
Staff Report is compiled by the IMF staff committee for review by the Executive Board on
24 February 2020 (Kumar and et.al., 2018). The staff report represents consultations with the Fiji
authority in December 2019 and is focused on available information since about 15 December
2019. It reflects on Fiji's near-to medium-term threats to policy goals, and was planned before
COVID-19 had become a global pandemic, resulting in unparalleled pressures on global trade,
resource and financial markets. Consequently, it should not represent the consequences of these
trends and relevant policy goals. The disease has significantly amplified the outlook for volatility
and downside risks.
Methodology
This study based on the data analysis methodology where debt to GDP ratio of Fiji evaluated
throughout the period of last ten years (Mabula and Mutasa, 2019). This piece is published to
record and clarify the pre-COVID‐19 decline in exports and federal plan changes. Although the
pandemic was, of course a massive surprise, this is not the priority of such a survey. In order to
improve trend growth, Fiji may not only have to rebound from a worldwide recession caused by
a pandemic, but will also have to absorb lessons from history. The debt-to - GDP ratio is a
measure that compares the debt levels of a country to its gross domestic product (GDP). A
country with higher debt-to - GDP ratio usually has difficulties paying off outside debts this is
also called "public debts", which seem to be any balances owing to foreign lenders.
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Figure 2 Debt to GDP Ratio, 2020.
Generally, government debt as a percentage of GDP is being used by stakeholders to
calculate the country's abilities to fulfil potential debt payments, impacting nation borrowing
rates and government bond rates. The high debt to GDP ratio, the less probably the nation is to
repay its debt and the greater the credit risks (Nath, 2019). A research by the World Bank noticed
that even if the debt-to - GDP ratio of a nation reaches 77% for a longer period of time,
economic development is slowed down. In an Fiji country, still there are no high debt to GDP
ratio of 77%. From the last 10 years, ratio of Fiji country almost reduces which means country’s
economy grow. In 2010, Debt-to-GDP ratio is 56.2% which continuesly redices and in 2017 it
was the lowest one that is 46%. After that, in 2018 it was 48.7% which again reduces and remain
with 48% in 2019. Above graph provide better understanding regarding incraese or decsrese on
debt –to-GDP ratio of Repiblic of Fiji.
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Data analysis
Below mentioned table shows the foreign aid per capital to the Republic of Fiji over the last
ten years (Prasad and Tisdell, 2019). This data shows the fluctuation of foreign received
throughput the period.
Year Foreign aid per capital ($)
2008 53.326
2009 77.797
2010 88.205
2011 87.313
2012 121.805
2013 105.383
2014 108.765
2015 117.979
2016 134.594
2017 166.276
2018 125.764
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From the above statistical graph, it has been observed that overall foreign aid for
Republic of Fiji for the last ten years is continuously fluctuated. In 2017, foreign aid per capital
was $166.276 which is highest among all (Purcell and et.al., 2018). Foreign Aid for the Republic
of Fiji fluctuated over the time and government has to make their strategies and policies
accordingly.
Australia is the largest participant in the growth of public health in Fiji. In 2020-21, they
would further raise support for our health programme, that builds infrastructure facilities,
improves the quality of care (particularly maternal, new-born and child health), tackles
communicable and non-communicable disorders, and strengthens the care system to react to
crisis including such COVID-19. They will endorse Fiji's COVID-19 action plans, including
critical institutional work to strengthen supply chains and manufacturing equipment, and
collaborate with international clients including the WHO and the United Nations Population
Fund ( UNFPA) to make best use of resources.
Fiji’s reliability is of major importance to a Pacific as a central Pacific economy and a
regional centre (Bandiera and Tsiropoulos, 2019). Driven by the long-term development of Fiji
and its COVID-19 goals, we are helping the Government of Fiji to improve national policies and
laws (Rhee and Yang, 2018). With increasing demand for improved public sector productivity in
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the light of low consumer revenues, Australia 's new governance programme will promote
effective peer-to - peer collaborations with key institutions, such as the Parliament and (with a
view to the 2022 elections) the Fijian Elections Office.
Result
From of the entire report, it has been concluded that behaviour of a budget deficit of a nation
since Hamilton and Flavin's (1986) paper, Macroeconomics has become an important subject.
This is seen as a major component of the economic growth of a country. Throughout this light,
the conduct of the fiscal deficit is of concern to both lawmakers and investors. Temporary budget
deficits pose little issues, as disparities can arise from coping with a downturn or a natural
catastrophe or some such other short-term occurrence. However, high and increasing budget
deficits present a challenge which is likely to contribute to government policies, such as stricter
fiscal policies throughout the form of spending constraints (Rho and Saenz, 2020). The problem
with budget deficits applies to inter-temporal sovereign debt situation, i.e. the current value of
debt with various maturities. If, for example spending (including interest charges) and revenue
do not move together throughout long term, the government would have an opportunity to
default on the debt, thus eroding investor trust. Fiji's budget have stayed in deficit over a lengthy
period of time, they are investigating if the losses are 'too high.' With the exception of 1990, the
budget of Fiji was in deficit. In the 1970–89 era, the budget deficit became fairly stable,
fluctuating around – 1.5% and – 6.0% of actual GDP. However, there has also been a
significantly growing trend in budget deficits throughout the post-1989 period.
In addition, this research also discussed about the debt to GDP ratio from the period of 2010
to 2019. It has been evaluated that more than 77% ratio indicates that economic performance
reduces. In case of Fiji throughout the period of overall performance, debt to GDP ratio is less
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than 77%. Among all of them, country’s highest ratio in the years was 2018 and the lowest debt
to GDP ratio in 2017 (Sroypetch, Carr and Duncan, 2018). It is not usually hard for a
government to spend a short-term budget deficit. It can be done either by lending from domestic
or international markets, or by a mixture of the both. That being said, the debt would be a
liability on coming generations throughout the context of greater taxes. Another way to fund the
deficit is by raising the money supply, which will contribute to a rise in inflation that
is effectively a sort of tax. Issuing bonds to public is indeed an option, however, similar to
traditional borrowing in domestic market; It would limit the resources held by private domestic
investment. Significant problems emerge, however, as deficits continue and grow. Unaffordable
budget deficits offer investors the risk of tax increases or maybe even a financial collapse. From
a political perspective, large and rising budget deficits lead to a need of financial tightening.
Conclusion and Policy recommendation
There seems to be a long term statistically stable relationship among persistent public debt
accumulation and economic development. Moreover, the projections of related long-term
coefficients both are negative; indicating that nations that have undergone sustained rises
throughout the debt-to - GDP ratio across extended durations have also witnessed lower
production growth (Walker and Pekmezovic, 2018). From the other hand, a temporary rise in
debt- to - GDP ratio (for example, to help alleviate volatility in the economic cycle) doesn't
really play a potential in the evolution-term relationship among economic development and
public debt. The study throughout this economic letters doesn't really offer any indications as to
the direction of the relationship involving public debt and growth, and in reality allows cause and
effect to operate in both directions. As a result, it is often challenging to provide general policy
recommendations based on approximate partnerships using a wide variety of different
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economies. The fact that, there is still a long-term adverse relationship among sustained
government debt and economic development over the last 10 decades of available information
allows for a deeper understanding of the market consequences of financial policies contributing
to a sustained accumulation of public debt. In our opinion, the secret to prudent debt financing is
a validation, supported by determination and intervention, that the rise in government debt is
temporary and would not be a drastic break from the standards in place.
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REFERENCES
Books & Journals
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risks under the Belt and Road Initiative. The World Bank.
Bertana, A., 2020, July. The Impact of Faith-Based Narratives on Climate Change Adaptation in
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Currenti, R. and et.al., 2019. Adaptation to climate change in an interior Pacific Island village: a
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format=pdf&pdf=38553&print=print>
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october-2017/ >
Issues related to the analysis. 2019. [Online]. Available Through:
< file:///C:/Users/Admin/Downloads/1FJIEA2020001.pdf >
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