Sunday, March 04, 2007

Illegal Regime Budget

Rakiraki chamber backs Budget opposition


Monday, March 05, 2007 - www.fijitimes.com

Update: 5.15pm THE Rakiraki Chamber of Commerce has backed the Fiji Retailers Associations stand that the 2007 revised Budget is anti-business, and harsh.

Chamber President, Uraia Waqa, said the increase in duty on a number of products would force many small businesses to close.

Fiji Retailers Association President Himmat Lodhia last week said the Budget would force small businesses to lay off staff because the cost of business would be too much.

The revised budget targeted shops selling luxury goods such as white goods, electronics, jewellery and perfumes with an increase in fiscal duty from three to 15 per cent.

Mr Waqa said many small proprietors would not be able to cope with the huge hike and would have no option but to shut down.

He said he was not surprised that large organisations backed the Budget.

''They can afford these hikes. And they also know that many small businesses would have to buy goods off them so they would be on the winning side anyway,'' said Mr Waqa.

''With Rakiraki being a farming town dominated by small proprietors, I cannot imagine what the effects would be if these start closing up,'' he said.

End of story


Growth policy lacking: Reddy
Dr MAHENDRA REDDYSaturday, March 03, 2007 - www.fijiitimes.com
Tokasa Ravutuba, 77, Eremasi Waidrodro, 9, and Unaisi Tarabite squatters of Namaka will be among the first who will feel the pinch of a diminished poverty alleviation allocation

In my commentary on the 2007 Budget last November, I wrote that: "the Budget has been tabled in the lower house at a time when there is threat to national security from within, violent crime is increasing, economic growth is low by developing country standards, trade deficit is widening, foreign reserve is dwindling and debt level is escalating beyond sustainable limits. Infrastructure is getting worse and an increasing number of people are facing economic hardship".

Today, we are not in much of a different position from then except that at that time, economic growth was forecasted to be 2% while the revised projection for this year is negative 2.5%. Under these circumstances, we are confronted with two tasks, one is to stabilise public finance and second is to provide the instruments and tools that would support an economic recovery plan. The dual objectives will certainly clash and thus the real test of budgeting is how we balance these two objectives. In the following section, I will examine the revised budget in light of this balancing act.

The Budget presented yesterday proposes an expenditure outlay of $1,572.3m, representing an 8.3% expenditure reduction relative to the original 2007 estimate ($1,710.8m). Of the total reduction in expenditure by $138.5m, $86.9m is sourced from operating expenditure cuts (see Table 1).The largest savings are sourced from salaries component, a 5% salaries cut for all civil servants and the reduction in the size of cabinet. The salary adjustment allocation of $60m is also struck out from the miscellaneous head. Salary cut is a short term solution only. In the longer run, the actual number of employees needs to be reduced. This is possible via privatisation of some of the government entities that can be run by the private sector without compromising governments' broader social objective. Privatisation of government entities will reduce governments operating grants. However, since 1987, a number of government entities have been privatised but the employment and grant reduction impact of it is not reflected in the budget. In fact operating grant continues to rise on an annual basis as well as the no of employees. A promising sign that emerges from this budget is a slight reduction in the number of establishments. This is a good start. What the government needs to do during the year is to fast track the process of privatisation of those enterprises that are year marked for it so that the 2008 budget can see a marked reduction in no of employees and the overall wages and salaries bill.

The composition of expenditure is critical as it will play an important role in fostering the overall growth of the economy. In this light, policy makers are often persuaded to reduce the operating component while increasing the capital component. The government has also announced several times that it plans to re-look at the operating/capital mix with the view to reducing it to 70/30 from over 80/20 ratio. A perusal of the budget reveals that this is quite unlikely to be achieved in the near future given the current trend in expenditure use and management. In the proposed revised budget, of the total expenditure, the overall operating component continues to hover around 80.9%, not much of a change from the original allocation in November. With a reduction in operating expenditure, capital expenditure has also been reduced thus keeping the operating/capital mix same. While government's will to reduce the operating component must be applauded, the reduction in capital allocation is quite worrying as it will certainly affect growth. It will compromise on government plans to solve the water problem and also improve on the state of other infrastructure such as roads. Further examination of the budget reveals that while nearly all the ministries budget has been subjected to expenditure cuts, the allocation for RFMF has in fact increased. The increase can be justified given that they are on the ground doing the work of the Police Force. However, in such case, the increase should have been sourced from the Police allocation. I have also said in the past that it is time now for armed officers to be based at all police stations and posts. Increasing Police budgetary allocation will not provide much help to reduce crime and violence but rather, the presence of armed officers at all the police stations and posts will have a positive impact on crime reduction. There are various models that could be adopted. One is to arm the police. The second model would be to identify educated and disciplined officers from RFMF and attach them with the Police Force. They should be deployed to all Police Posts and Stations around the country.

The government have indeed worked hard to reduce the expenditure. However, this reduction in expenditure, which will dampen demand, along with a forecasted decline of the economy by 2.5% would certainly have an implication on 2007 revenue. However, the 2007 revenue projections are all higher than 2006. This is questionable. The direct income tax is projected to increase from $397.22m to $420.55m when we have in fact witnessed a significant proportion of the population losing their jobs or facing cut in working hours. Added to this is the 5% pay cut. On the VAT side, the amount of VAT revenue is a direct function of economic activity in the country. But while we have forecasted a negative 2.5% growth, the VAT revenue projection is made upwards for 2007. Therefore, it seems to me that our projections are out of line and we may in fact face some major financial crunch this year.

Expenditure cuts and increases in revenue have a direct bearing on governments' ability to keep deficit within sustainable limit. The interim government has indeed demonstrated its will to bring down deficit to 2% of GDP. It is certainly not an easy task when you are faced with numerous demands for government resources. However, I did sound an early warning that we don't have to rush into delivering a 2% deficit at the expense of capital projects as it will affect growth. The reduction in capital allocation by $22.6m is a point to note. Budget deficit is always aimed to be below 4% of GDP. Government via its tax financing tools was able to bring it below this critical figure. The remaining deficit has to be financed via borrowing. This obviously will have implications on the overall debt level of government thus affecting the future generations. Government's debt position is already quite worrying as it currently stands at 53% of GDP, above the sustainable limit of 40% of GDP. The interim government have certainly made the correct beginning by reducing expenditure to reduce deficit and therefore debt. However, further reduction in expenditure in the near future will not be possible. Instead, the economy must grow and with the additional revenue generated by the growing economy, debt can be brought down to manageable level.

Rising debt has a number of implications on the economy, in particular, it will compromises governments' ability to channel expenditure to productive sources. As we note that debt servicing alone this year will take up 28.4% of the overall expenditure. This leaves us only with 71.6% of the total outlay to finance public sector activities. Furthermore, our debt is at a level where we are paying back more than what we are borrowing to service the existing debt. This year, we are planning to borrow $371.1m while we will pay back, $447.2m to service our previous debt servicing. So in effect what we are borrowing is not even enough to service our debt. In such scenario, if growth doesn't pick up, we could face the worst scenario, a "low growth-high debt trap".

A Contractionary Budget and Monetary Policy
The budget delivered yesterday is a contractionary budget. Some economists argued recently that the budget should be balanced. I argued that we should certainly reduce operating expenditure to achieve both a reduction in deficit and also to divert part of this expenditure towards raising the productive capacity of the economy. There does exists a school of thought that argues that when an economy is not doing well, expansionary policy could bring it back to sustainable growth path. That is deficit financing is good when the borrowing is channelled towards raising productive capacity of economy, when good governance in public sector entities prevailsthat is, when we have the fundamentals in place. While I am quite confident that the deficit created will be used in the right place this year given the Interim governments serious concern on corruption, I would not have rushed to deliver a 2% deficit this year but rather would have targeted 3% this year and 2 % next year.

The Finance Ministers address completely alluded to the conduct of Monetary policy and how it is complementing its fiscal policy's effort to promote economic growth. There seems to be some concern on the conduct of monetary policy in Fiji for some time and it is time now we examine it quite closely. At a time when the country is struggling to attract investment, interest rates are rising. People are finding it difficult to cope up with their mortgage payment and some have even sold off their assets or are in the process of selling it.

What's in the Budget for Growth?
As said earlier, the Interim government has done an excellent job in setting the platform for stabilisation of public finances. However, the budget falls short of providing a platform for investment and growth. The reduction in allocation for capital projects is a cause of concern. Our state of infrastructure is pathetic. Public utility provision, in particular water provision, is in shambles. All these will affect business performance. If these are not provided both in quantity and quality, then we can't expect private sector to grow. Crime and violence has been a major problem in Fiji in the past. The budget has no concrete plans to contain this once the military returns to barracks. People will not be willing to work hard and accumulate capital in various forms, when thugs are allowed to roam freely and forcefully extract this surplus created by the hardworking innocent people. Furthermore, we will also face difficulty in attracting investors to Fiji if they know that the surplus that they will create has a high probability of being extorted by someone else. Therefore, the sooner we make our law and order plans public, the better it will be for economic growth.

On growth initiatives, government plans to continue with some of the past initiatives to promote a private sector led growth. These include support to ICT operators, the IT and Audio Visual industry and boost for Small and Micro enterprises. Some of these initiatives are largely dependent on the agriculture sector and land resources. In this budget, agriculture sector has not received the allocation it rightfully deserves. Furthermore, there is no concrete plan to resolve the property rights issue which underpins the release of land for agricultural use. As a result, large tracts of land are not used and agricultural output has been declining. Commercial banks have also reduced their lending to agricultural sector. Rural dwellers have lost faith in agriculture and are migrating to urban areas. Apart from adding to the existing woes of urban areas, lack of agrarian population in the rural areas will be a major stumbling block for reviving the rural agricultural sector. No amount of investment in agricultural projects will do well if the people with wealth of knowledge on agricultural techniques and husbandry are not retained back in the rural areas. I must say again that agriculture could be one of the areas for Fiji to source its growth and rapid action is needed to ensure that it is resurrected.

In summary, this budget has been delivered at a very trying time for the government. It demonstrates the will of the Interim Government to stabilise public finances. It has made the right beginning. However, the budget lacks initiatives to promote growth. Hope the 2008 budget will provide support structure for the economic recovery plan and thus boost economic growth.

Dr Reddy is an Associate Professor of Economics at the School of Economics, and Associate Dean (Research and Postgraduate Studies), Faculty of Business and Economics, University of the South Pacific. The views expressed in the article are his and does not necessarily reflect that of his employer.

Instead, the economy must grow and with the additional revenue generated by the growing economy, debt can be brought down to manageable level.
Rising debt has a number of implications on the economy, in particular, it will compromises governments' ability to channel expenditure to productive sources. As we note that debt servicing alone this year will take up 28.4% of the overall expenditure. This leaves us only with 71.6% of the total outlay to finance public sector activities. Furthermore, our debt is at a level where we are paying back more than what we are borrowing to service the existing debt. This year, we are planning to borrow $371.1m while we will pay back, $447.2m to service our previous debt servicing. So in effect what we are borrowing is not even enough to service our debt. In such scenario, if growth doesn't pick up, we could face the worst scenario, a "low growth-high debt trap".
The budget delivered yesterday is a contractionary budget. Some economists argued recently that the budget should be balanced. I argued that we should certainly reduce operating expenditure to achieve both a reduction in deficit and also to divert part of this expenditure towards raising the productive capacity of the economy. There does exists a school of thought that argues that when an economy is not doing well, expansionary policy could bring it back to sustainable growth path. That is deficit financing is good when the borrowing is channelled towards raising productive capacity of economy, when good governance in public sector entities prevailsthat is, when we have the fundamentals in place. While I am quite confident that the deficit created will be used in the right place this year given the Interim governments serious concern on corruption, I would not have rushed to deliver a 2% deficit this year but rather would have targeted 3% this year and 2 % next year.
The Finance Ministers address completely alluded to the conduct of Monetary policy and how it is complementing its fiscal policy's effort to promote economic growth. There seems to be some concern on the conduct of monetary policy in Fiji for some time and it is time now we examine it quite closely. At a time when the country is struggling to attract investment, interest rates are rising. People are finding it difficult to cope up with their mortgage payment and some have even sold off their assets or are in the process of selling it.
As said earlier, the Interim government has done an excellent job in setting the platform for stabilisation of public finances. However, the budget falls short of providing a platform for investment and growth. The reduction in allocation for capital projects is a cause of concern. Our state of infrastructure is pathetic. Public utility provision, in particular water provision, is in shambles. All these will affect business performance. If these are not provided both in quantity and quality, then we can't expect private sector to grow. Crime and violence has been a major problem in Fiji in the past. The budget has no concrete plans to contain this once the military returns to barracks. People will not be willing to work hard and accumulate capital in various forms, when thugs are allowed to roam freely and forcefully extract this surplus created by the hardworking innocent people. Furthermore, we will also face difficulty in attracting investors to Fiji if they know that the surplus that they will create has a high probability of being extorted by someone else. Therefore, the sooner we make our law and order plans public, the better it will be for economic growth.
On growth initiatives, government plans to continue with some of the past initiatives to promote a private sector led growth. These include support to ICT operators, the IT and Audio Visual industry and boost for Small and Micro enterprises. Some of these initiatives are largely dependent on the agriculture sector and land resources. In this budget, agriculture sector has not received the allocation it rightfully deserves. Furthermore, there is no concrete plan to resolve the property rights issue which underpins the release of land for agricultural use. As a result, large tracts of land are not used and agricultural output has been declining. Commercial banks have also reduced their lending to agricultural sector. Rural dwellers have lost faith in agriculture and are migrating to urban areas. Apart from adding to the existing woes of urban areas, lack of agrarian population in the rural areas will be a major stumbling block for reviving the rural agricultural sector. No amount of investment in agricultural projects will do well if the people with wealth of knowledge on agricultural techniques and husbandry are not retained back in the rural areas. I must say again that agriculture could be one of the areas for Fiji to source its growth and rapid action is needed to ensure that it is resurrected.
In summary, this budget has been delivered at a very trying time for the government. It demonstrates the will of the Interim Government to stabilise public finances. It has made the right beginning. However, the budget lacks initiatives to promote growth. Hope the 2008 budget will provide support structure for the economic recovery plan and thus boost economic growth.
Dr Reddy is an Associate Professor of Economics at the School of Economics, and Associate Dean (Research and Postgraduate Studies), Faculty of Business and Economics, University of the South Pacific. The views expressed in the article are his and does not necessarily reflect that of his employer.

No comments: