International economists concerned about Fiji's pension fund

Reproduced from Radio Australia' Website: May 19, 2010 16:40:16

International economists have expressed concern about the huge losses announced by Fiji's National Provident Fund and warned of future problems if the government continues to borrow so heavily from the fund. Earlier this month, the Fiji Provident fund announced a writedown of its assets of 327 million Fiji dollars or about 165 million US dollars. Australian National University economist, Jon Fraenkel, says the writedown is a disaster for the people of Fiji. Ratings agency, Standard and Poors, says Fiji's international credit rating could be affected.

Presenter: Jemima Garrett
Speaker: Kyran Curry, Sovereign Ratings analyst with Standard and Poors; Jon Fraenkel, Research Fellow with the State, Society and Governance in Melanesia Program, at the Australian National University

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GARRETT: Every worker in Fiji is required to save for their retirement by making contributions to the National Provident Fund.

Jon Fraenkel, a Research Fellow with the State, Society and Governance in Melanesia Program at the Australian National University says the writedown is a staggering amount of money and far more than was lost in the infamous National Bank of Fiji scandal 15 years ago.

FRAENKEL: Reported losses then were about 220 million, so this is far larger and these are peoples savings, their retirement pensions that have been put away over years and years and years and it's a major hit for the economy and it's a major hit for the living standards of people in Fiji.

GARRETT: When he announced the writedown, the Provident Fund Chief Executive, Aisake Taito, was quick to assure members their remaining savings are safe.

But economists from Fiji and elsewhere say it is very likely that there are more writedowns to come.

International Ratings Agency Standard and Poors says its concerns are related to the important role the Provident Fund plays in funding government deficits and in making loans to government entities.

The Agency's analyst, Kyran Curry, says Fiji's credit rating could be affected.

CURRY: We see the problems of the providence fund as being something that generally weighs on the institutional transparency and independence in Fiji and that's more of a direct issue relating to the sovereign ratings. It's a concern for us that we're not seeing the levels of transparency and governance in Fiji that we have seen in the past and that potentially has a significant impact on the rating in the medium term.

GARRETT: So what sort of impact could it have on Fiji's rating?

CURRY: Potentially if there are significant losses in the fund, given the fund is actually a significant sponsor of government debt, to the extent that the level of assets may not be there when in future years the population is increasing. People are reliant on it to fund their retirement incomes. That is something that may impact on the ratings, because it will impact on the government's fiscal flexibility and its fiscal standing more generally.

GARRETT: Economists in Fiji are deeply concerned about the Provident Fund and the web of connections it has with government, struggling companies and with the Reserve Bank.

Professors Biman Prasad and Wadan Narsey from the University of the South Pacific have each called for a public inquiry.

And Professor Narsey has published a detailed analysis of the Provident Fund's predicament.

Jon Fraenkel from the ANU says the issues are complex.

FRAENKEL: The blame does not solely lie with this government. There have been errors made also on the Qarase Government and some the investment decisions, for example, the Natadola resort and the Momi Bay resort were made back then. However, it is certainly the case that three years of economic crisis and downturn in the tourism industry have not helped at all and they have made it much more difficult for new resorts like Natadola to survive. And, of course, the Fijian Inland Revenue and Customs Authority's interpretation of tax rules pretty much ruined the Momi resort straight after the coup. So although there's got to be some acknowledgment of former governments, this government has certainly played its part.

GARRETT: Professor Narsey has highlighted a number of structural problems for the Fiji National Provident Fund. It's been used as a source of government loan money. The Reserve Bank is using it as a tool of monetary policy forcing it to bring its assets back onshore, where they then suffered from the devaluation of the Fiji dollar. Do you share Professor Narsey's concerns about that sort of problem?

FRAENKEL: Yes, I do and that's not only my view, it was also a concern raised by the visiting international monetary fund delegation I think in November last year where they expressed deep concern about the level of government borrowing from the Fiji National Provident Fund. This also has been a problem going back over years, because since the government borrowed so heavily from the Fiji National Provident Fund, it also protects the monopoly rights of various assets that the provident fund holds, so there is a kind of circular difficulty that arises in Fiji's economy as a result of this.

GARRETT: Professor Narsey says that the only solution is sustained economic growth and that the only way to get that is that Fiji needs to have early elections and to restore the independence of the judiciary. What's your view on that?

FRAENKEL: Yes, well I think he also points out that there is a collapse in investor confidence as a result of arbitrary decisions, expropriation of assets, decrees that change the rules of the game constantly and that limiting economic growth. Absolutely, I think the recovery in Fiji depends on some economic growth. The economy is in major difficulties and the government needs to do something to engineer economic growth and going back to elected democracy would be a major boost to investor confidence.