The impact of Fiji’s devaluation

It's not hard to understand the motives. But the devaluation is a gamble that is not guaranteed to pay off.

No doubt, the devaluation had to do with the export sector's poor contribution to income (goods only in the accompanying chart). Devaluation will cut the foreign-currency price of Fiji's exports and possibly increase income in $F—if there is a strong export supply response.

That may be a problem, however, because output in the crucial agricultural sector has been disappointing, in part due to damage from the 2008 cyclone but also because of a failure to invest in new production and technologies and because of land-ownership disputes etc. Manufacturing as a whole has been in the doldrums since the margin of preference for garments in Australia has been eroded (by cuts in Australian import barriers to e.g. China).

Also, the devaluation will cut the income of every Fijian who depends on a domestic wage

Where the devaluation will have most impact is on the $F value of remittences from residents and workers abroad, which have become a more important source of income as the contribution of the export sector to the economy has fizzled. But, with the increasing trouble in Fiji, many expatriates are likely to have less interest in sending money home. Worse, many of them are facing employment challenges in their 'host' economies, thanks to global recession.

Data in the two charts (click the thumbnails) from the Asian Development Bank.

Tags for this entry: trade countries recession exports pacific fiji monetary policy remittences