INFLATION in Fiji is an ongoing problem, and it is something we should all be concerned about. In April this year, Fiji’s annual inflation rate – the rate at which the price of goods and services has increased – rose to 7.1 per cent, the highest observed in the past 10 years.
The rise in prices have been a result of the VAT increases introduced in the last budget as well as other factors. It is important to note that once the prices of goods and services increase, it is very difficult to remove that price hike.
Ongoing inflation causes prices to increase year after year, and due to the accumulative nature of inflation, it is fundamentally important for governments to ensure that inflation is minimised.
So an increase of 7.1 per cent in one year is alarming. That 7.1 per cent increase is now fixed into prices around Fiji.
In fact, evidence suggests that the cost of living in Fiji has been substantially increasing for over a decade while wages have lagged behind. The sad reality is that, despite the development rhetoric of successive governments, many Fijians have become poorer. Inflation of this nature is a major failure of government policy.
How did inflation become a problem in Fiji?
There are predominantly three ways that inflation can take hold in a nation like Fiji.
Firstly, inflation happens when a country devalues its currency. The Fijian dollar has been devalued four times: twice after the 1987 coup, once under SVT in 1998 and a fourth time under the Bainimarama regime in 2009. Devaluing the Fijian dollar in 2009 made the prices of imports go up. This was, as expected, inflationary.
Market forces would have disarmed this inflationary threat alongside the right government policies such as disincentives against non-essential imports and a steadying of public and private debt.
However, this did not happen. Debt has fuelled consumption, especially import consumption, which has caused inflation to set in. For example, credit for new cars averaged $15m annually in the ten years leading up to 2012, while the annual average in the five years between 2013 to 2017 was almost $100m.
Even though cars were more expensive, they were being purchased through debt and at unprecedented levels.
Secondly, rising public and private debt creates excess money, which increases the money supply. Money in the domestic market competes for goods and services.
However, if the money supply increases while productivity remains sluggish, the price for goods and services rises. This has also happened in Fiji since the early 2010s, where government policies have directly and indirectly caused public and private debt to dramatically increase while local productivity has largely remained stagnant.
Thirdly, the introduction of a consumption tax like VAT will increase the nominal prices of goods and services. VAT was introduced by the SVT government in 1992, has undergone various adaptations and was increased in the last budget under the Coalition Government, as mentioned above.
Importantly, while consumer and asset prices have increased from these three failures in government policy, wages have not substantively increased. This has resulted in the cost of living rising considerably for the majority of Fijians.
While the rhetoric of economic growth is bandied around by governments over the last 10 to 15 years, the growth has been largely due to inflation.
For this reason, the intrinsic sentiment among the people of Fiji has been that their lives have become more challenging.
Who are the losers?
Low wage earners are the most affected by inflation.
Their wage increases are always inadequate and delayed, trailing far behind the inflation curve.
Increases in minimum wage have been desperately inadequate, which has caused great hardship for many Fijians. Generally, the working class in Fiji has become increasingly ill-equipped to cover their basic needs.
Furthermore, the tax data suggests that the middle class has not been able to negotiate their wages in line with inflation either.
In addition, the middle class tends to have greater access to credit like home and car loans.
This results in a desire to consume more and enter the property market.
However, because of consumer and asset price inflation, the cost of interest payments to banks has become an ever larger percentage of middle class disposable income, while their other daily costs have also risen.
Who are the winners?
Inflation incentivises the wealthy who have capital (the capital class) to invest, and is a mechanism by which businesses expand.
Inflation guarantees that, over time, the price of an asset will increase while the value of debt once required to purchase the asset becomes less significant.
Inflation also guarantees future increases in prices for goods and services, which tends to mean potentially higher future profits for businesses from investments they make in the present.
Many governments such as FijiFirst and the present Coalition Government encourage economic growth through a pro-inflation policy as part of a ‘trickle down’ economic ideology — that is to say, supporting the wealthy so that their wealth can trickle down to the rest of the population.
As Ben Bernanke, former chairperson of the US Federal Reserve said: “Low and stable inflation in many countries is an important accomplishment that will continue to bring significant benefits.”
High wage earners act similarly to the capital class.
Their investments in such things as real estate initiate future asset price inflation which they benefit from because they can negotiate for wages that stay above the inflation curve, shielding them from any cost of living increases.
It is ironic that members of the government have recently negotiated an increase to their wage to shield themselves from the very inflation that they have created.
Conclusion
The economic policies of the FijiFirst and Coalition Government since 2009 have caused inflation. Such policies as devaluing the dollar, increasing VAT and creating a debt-and consumption-fuelled economy have not created the type of growth that brings broad wealth to Fijians.
Wealth created by the capital class has not “trickled down” to the rest of the population. What has transpired is unprecedented inflation and a rise in the cost of living which has created extraordinary levels of poverty and a fragile economy.
While low inflation can be an important mechanism for economic growth, excess inflation causes wealth disparity.
Inflation can be seen as a mechanism that directs money away from the poor and middle class to incentivise the rich.
Therefore, it is imperative that governments keep inflation in check. They, and especially their finance ministers, need to be scrutinised for the way they manage inflation.
- EDWARD NARAIN is a Fijian political analyst, researcher and writer based in Melbourne Australia. The views expressed in this article are not necessarily of this newspaper
