Fiji Second Fiscal Sustainability and Climate Resilience DPO

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The operation supports Fiji’s reform effort to strengthen medium‐term fiscal sustainability while undertaking structural reforms to improve the business climate and resilience to climate change. The operation is the second in a programmatic series of two development policy operations (DPOs), with a total of US dollar 64 million (US dollar 6 million from IBRD and US dollar 58 million equivalent1 from IDA, including US dollar 29 million from the Scale-Up Facility2). This is Fiji’s first IDA-financed operation since the country gained access to IDA on July 1, 2019. The Program Development Objective of the DPO series is to support the government’s effort to: (i) strengthen medium‐term fiscal sustainability; (ii) improve the investment climate; and (iii) build climate resilience. The main risks to the proposed operation stem from Fiji’s macroeconomic context and its vulnerability to climate related disasters. A sharper than anticipated slowdown in growth in Fiji’s export markets and tourism sources, or disruptions to the global economy could deteriorate domestic macroeconomic conditions and threaten debt sustainability: Fiji faces a moderate risk of debt distress and this can only be reduced through continued fiscal consolidation and prudent public borrowing. Vulnerability to climate change also poses a risk. Another major natural disaster in the next few years could threaten macro stability and lead to slippages in the reform agenda as a large part of the bureaucracy would have to shift its attention to disaster recovery and reconstruction efforts. Measures supported by this proposed DPO to strengthen medium-term fiscal sustainability and build fiscal buffers will be an important element in mitigating macroeconomic risks. This DPO also supports several reforms, which are the direct responsibility of several line ministries, whose capacity may be stretched - and where understanding of budget support operations may be limited unlike the Ministry of Economy. However, appropriate training and technical assistance should serve to offset any such risk.