The Reserve Bank of Fiji.[File Photo]

The recent spike in infections due to the second wave of COVID-19 impedes confidence and poses significant downside risks to economic activity says the Reserve Bank of Fiji.

In its latest economic review, Governor, Ariff Ali says while the domestic economy is envisaged to contract further this year, the steady progress in local vaccination could pave the way for a modest recovery next year.

The Governor reiterated that vaccinating the population will be essential to control the spread of the virus, help support the reopening of businesses and borders and kick-start tourism activity.

[Governor, Ariff Ali : File Photo]

He says the prolonged unemployment situation due to the second wave of the pandemic has worsened poverty and inequality amongst vulnerable groups.

Ali adds in this regard, continued fiscal support will be crucial to ease the burden on households and firms and minimize the scarring effects of the pandemic on long-term growth prospects.

The Governor says the consumption and investment indicators remain sluggish given the reduced spending power of households and firms.

Ali says the current liquidity level remains ample at $1.6 billion consistent with the monetary policy stance aimed at placing downward pressure on interest rates.

Ali stated the outlook for inflation and foreign reserves is stable.

Annual inflation came in at -1.6 percent in May, influenced by the lower prices of kava and alcoholic beverages.

However, near-term risks to inflation are expected to stem from increases in global crude oil and food prices, disrupted local supply chains due to stringent COVID-19 measures, and increasing freight costs.

Foreign reserves are currently strong at $3.1b.

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