Banking System Liquidity Improved Slightly - What can be done further?

Banking system liquidity in Fiji has improved slightly to around F$105 million at end April 2009.

This came after the Reserve Bank of Fiji's actions to reduce the deposit requirement that banks are to hold with the Reserve Bank to 5% from 6%. The Bank had also devalued the Fiji dollar exchange rate by 20% three weeks ago.


What can be done further to stimulate the economy?

The Reserve Bank of Fiji's actions have in the past been generally appropriate for Fiji.

Around 2006, to dampen growth in the property loans market and with intentions to promote lending for investment purposes, the Reserve Bank had put in a requirement that lending for housing mortgages be limited, particularly for those customers that already own a home/property.

They also reviewed all bank lending applications to ensure that lending was indeed directed towards investment related purposes.

What can be done now to encourage money to move around the economy and stimulate growth, is for lending by banks and credit providers to be encouraged again. However, as in the past, lending has to be for purposes that generate economic growth e.g. those that will generate production, more exports, and increased employment. Lending for residential property development and buying second home can still be restricted. (This particular market got very inflated a few years ago in Fiji, particularly in the Suva and Nadi areas.)

Should banks now work on developing mortgage securitisation products (having learnt lessons from the US banks' sub prime mortgage lending debacle) and be able to transfer out some of the loans that exist in their books, to free up their capital and liquidity for further lending? I am quite sure there will be interest locally and around the Pacific Islands region for buying mortgaged backed securities from Fiji. The regulator and potential investors, though, have to be up-to-date with the actual risks and how these securities are to be valued - these were both weaknesses in US regulators, banks and investors prior to the financial crisis of 2007/2008.

With more and more people are being displaced from their employment as a result of the global/local crisis, there would also be a need for an alternative livelihoods project (like that which had been done in the agricultural/sugar cane sector in the past) where such people are provided training on new skills to be able to generate income e.g. setting up and running small businesses.

The Small and Micro enterprise sector has been found to be one of those that can contribute well to the development of an economy, anywhere around the world.

In Fiji, people who wish to run businesses have a primary need to understand the basic principles of running a business, how not to mix business with their personal affairs, the rudiments of an accounting and recording system, how to raise capital and prepare the background papers for it, how to prepare budgets and monitor compliance with them, how to prepare business/corporate/strategic plans and to stick with them (including regularly review them to ensure that they are adequate for the changing environment in which they operate), etc.

More and more people are entering the job market with qualifications but there are not many jobs available. Yet, curricula in schools and tertiary institutions do not provide anything on entrepreneurial training like they do in Singapore, for instance.

Can we export some of our qualified personal but provide incentives for them not to entirely migrate to overseas countries where they will provide their services, but to still find it a benefit to remain a Fiji citizen/resident?

The development of a national human resource development plan should be able to identify these things.

These are some of my thoughts that can be developed further.

Note : For investment advice and investment portfolio management services, call our office on (679) 3342719, (679) 3544897 or email info@gilbert.com.fj. We also do consultancies in areas relating to the financial sector in Fiji and can conduct or assist with similar consultancies in the Pacific Islands region. Our other products include :

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Reserve Bank of Fiji reduces overseas travel allowance

In its latest press release (27/3/09), the Reserve Bank of Fiji has put further restrictions on the amount of money that can be taken out of the country. With immediate effect, overseas travel allowances have been reduced to FJD 5,000 per traveler and a FJD 5,000 limit per month on credit and debit card payments.

These monetary policy measures have been necessary in light of the worsening global economy and its impact on our trading partners and ultimately our foreign reserves.

Furthermore, RBF will be reviewing Fiji’s growth downwards given the current global economic condition.

On a positive note, however, inflation for the month of February was 1.9 percent compared with 6.6 in January. RBF year-end projections still remain at 4.5 percent.

RBF’s Tight Monetary Policy Will Remain Unchanged

Mr. Savenaca Narube, the Governor and Chairman of RBF announced in a RBF press release dated 27/02/09 that RBF’s tight monetary policy would remain unchanged.

In making this decision RBF took into account the deepening global financial crisis which has negatively affected Fiji’s trading partner economies. The International Monetary Fund has in fact downgraded global growth to 0.5%.

Leading from this, Fiji’s growth prospects for 2009 do not look too good, with tourism, exports and remittances likely to be the worst hit. This will not help the state of our foreign reserves which currently stands at over $700m.

In addition, the RBF board also recognized that the recent flooding has necessitated Government expenditure in humanitarian and rehabilitation support at a time when there is less money available to finance loans, and interest rates already trending upwards. With these considered, RBF had to maintain its current stance.

However all is not doom and gloom. Mr. Narube advises that Government has the capacity to loan from abroad to finance its expenditure and in the process prop up our foreign reserves. The RBF revealed that Government’s external debt is only 7% of GDP and our external debt servicing is as low as 3% of our export earnings.

In addition, the governor said the bank will continue to maintain the right policy mix to ensure monetary and financial stability. The following are facilities that the bank has put in place to ease the burden on the economy.

• Halved its minimum lending rate (MLR) from 6% to 3% (i.e. interest charged on loans taken by banks from the Reserve Bank of Fiji)
• Introduced an Export Finance Facility (EFF) whereby banks can borrow cheaply from RBF (max. 2%) and must lend cheaply to exporters.
• Introduced a Flood Rehabilitation Facility (FRF) which is similar to EFF.

Furthermore, Mr. Narube said RBF could also use the Statutory Reserve Deposits (SRD) policy tool to stabilize liquidity. All banks in Fiji are required by law to keep (deposit) a specified percentage of their funds with the RBF. RBF sets this SRD percentage and by manipulating it can withdraw funds (tighten liquidity) or inject funds (improve liquidity) into the economy.