Reserve Bank increases Statutory Reserve Deposit Requirement

The Reserve Bank of Fiji has announced that it will increase banks Statutory Reserve Deposits to 7%, from the current 5%.

The increase will reduce the amount of funds that banks available for lending and other purposes.

The move comes as inflation rates rose to 6.3% in September 2009 from 5.1% a month earlier. Year end inflation has been forecasted by the Reserve Bank of Fiji at 9.5%.

Taken together with the Reserve Bank's earlier directive that banks reduce their interest spreads to 4% over 2009, banks will face committed pressure to attempt to maintain their profit margins as they work to meet the Reserve Bank's directive.

Over the last ten years, the Reserve Bank of Fiji has used interest rates as a primary tool to influence interest rates movements. Apparently, this might not have worked as planned so over the last two years, the Reserve Bank has gone back to using more direct means of controlling bank credit through the use of statutory reserve deposit requirements, credit ceilings and specific interest rates directives.

Note : For bank and financial sector compliance advice, pls call our office on (679) 3342719 or email info@gilbert.com.fj. We have assisted a number of financial institutions (in the banking and insurance sectors and the capital markets industries) to put in place policies and procedures to meet any relevant requirements imposed by their financial sector regulators. Our Principal has also sat as a Board Director of a licensed credit institution in Fiji. During his time there (a little over 2 years), he assisted with putting in place appropriate policies and processes and improve the risk and compliance culture within the company. These contributed to the institution making record profits over 2 years consecutive years. Refer to the financial institution's relevant summary financial statements for the 2 years here and here.

RBF Drops Statutory Reserve Deposit (SRD) Rate

In its continued bid to stabilize the local financial sector and improve liquidity in the country, The Reserve Bank of Fiji has announced the reduction of the Statutory Reserve Deposit (SRD) from 6 percent to 5 percent, effective today. This comes exactly a week (01/04/09) after the RBF implemented its flood rehabilitation facility for businesses affected by the recent floods, and underpins the central bank’s seriousness about generating economic activity in the country.

The SRD is a legally mandated proportion of total deposits and similar liabilities of each licensed bank in the country that needs to be deposited with the RBF. The relaxing of the SRD rates will inject much needed funds into the highly illiquid local financial sector.

Reserve Bank of Fiji Economic Review Vol. 26, No. 2, month ended February 2009

In an RBF Economic Review Vol.26, No.2 dated February 2009, the bank says that as a result of the global financial crisis, the International Monetary Fund has been forced to revise its global growth estimate of 2.2% down to 0.5%. Many of Fijis’s trading partner economies are expected to contract this year. Only Australia has been forecasted to record a growth, albeit one of the lowest in recent years.

On the domestic front, growth in the Fiji economy for 2008 was estimated by RBF to be about 1.2%. Listed below are some of the prominent highlights:

• Annual decline of 6.9% in money supply (broad money) on account of low demand deposits which had declined by 25.6%.
• Domestic credit growth slowed, led by less government borrowing (4.8% in Dec from 6.9% in Nov).
• Worsening of trade imbalance (i.e. more imports over exports) by $1.9b in November. In fact, imports increased by 24.2 %.
• Annual decline of remittances by 26.7%.
• Low cane & sugar output.
• Tightening of liquidity with both lending and time deposit rates increasing.

On a positive note however:

• Although exports levels were lower than imports, exports nonetheless had increased by 16.7%, mainly through re-exports of mineral fuels, and higher earnings from sugar, gold and fish.
• Raising the tax threshold to $15,000 in June of 2008.
• Improved performance of tourism, copra, electricity, gold and construction & building activities.
• Decline in inflation from 7.4% in Jan to 6.6% in Dec.
• Increase in capital spending and investment lending.

Growth in 2009 is estimated to be around 2.4% by RBF. However, this is all contingent upon both global influences and how well the country handles itself coming out from the recent flood crisis, and during the current tight liquidity situation.

The RBF revealed that inflation stood at 6.1% in January but forecasted a drop to 4.5% by the end of the year. This inflation estimate may be largely due to a drop in global oil price which has seen the benefits flow to the local transport, heating and lighting industries. However, because of Fiji’s high dependence on oil and wheat, the price stability of these commodities will have a huge bearing on this year end estimate.

The RBF has also revealed that the Fiji dollar has declined in value (i.e. the Nominal effective exchange rate of Fiji Dollar had an annual drop of 0.3% in January 2009) but hopefully through RBF’s current monetary policy mix, Fiji’s financial situation will continue to be stable. In addition, the RBF says that official foreign reserves are at a provisional level of $672.2m, sufficient to cover 2.7 months of imports.

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.