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.

The Reserve Bank of Fiji Clarifies Issues on Liquidity

In a Reserve Bank of Fiji press release dated 24 Feb 2009, the RBF has clarified that the low availability of funds for lending in the financial sector, which resulted in an increase in interest rates was not because of RBF’s monetary policy but was a direct result of the outflow of foreign reserves. Last week, ANZ increased its rates by 0.5% while Westpac will increase its rates today by 0.25% and a second increase on the 23/03/09 of another 0.25%.

In response to the tightening liquidity for banks, the RBF has advised banks to continue using the overnight inter-bank market and offering competitive rates for deposits. If these measures fail, banks can borrow from RBF’s overnight lending facility also known as lender of last resort facility. In addition, RBF has an export finance facility whereby banks can borrow at a maximum interest rate of 2% and lend to exporters at concessional rates. The purpose being to promote exports and improve the short-term liquidity needs of banks.

The Governor of RBF, Mr. Savenaca Narube allayed fears of a credit crunch and said “the Reserve Bank will ensure that the financial market will continue to operate smoothly and that the financial system will remain sound.”