Low Liquidity Anxieties

By: Dionisia Tabureguci

A state of low liquidity in Fiji’s banking system – which currently sits at around F$350million – has been linked to increased pressure on the country’s foreign exchange reserves to finance Fiji’s Current Account Deficit. 

The ANZ bank alluded to this in its May Economic Monitor for Fiji, released last week, where it said that while the current state of low liquidity is not a “crisis” and does not pose a risk to bank solvency, it did provide the central bank with a means to dampen local demand.

“The Reserve Bank of Fiji (RBF) is concerned about the recent widening of the Current Account Deficit (CAD) which, in turn, is driven by an escalation in motor vehicle imports due to reduced import duty, higher fuel imports due to sharp lifts in oil prices as well as increased imports via a surge in construction activity including machinery,” ANZ wrote. 

“However, this deficit wasn’t fully offset by foreign direct investment  (FDI).  The balance of the deficit had to be financed out of the nation’s foreign reserves.  The requirement to fund the deficit out of reserves grew larger over 2018.”

The Current Account, which records exports and import payments of goods and services, has historically stayed in deficit territory but in recent times has widened considerably.

Data compiled by the ANZ from the Fiji Bureau of Statistics and its in-house research showed that in March 2016, Fiji’s current account deficit was less than negative F$200million but a year later (March 2017), it had ballooned to close to -F$800million.

In September 2017, CAD had dropped back to a little over negative -$500million then widened again to over –F$700 million in March 2018 and continuing in that trend, passing the –F$1billion mark on September 2018.   

This showed that Fiji’s export earnings were not keeping up with its import bills.  Hence, the RBF has had to dip into the foreign reserves to pay for the deficit.  This has seen reserves drop from over F$2billion in January to F$1.94b at the end of April according to RBF figures. 

RBF is hoping therefore that the low liquidity level will drive up the cost of credit, which in turn would dampen consumer demand and this subsequently should put the brakes on imports.

“The central bank wants to reverse, or at least reduce the outflows for foreign reserves.  It is relying on lower levels of liquidity, from falling foreign reserves, to push lending rates higher,” ANZ said. 

“As bank lending rates rise, the bank (RBF) is hoping credit growth slows, which would lower demand for imported goods, in particular, consumer goods, especially cars. As CAD improves, the bank would be in a better position to accommodate higher construction activity and absorb shocks from oil and fuel price hikes.”

RBF Governor Ariff Ali said the central bank “is not taking from reserves to fund the deficit in CAD.”

“Fiji has always had a history of CAD.  In fact, CAD is expected to narrow this year, so the statement that it is getting wider is incorrect.  During the period 2013-2017, the CAD was widening but our reserves was actually increasing.  The CAD is part of the Balance of Payment…CAD is the sum of the merchandise trade and Services Accounts, including transfers. It does not include FDI, equity and foreign loans or capital drawdowns. So essentially, the CAD is funded by the financial and capital amount and any shortfall is then reflected in a lower foreign reserves.

“There are times reserves decrease because we vent reserves or allow FNPF and others to invest offshore…A tightening of monetary policy also means overheating of the economy and not necessary a crisis. A easing of monetary policy means growth is below trend and therefore needs to be stimulated,” Ali said.

Pressure on imports coming from local vehicle demand has been particularly noticeable and in the last five years, import bills for that activity had been astronomical.   

“Over the last five years, we have had imports of vehicles and machinery worth F$2 billion.  The preceding five years, we have had imports of (the same) worth F$500 million,” Ali said in a recent interview with local television station MaiTV. 

Fiji Bureau of Statistics data on newly registered vehicles revealed the number shot up from a little over 7,600 in 2013 to 10,846 in 2014 to over 15,100 in 2016. 

According to ANZ, while liquidity has been allowed to fall as a stopgap measure to falling reserves, overall liquidity management will be key in steering the economy away from recession. 

“While liquidity is not hindering growth now, further falls could push interest rates even higher,” it said.  “This would act as a brake on growth and could derail economic expansion.  The Reserve Bank will have to manage liquidity carefully to maintain consistency with its easing policy and to secure continued economic expansion.”  

Fiji’s low liquidity has been the subject of heated debate on social media and in Fiji’s parliament, with government defending the status quo and opposition parties calling it an “economic crisis”.

Economists however are predicting growth to slow on the back of government reining in expenditure in order to strengthen its fiscal position. 

ANZ expects public demand to range from “flat to falling” over the next two years as Fiji braces for what’s expected to be “a tight budget”. 

“All in all, Fiji has recovered well from its recession in 2009 and gone on to register nine consecutive years of economic expansion.  Counter cyclical fiscal stimulus played a key role in sustaining growth.  The Reserve Bank of Fiji kept interest rates low and made room for the boom in construction activity by facilitating higher imports of machinery and construction materials through careful management of foreign reserves.  Today, Fiji’s economy is 53 percent larger than in 2009, has an additional 100,000 people in jobs and enjoys an all-time low unemployment rate of 4.5 percent,” ANZ said. 

This story was updated on May 27 to include the Reserve Bank’s response to issues around financing the Current Accounts Deficit in our original report and to provide additional content important for context from the ANZ report. The headline was also amended.