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$546.2 Million Liquidity Seen As Adequate

The liquidity in our banking system was recorded by the Reserve Bank of Fiji being $546.2 million as at May 26. The central bank noted this in its May Economic
01 Jun 2016 13:44
$546.2 Million Liquidity Seen As Adequate
Reserve Bank Of Fiji

The liquidity in our banking system was recorded by the Reserve Bank of Fiji being $546.2 million as at May 26.

The central bank noted this in its May Economic Review. It has been noted given the current monetary policy stance, the level of liquidity is adequate and complements monetary policy stance which is to keep lending rates low.

Liquidity is basically the excess funds that commercial banks have at the end of each day that they have not lent out. Simply put, these funds are that are deposited with the Reserve Bank and currently do not earn any interest.

In April, liquidity in the banking system fell by 10 per cent ($55.1m) to $498.7 million, led by the decline in foreign reserves (-$29.9m) and increases to both currency in circulation ($16.3m) and Statutory Reserve Deposits ($6.9m).

While the level of liquidity is slightly lower than that recorded during the early part of 2011, it has been hovering between $500 million to $600 million for most of the past five years.

One of the main reasons for the slight reduction in liquidity in March/April was due to the rise in cash held by the general public, part of which was due to the withdrawal of funds from FNPF.

 

What affects liquidity?

There are a number of factors that directly affect liquidity.  The first is the monetary policy stance adopted by RBF.

The central bank can mop up (withdraw) liquidity from the banking system by issuing its own securities. Conversely, it can add liquidity if it redeems existing stock of RBF securities. 

The second way liquidity is affected is through changes in the level of foreign reserves.

If we receive foreign reserve (inflows), the foreign exchange is converted into Fijian dollars and hence liquidity is added. 

On the other hand, if we pay for imports, our foreign reserves decline, liquidity is drained out of the system as we have to convert the Fijian dollars into foreign currency. 

The third way liquidity is affected if the RBF lends to commercial banks or Government.  When RBF lends, liquidity is added and when the loan is repaid, the level of liquidity declines. 

The final way liquidity is affected is when the public withdraws cash or deposits cash. 

When you withdraw cash, bank liquidity will fall as you have now taken cash and alternatively when you deposit cash, banks now have more funds or liquidity.

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