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Reserve Bank Tells Real Story On Liquidity

The Reserve Bank of Fiji’s Chief Manager Risk Management and Communications, Lorraine Seeto, yesterday responded to queries sent by the Fiji Sun Business on liquidity. Below are her responses to
02 Jun 2017 10:52
Reserve Bank Tells Real Story On Liquidity
Lorraine Seeto.

The Reserve Bank of Fiji’s Chief Manager Risk Management and Communications, Lorraine Seeto, yesterday responded to queries sent by the Fiji Sun Business on liquidity.

Below are her responses to the questions.

 

  1. What was the main driver of the increase in bank liquidity?

While there are various measures of bank liquidity, the most common measure is excess reserves or commercial banks’ demand deposits (BDD) placed with the central bank. These are essentially deposits with commercial banks that are over and above the required statutory reserve deposit (SRD) levels required by the Reserve Bank of Fiji (RBF).

There are various factors that influence the level of BDD including changes in the level of foreign reserves, the amount of currency in circulation (CIC) or cash-in-hand held by the general public, the inflow and outflow of Government deposits with RBF, changes in SRD and the injection or withdrawal of funds by RBF under its various lending facilities or through the conduct of open market operations (OMO).

In terms of performance over the last few years, there has been a general downward trend in bank liquidity which has declined from a high of $773 million in November2013 to just under $400 million in early 2017.

The reduction in liquidity was largely attributed to a general downward trend in foreign reserves, an increase in SRD and a build-up in CIC.

More recently, BDD has risen notably since April 2017 and is currently around $718 million.

Underpinning the increase is the marked rise in foreign reserves, which reached a record high of $2,242 million, due to a number of factors including Government’s drawdown of the US$50 million (F$105 million) Asian Development Bank emergency assistance loan for TC Winston related rehabilitation works, and other foreign exchange inflows associated with export proceeds, tourism earnings, and personal remittances.

Another contributing factor to the rise in BDD, although to a lesser extent, is theseasonal decline in CIC.

 

  1. How does RBF control liquidity?

The RBF is able to control the level of liquidity using a number of tools at its disposal. Firstly, it can influence the level of liquidity directly by changing the SRD rate.

Currently, commercial banks are required to hold 10 per cent of their deposit liabilities with the RBF. If the RBF reduces the SRD ratio to below 10 per cent, this frees up a portion of the current SRD level which then becomes excess reserves or BDD.

Conversely, if we raise the SRD ratio, banks will need to hold more of their deposits in SRD thereby reducing the BDD.

The second method of influencing the level of liquidity in the banking system is through the conduct of OMO.

This is an indirect method of influencing liquidity where the RBF issues its own securities called RBF Notes.

When market players purchase or invest in RBF Notes, money moves out from the banking system to the RBF.

For example, if the RBF issues $100 million of its own Notes with a 14 day maturity, depending on the uptake by investors in the market, BDD can decline by up to $100 million.

On maturity i.e. after the 14-days, BDD will increase by $100 million when the RBF pays investors back. Therefore, by issuing RBF Notes or conducting OMO, the RBF is effectively able to mop up liquidity or reduce the level of BDD in the system.

The third method that RBF has used from time to time is to vent its foreign reserves by allowing non-bank financial institutions such as FNPF to invest offshore. This usually happens when foreign reserves are at healthy levels. Any outflow of foreign reserves has a direct negative impact on bank liquidity.

 

  1. Is the build-up in liquidity good or bad?

It is difficult to make a general statement on whether a significant build-up or decline in BDD is either good or bad.

Similarly and perhaps more importantly, one cannot make an outright statement about a particular level of BDD at a particular point in time being either good or bad.

As highlighted above, we have seen a general downward trend in BDD over the last 3 years.

The recent increase in BDD which is partly due to a drawdown of external loans is also due to the strong performance of foreign exchange earning sectors.

Hence, the build-up in liquidity does not necessarily reflect that the economy is performing weakly; instead it signals that some sectors are doing well.

Commercial banks have a significant amount of loans that have been approved but are not fully drawn/utilised. In this regard, the build-up in liquidity is positive and would support the banks in their issue of loans.

In addition, the large pool of liquidity complements the current monetary policy stance of supporting growth by not putting upward pressure on lending rates.

Furthermore, the RBF estimates that total investment to Gross Domestic Product (GDP) ratio this year is expected to be just below Government’s 25 per cent target.

This was validated by the results of the RBF’s recent Business Expectations Survey with suggests that investment in plant and equipment as well as buildings will remain robust in the near term.

Finally, the Macroeconomic Committee recently revised the country’s GDP growth forecast for 2017 upwards to 3.8 per cent from 3.6 per cent previously.

The build-up in liquidity is therefore appropriate as this will support credit expansion and contribute positively towards growth.

While there has been some slowdown in private sector credit, the expansion in credit is still faster than the nominal growth in GDP.

 

  1. What is the outlook for liquidity?

There is no immediate concern about the level of liquidity in the banking system. The

RBF will continue to manage liquidity in line with its monetary policy stance.

Feedback:  ivamere.nataro@fijisun.com.fj

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