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Ariff: How Bank Helping Economic Growth

The financial year of the Bank now ends on 31 July instead of 31 December. This is in line with the recent changes in Government’s fiscal year as required by
09 Jun 2017 10:19
Ariff: How Bank Helping Economic Growth
Acting governor Faizul Ariff Ali.

The financial year of the Bank now ends on 31 July instead of 31 December.

This is in line with the recent changes in Government’s fiscal year as required by Section 54 of the Reserve Bank of Fiji Act [1983] which states “the financial year of the Bank shall coincide with the financial year of the Government”.

Yesterday, Reserve Bank of Fiji presented their economic affairs report to the standing committee.

With its objective not to maximise profit and to support economic growth, the key outcomes in relation to the three KPIs, price stability, external stability and financial system stability were also highlighted.

The following was presented by the Acting Governor of the Reserve Bank of Fiji, Faizul Ariff Ali.

 

Price Stability

All central banks have the same mandate to ensure that inflation is low and stable.  This is no different even for small central banks like us.

Fiji was hit by Tropical Cyclone (TC) Winston in February 2016.  Consequently, the supply of fresh fruits and vegetables and for some of us, the supply of our favourite national drink, kava, was affected.  Consequently, inflation rose to 5.5 percent at the end of July 2016 from 1.6 percent at the end of December 2015.

Almost 2.0 percentage points of the 5.5 percent inflation outcome at July end was driven by higher kava prices.  Even though kava constitutes only 2.5 percent of our Consumer Price Index (CPI) basket, it contributed substantially to the inflation out-turn. As a result, while yaqona farmers benefitted from the high prices, kava consumers had to fork out significantly more for their favourite brown label drink as prices almost doubled by July 2016 and rose three-fold by January this year.

For those who don’t drink kava, their inflation was around 3 percent.

 

External Stability

As a small open economy dependent on imports of a variety of goods such as medicine, food, fuel and machinery, there is a need to maintain a sufficient level of foreign reserves otherwise there will be pressures on the exchange rate.

The International Monetary Fund has set a benchmark on the level of foreign reserves which states that it should be sufficient to cover 3 months of imports.

In regards to external stability, Fiji’s foreign reserves remained well above the benchmark throughout the review period.

At the end of July 2016, the foreign reserves were $1,982 million, just $18 million shy of the $2 billion mark and was sufficient to cover 5.5 months of retained imports.

These foreign reserves are what the RBF holds in its accounts.  In addition, RBF have allowed a number of non-bank financial institutions to invest offshore.  At the end of July 2016, foreign reserves held by other institutions amounted to more than $500 million.

 

Financial Stability

It is paramount that the financial system is safe and sound whereby depositors, pensioners, policyholders and unit holders’ funds are protected.  The safety and soundness of the financial system is also crucial in ensuring the confidence of investors and international agencies.

The Fijian financial system remains safe and sound supported by a growing asset portfolio which rose marginally from the end of 2015 to July 2016 to just over $16 billion.  This is almost twice the GDP.

As at 31 July 2016, the banking sector accounted for 53 percent of the total assets, followed by FNPF at 31 percent and the insurance industry at 9 percent.

The RBF uses international best practices and standards to assess the safety and soundness of the financial system, based on a composite index of a number of indicators such as earnings, capital or solvency, liquidity, quality of management, asset quality, governance and risk management.  A primary objective of the prudential supervision role of the RBF is prevention, rather than rectification, so a risk-based approach to supervision is undertaken where risks to the operations of individual institutions and the financial system as a whole are closely monitored.

The RBF undertakes off-site and targeted on-site examinations of all supervised institutions in the system, and continuously reviews prudential supervision policies in line with recent developments and international best practices.  It also produces an annual Financial Stability Report on Fiji’s financial system.

 

What is the outcome of this?

By meeting its KPIs the Bank is effectively contributing towards sustainable economic growth.  It was estimated that the economy grew by 2.0 percent in 2016 despite the substantial damage caused by TC Winston and further economic expansion is forecasted in the coming years.  Economic growth in turn translates to more income, more jobs, more tax revenue for Government, a reduction in poverty and increased standards of living.

Inflation at the end of May this year was down to 2.5 percent and we expect inflation to be around similar levels for the remainder of the year;

Foreign reserves reached a number of new highs recently and peaked at $2.25 billion last week.

Economic growth is projected for the 8th consecutive year in 2017 and the growth rate was recently revised upwards to 3.8 percent.

 

Financial Performance

The RBF made a profit of $13.9 million for the seven month period.  However, the total amount transferred to Government was $16.9 million as it included $3.0 million of the revaluation reserve account (RRA).

This is in accordance with sections 8(3) and 34 of the RBF Act which states that one fifth of the RRA is to be transferred to the Government along with our profits.

This compares with a transfer of $32.2 million to Government for the twelve month period which ended on 31 December 2015.

The total profit and revaluation reserve was transferred to Government in the past five years totaled $160.0 million.

Feedback:  selita.bolanavanua@fijisun.com.fj



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