Reserve Bank Governor: How, Why Liquidity Level Set

Managing liquidity is an in­tegral part of the Reserve Bank of Fiji’s job. These were the words of the RBF Governor Ariff Ali during a press conference on banking system
12 Mar 2019 12:15
Reserve Bank Governor: How, Why Liquidity Level Set
Reserve Bank of Fiji Governor Ariff Ali (right) and deputy governor Esala Masitabua on March 11, 2019. Photo: Maraia Vula

Managing liquidity is an in­tegral part of the Reserve Bank of Fiji’s job.

These were the words of the RBF Governor Ariff Ali during a press conference on banking system li­quidity at the central bank yester­day.

“Every day the economics team works very closely with the finan­cial markets team and prepares a liquidity forecast.

“We do this forecast for the next couple of days, weeks and next few months.

“As I highlighted early there are number of factors that influence the level of liquidity .

“So when we say we manage the level of liquidity, we look at the forecast of liquidity, so internally in our policy meetings we know what is appropriate for the econo­my as of right now.

“If we see liquidity is moving out of line, we try and adjust it. By ad­justing I mean we are try to align it to where we want it to be.

“If the liquidity outlook is higher than where we want it to be, we will go to the system and absorb liquidity.

“If liquidity is much, much lower than we want it to be, we will go and inject in to the system.

“Right now liquidity is about $300 million, it is more than sufficient to meet the demands of the econ­omy, that is more than sufficient to meet the demand of the borrowers.

“But at the end of the day we feel the level of liquidity has to be con­sistent with where we want the economy to head.

“So sometimes the demands from the private sector loans could be much, much higher, but if we feel that is not appropriate for the economy we will then withdraw money from the system.

“Sometimes we feel we need to en­sure that the economy grows much much faster, so there should be de­mands to make the economy grow.

“What we will then do is pump li­quidity into the system, the banks will have all this money not earn­ing interest rates then they will look at loans and see which loans they can give.

“Of course, they will need to man­age their non-performing loans, they will not give loans for the sake of giving loans and ensure that people have the ability to pay.

“So managing liquidity is done on a day to day basis by the Reserve Bank of Fiji and it has to be con­sistent to where we want it to be.

“People are saying that $300m li­quidity is not sufficient; our view is that liquidity is more than suf­ficient.

“We have been able to manage liquidity between $1m to $10 m of course it has come down but it was more than sufficient.”

He said at one point liquidity was at $1m and if you go back at the late 1990’s we were managing liquidity at below $10m.

“There were instances that li­quidity where by it was close to $1m or even lower than $1m,” Mr Ali said.

“One of the reasons liquidity was low was because we deliberately went into the system and withdrew liquidity through RBF notes.

“The Banking Act allows that the minimum level of liquidity for each bank to hold is $20,000 only.”

Association of Bankers in Fiji

The Association of Bankers in Fiji (ABIF) would like to clarify the situation on the level of bank liquidity in the system.

Association of Banking in Fiji’s chairman, Rakesh Ram,said: “The bank liquidity is surplus funds that are deposited with the Re­serve Bank of Fiji.

“The current level of around $300 million is adequate to meet the de­mands of the banks.

“There is a cost of holding high surplus funds since interest is paid on the deposits. Each bank has its own internal liquidity policy.

“The level of how much each bank holds as liquidity is depend­ed on a number of factors includ­ing approved loan pipelines or committed loans, level of deposits, trend in import payments by cli­ents, amount of precautionary bal­ances etc.

“Bank liquidity varies across in­dividual banks or is not evenly dis­tributed. However, banks that have lower liquidity level or shortfall needs are able to source liquidity from other commercial banks on an overnight basis or from the Re­serve Bank.

“This is not something that is new, but has been in existence for a very long time.

“One key area that the banks have been working collaboratively to assist in managing system and individual liquidity is through en­couraging more electronic trans­actions.

“The ABIF is of the strong view there is room to reduce currency in circulation, which is currently around $850 million.

“Hence, all the banks fully sup­port the use of EFTPOS by the gen­eral public because this has the po­tential to increase bank liquidity because withdrawal of cash reduc­es liquidity by the same amount.

“The ABIF has been in close con­sultation with RBF on the level of liquidity and in the economy and know that the current levels are well above historical average,” Mr Ram said.

He also highlighted that there has been a lot of talk between liquidity crises and cash crises.

“Cash is our coins and notes, so we have in our vault enough mon­ey that will meet the demands for the next five years and more.

“So there are no cash crises, I see a lot of social media talking about cash crises; we have more than enough cash in our stock to meet the demands, of the economy in the next five years and more.

“In terms of liquidity there are no liquidity crises, we feel that the most appropriate level of liquidity right now is $300m.

“Liquidity is the access money that commercial banks have at the end of each day sitting with the Reserve Bank and earning no in­terest

“So this is the surplus money that the commercial Bank have because they are unable to lend out, because the depositors have not withdrawn their money or bor­rowers have not fully drawn their money or excess money they have earning no interest or one hand take deposits or pay interest.

“They take this money to give out as loans. The difference between what they take as deposits and what has not been lent out, is ex­cess liquidity/reserve.”


Mr Ali reminded the media that whatever they report such as there is a low level of liquidity or liquidi­ty is very low without understand­ing it would than create anxiety in the market.

“Sometimes low level of liquidity is the right level of liquidity so I think that most important thing. There is nothing as low or high level of liquidity most important thing is what is the right level of liquidity.

“Right now what I am seeing in the banking system is more than sufficient. The best people to talk about liquidity is the central bank.

“I have not lost sleep over the li­quidity issue, it does not keep me awake.

“I feel its an unnecessary distrac­tion from what we do because we have got a lot of important things to do.”


Fijisun Ad Space

Get updates from the Fiji Sun, handpicked and delivered to your inbox.

By entering your email address you're giving us permission to send you news and offers. You can opt-out at any time.

Fiji Sun Instagram