Liquidity More Than Sufficient

He revealed that current liquidity level of around $350 million is more than adequate to meet the needs of the banking system.
20 Apr 2019 16:03
Liquidity More Than Sufficient
Governor of the Reserve Bank of Fiji Ariff Ali

The role of the Governor of the Reserve Bank of Fiji is not to be popular or to be liked as the responsibility is immense.

Its decisions or actions has immense impact on every sector of the economy and therefore it’s not for the faint of heart.

These were the words of Governor Ariff Ali on Tuesday evening when giving a presentation on the Bank liquidity during a seminar organised by the Fiji Institute of Accountants.

The Governor of the Reserve Bank of Fiji clearly demonstrated to almost 200 accountants that current level of liquidity is more than sufficient.

He revealed that current liquidity level of around $350 million is more than adequate to meet the needs of the banking system.

Management of liquidity

Governor Ali informed the participants that the management of bank liquidity is a core function of the bank and this is continuously monitored on a daily basis against the monetary policy stance.

He showed data that revealed that prior to 2012, commercial bank liquidity was well below $100m with long periods where liquidity was less than $10m.

He pointed out that the build up in bank liquidity to almost $800 million was not by accident but a result of deliberate management or action by RBF.

He said, it was the actions of RBF that resulted in bank liquidity to $800 million.

Similarly, it is RBF that has slowly withdrawn liquidity from the banking system.

The Governor explained that the monetary policy stance is linked to business cycles.

The buildup in bank liquidity was to support economic growth and it is very clearly apparent that its accommodative monetary policy has helped the economy to grow.

He also pointed out that the withdrawal of liquidity is in response to the fact that the economy is growing above trend.

He demonstrated with data that five out of the last six years, Fiji’s economic growth had been above our historical growth rate.

On a question by a participant if the central bank was independent, Governor Ali replied: “The RBF Act states that one of its key role is to be advisor to Government, a role that all his predecessors and I take seriously as Governments fiscal policy can pose challenges to monetary policy.

“The independence of RBF can be clearly demonstrated by the fact that the Bank has managed to reduce liquidity and not kept it high to please Government.”

The Governor highlighted that the Bank has the potential with a variety of tools and facilities to raise liquidity to well over $1 billion.

He said that some of these measures can be done within a day.

He posed the question, does it make sense for RBF not to raise liquidity if it had the tools to do so? He responded that it was not neces- sary and the current level was not only adequate but also consistent with its monetary policy stance.

He gave an example that commercial banks hold 10 percent of their deposits as Statutory Reserve Deposits or SRD with RBF. This equates to $783 million.

It would be easy for RBF to reduce SRD to say eight per cent and inject over $150 million in liquidity tomorrow.

Or for that matter, reduce it to five per cent and inject almost another $400 million in the system.

About the misinformation

Governor Ali said that the mis- information about liquidity is because those making comments have little knowledge on the role of RBF, monetary policy stance and factors influencing liquidity.

He gave another example that he can reduce liquidity tomorrow by venting foreign reserves or allowing FNPF to invest offshore. Likewise, liquidity will increase if FNPF is told to repatriate its offshore investment.

Participants commended the presentation by Governor saying that they have a much better understanding of liquidity now.

The Governor ended his presentation by quoting Warren Buffet, “Someone sitting under the shade of a tree is because some planted a tree a long time ago”.

He added, the role of RBF and monetary policy is similar, to build enough trees for its 900,000 to sit in the shade of economic prosperity.


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