Analysis | Politics

Liquidity 101 – Not The Doom And Gloom Opposition Is Making It Out To Be

As of September 2, 2019, liquidity in the banking system stood at $626.7 million, more than double since the end of 2018.
04 Sep 2019 17:01
Liquidity 101 – Not The Doom And Gloom Opposition Is Making It Out To Be


Every second person on Facebook has become an expert on the economy and liquidity. Do they even know what this means? It most certainly does not seem so.

Every Parliament sitting has seen at least one question on this elusive liquidity. Yesterday was no different.

As of September 2, 2019, liquidity in the banking system stood at $626.7 million, more than double since the end of 2018.

This is expected to rise to around $700 million by the end of this year, more than sufficient to meet the credit needs in the economy.

What is bank liquidity?

Commonly when one talks of liquidity, they are usually referring to the ease at which assets can be converted to cash in order to meet payment obligations. From a central bank’s perspective, bank liquidity is, therefore, a measure to check that commercial banks have enough available funds to meet the demand for loans and other financial commitments. Using this framework, when the Reserve Bank of Fiji refers to bank liquidity, it is referring to banks’ demand deposits or excess reserves which are deposited with the RBF.

These deposits are additional from the statutory reserve deposit (SRD), which is a mandatory prudential requirement. The RBF independently manages the level of bank liquidity in line with its monetary policy stance without the Government’s intervention.

Factors that influence liquidity:

There are several factors that influence bank liquidity, including movements in foreign reserve and currency in circulation, RBF activities including its use of the SRD ratio, its lending facilities and its investments; and also movements in Government’s deposits with RBF.

First on foreign reserves:

This represents the income we earn from our exports of sugar, mineral water, garments and tourism, and inflows from external loan drawdowns etc. An increase in foreign reserves results in a corresponding increase in bank liquidity as exporters convert their foreign currency for Fijian dollars. Conversely, an outflow of foreign exchange for import payments results in a reduction of bank liquidity as importers draw down their Fijian dollar deposits and purchase foreign currency.

As for RBF facilities, the central bank has various credit facilities – including its Import Substitution and Export Finance (ISEFF) and Housing Facilities – that it offers commercial banks and other financial institutions such as FDB and Housing Authority. When the RBF lends funds to the banks or FDB or Housing Authority via these facilities, liquidity is added into the banking system and the opposite happens when the funds are repaid.

The government had earlier revealed that an increase in the SRD rate (currently 10 per cent of commercial banks deposits) would mandate banks to increase their deposits with the RBF, and consequently reduce excess liquidity available for lending to individuals and businesses.

A reduction in the SRD will increase bank liquidity.

Bank liquidity remains adequate.

Our current liquidity levels above $600 million is far than adequate. The RBF has been stating all along that bank liquidity is adequate to meet the credit needs of the economy. Over the past three months, bank liquidity has almost doubled from the level at the end of 2018.

There are several factors underlining the recent pick up in bank liquidity. A large part of this increase in bank liquidity reflects the build-up in foreign reserves which has risen by approximately $150 million supported by inflows from tourism and personal remittances.

In addition, the increase in bank liquidity has also been underpinned by approximately $100 million drawdowns of the ISEFF and Housing Facility. The ISEFF is aimed at boosting exports or promoting import substitution where the RBF lends to banks at 1 per cent and the maximum interest rate charged to eligible customers by the banks is 5 per cent.

The interest rate on the Housing Facility is similar and is for first home buyers and operates through commercial banks and Housing Authority.

Outlook for Bank liquidity:

Given that the outlook for foreign reserves, a key determinant of liquidity, outlook remains solid for the rest of 2019 and the medium term, bank liquidity should also remain sufficient for this year and into the near term. The RBF will closely monitor liquidity in line with its monetary policy stance. 18. Finally, commercial bank’s lending rates in Fiji has been at historic lows. For the first time in over a decade commercial banks have raised interest rates.

However, this has been capped at around 1.00 -1.25 percentage points. On the other hand deposit rates have risen by much more resulting in the narrowing of the interest rate margins. Lending rates are still lower than that under any other Government before us. With the build-up on liquidity, the pressure on further interest hikes has been significantly diminished. In fact, the opposite is likely.

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