Too High Or Too Tight

Fiji’s current levels of liquidity is not an act of serendipity, a leading regional economist said.

Liquidity, commercial banks excess cash balances with the central bank, exists by design, ANZ’s leading Pacific economist Kishti Sen said. It is reflective of the central bank’s continuation of its accommodative monetary policy stance, he said yesterday.

“By accommodating, we generally mean that the economy has room to accommodate higher or faster pace of economic expansion without putting undue pressure on the nation’s foreign reserves and consumer price inflation, RBF’s two main mandates under its own Act,” Mr Sen said.

“I think that’s the logic behind the RBF’s thinking on why loose monetary conditions - ie higher levels of liquidity - are more appropriate at the moment.

“The RBF does not want to get in that way of higher growth rates and hence is not actively engaged in absorbing liquidity - like mopping up excess cash by issuing its own securities or doing more reverse repurchase agreements, borrowing money - in the open market operations.”

The central bank is allowing the market to find its own equilibrium on what the appropriate levels of liquidity should be, Mr Sen said.

For now, it is letting the game play out with minimal intervention from the central bank itself, he said.

“Once private investment picks up - we know one is coming if building approvals data is anything to go by - stronger credit growth will materialise, loans will be drawn down, imports will rise and foreign reserves will fall,” Mr Sen said.

“That’s the ideal scenario that the central bank wants to engineer. “All in an orderly basis, of course.”

Exchange Controls Relaxing exchange controls to allow investors to park more of their surplus cash into overseas assets would be premature, Mr Sen said.

“Because, if you look at the big picture, there is more investment coming and you want to make it easier rather than tougher for investors to access finance,” he said.

Seven years ago, when liquidity levels fell to below F$300m (see chart above), people thought the sky was going to fall in on Fiji.

Graph: ANZ

“I think that’s the logic in RBF’s decision making process when it comes to appropriate levels of liquidity for the financial markets.”

Remember 2019 Seven years ago, when liquidity levels fell to below F$300m (see chart above), people thought the sky was going to fall in on Fiji.

“Of course, the dooms day scenario did not materialise, as that was also an event engineered by the central bank, to reverse the downtrend in Fiji’s foreign reserves,” Mr Sen said.

“In about a year’s time, we would be in a better position to see if Fiji is carrying too much of an ‘excess’ above the buffer on liquidity required, which is when we can have a debate on whether more flexible exchange control regulations are appropriate.”