www.fijilive.com - 24/02/2009
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Fiji’s central bank is working on revising its prediction for the economy given less than three months ago as it braces for an unexpected downturn.
Reserve Bank of Fiji Governor Savenaca Narube said the Macroeconomic Policy Committee, which helps government formulate policies and make forecasts, is “extremely busy” revising the prediction for the economy in light of the floods last January and the global economic meltdown.
“Given what is happening around us, we will do extremely well to achieve the 2.4 per cent growth that was released in November last year,” Narube said, while addressing guests at the launch of a book, “A Voice of Reason: The Writings of Savenaca Siwatibau”, at the University of the South Pacific yesterday.
“I hope that the Reserve Bank will not be blamed for this economic scenario.”
Earlier this week the Fiji Labour Party issued a statement putting much of the blame for Fiji’s rapidly declining foreign reserve levels, falling exports, tight liquidity and escalating interest rates on the RBF.
The party said the latest RBF economic review revealed that foreign reserves were down to $767 million, liquidity was tight, rising interest rates and expected decline of exports subsequent to flood damage to sugar cane and other crops.
The Party said this was the complete opposite to six months ago when party leader Mahendra Chaudhry was interim Finance Minister.
It said foreign reserves stood at $910 million then, liquidity was flush, interest rates low, investment levels rising, exports upped 33 per cent compared to 2006 and debt level brought down to 45 per cent of GDP from a high of 53 per cent under the Laisenia Qarase-led government.
The party said the RBF had relaxed monetary controls too soon and triggered rapid outflow of local funds.
“It also relaxed exchange controls on importation of capital goods, permitting payment in Fiji dollars,” it added.
Narube has hinted that managing foreign reserves has been difficult.
“My hair is not only grey they have turned all white in the last six months,” he said.
He has also emphasized the need for stability before Fiji can solve its economic problems.
“We live in challenging times,” he said.
.
“The world economy is buckling from the fallouts from the financial crisis. Fiji will not be immune from this global recession. Our economy was already under some stress.
“Siwa (tibau) was a stickler for economic stability. I am sure that he would emphasise to us today that while we have a host of economic problems we must deal with the stability first before we can solve the others.
“This would be a wise counsel. We will do well to heed it. Without stability you do not have a foundation for growth.”
February 25, 2009
February 21, 2009
A looming cash crisis
A looming cash crisis
Dr Mahendra Reddy
www.fijitimes.com - Saturday, February 21, 2009
THE continuous increase in interest rates over the past six months does not augur well for Fiji's economy.
The raise in interest rates will affect the economy via two channels - the construction and consumption channels.
As interest rates rise, home values fall and consumers feel they are losing on their value of total stock of assets.
They will cut their consumption.
That is, they will cut down general spending as well as avoid borrowing against their homes.
Thus new construction will be less forthcoming.
If this situation is prolonged and simultaneously, real income declines either as a result of inflation or pay cuts or layoffs, we may trigger a crisis in the sub-prime mortgage market where borrowers are just making theirs ends meet with multiple payment demands.
The banks are behaving this way (raising interest rates) because due to shrinking liquidity, retail and wholesale deposit rates have been increasing and no bank would want their interest rate spread to continue to worsen.
Hence, they have rushed into raising lending rates to maintain the interest spread.
The Reserve Band of Fiji is also a contributory institution to this rise in interest rates.
It must now immediately examine its two main tools - the RBF funds rate and the discount rate.
The RBF funds rate is the bank to bank borrowing rate.
At any given time, some banks have extra reserves and some have a shortage of reserves. In the funds market, banks with excess reserves lend to those that are short handed.
The RBF can intervene in this bank-to-bank transaction by buying and selling bonds to the banks thus restricting the liquidity at the level.
When RBF sells bonds, it pulls funds out of the bank, thus reducing liquidity.
Secondly, the RBF also uses a discount rate which it employs when it lends directly to a bank.
Thus raising this discount rate will also cause the banks to raise their lending rates.
Therefore, it is not the banks only which are trying to protect their interest spread by responding to the retail and wholesale market, but rather, they are also responding to RBF's use of the two key tools at its disposal.
We must also note that prolonged use of government expenditure without raising the productive capacity of the economy also raises inflation rates and thus the interest rates.
It is for this reason that we must be prudent in use of government expenditure particularly when it comes to debate of whether established international benchmarks should be compromised.
* Dr Reddy is the Dean of the Faculty of Commerce, Hospitality and Tourism Studies at the Fiji Institute of Technology. The views expressed in this article are his and do not necessarily reflect that of his employer.
Dr Mahendra Reddy
www.fijitimes.com - Saturday, February 21, 2009
THE continuous increase in interest rates over the past six months does not augur well for Fiji's economy.
The raise in interest rates will affect the economy via two channels - the construction and consumption channels.
As interest rates rise, home values fall and consumers feel they are losing on their value of total stock of assets.
They will cut their consumption.
That is, they will cut down general spending as well as avoid borrowing against their homes.
Thus new construction will be less forthcoming.
If this situation is prolonged and simultaneously, real income declines either as a result of inflation or pay cuts or layoffs, we may trigger a crisis in the sub-prime mortgage market where borrowers are just making theirs ends meet with multiple payment demands.
The banks are behaving this way (raising interest rates) because due to shrinking liquidity, retail and wholesale deposit rates have been increasing and no bank would want their interest rate spread to continue to worsen.
Hence, they have rushed into raising lending rates to maintain the interest spread.
The Reserve Band of Fiji is also a contributory institution to this rise in interest rates.
It must now immediately examine its two main tools - the RBF funds rate and the discount rate.
The RBF funds rate is the bank to bank borrowing rate.
At any given time, some banks have extra reserves and some have a shortage of reserves. In the funds market, banks with excess reserves lend to those that are short handed.
The RBF can intervene in this bank-to-bank transaction by buying and selling bonds to the banks thus restricting the liquidity at the level.
When RBF sells bonds, it pulls funds out of the bank, thus reducing liquidity.
Secondly, the RBF also uses a discount rate which it employs when it lends directly to a bank.
Thus raising this discount rate will also cause the banks to raise their lending rates.
Therefore, it is not the banks only which are trying to protect their interest spread by responding to the retail and wholesale market, but rather, they are also responding to RBF's use of the two key tools at its disposal.
We must also note that prolonged use of government expenditure without raising the productive capacity of the economy also raises inflation rates and thus the interest rates.
It is for this reason that we must be prudent in use of government expenditure particularly when it comes to debate of whether established international benchmarks should be compromised.
* Dr Reddy is the Dean of the Faculty of Commerce, Hospitality and Tourism Studies at the Fiji Institute of Technology. The views expressed in this article are his and do not necessarily reflect that of his employer.
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