The International Monetary Fund says persistent surplus liquidity in Fiji’s banking system has weakened the effectiveness of monetary policy and is calling for stronger liquidity management to improve the transmission of interest rate decisions.
In a Selected Issues Paper prepared as part of Fiji’s 2026 Article IV consultation, the IMF said the country’s prolonged excess liquidity has been driven by strong foreign exchange inflows, government cash-management practices and limited sterilisation operations.
The report notes that Fiji’s monetary policy framework, while centred on the fixed exchange-rate peg and the Overnight Policy Rate (OPR), has been operating “de facto as a floor system” because banks continue to hold large excess reserves.
According to the IMF, the Reserve Bank of Fiji’s policy rate has had limited influence on short-term market interest rates because banks are not relying on interbank borrowing to meet their liquidity needs.
The paper states that liquidity intensified sharply during 2021 and 2022, with banks’ reserves peaking at about $2.6 billion before easing slightly. However, liquidity remained elevated at around $1.8 billion to $2.2 billion throughout 2024, well above pre-pandemic levels.
The IMF attributes the buildup to strong tourism and remittance inflows, foreign exchange interventions to maintain the Fiji dollar’s peg, and the accumulation of government deposits from donor-funded projects and external financing.
The report says the persistence of excess liquidity has reduced the signalling value of the policy rate, limiting the effectiveness of monetary policy under tightening conditions.
To strengthen monetary policy implementation, the IMF recommends that the Reserve Bank reactivate open market operations, particularly through the regular issuance of Reserve Bank of Fiji Notes, to absorb surplus liquidity.
According to the report, predictable liquidity-absorbing operations would gradually restore the role of short-term interest rates, improve price discovery in the interbank market and strengthen the transmission of monetary policy across the financial system.
The IMF concludes that while Fiji’s exchange-rate peg remains an effective anchor for price and external stability, improving liquidity management will be critical to ensuring monetary policy remains effective as economic conditions evolve.
