The notion of printing money has come up again and, once again, this has led to a bit of confusion. It is important to clarify, because of the recent discussions in parliament over how Fiji tackles the economic challenges of COVID-19. The first thing I suggest is we avoid the phrase ‘printing money’, which echoes the kind of inflation we saw in post World War II Germany.
Even though Fiji’s central bank, the Reserve Bank of Fiji (RBF), can increase the money supply, no money needs to be literally printed. Increasing the money supply by creating new money should be called ‘debt monetisation’. Debt monetisation is in fact carried out by all banks, not just central banks, to attempt to fund productive areas of the economy.
It is important to note thatcommercial banks monetise debt every time they issue a loan (credit creation). Commercial bank liquidity is hailed as the best way to monetise debt, but let’s not be too hasty in dismissing the possibilities of debt monetisation by the RBF.
A primary role of a central bank is to manage the level of money in the economy – this is called monetary policy. The amount of money in the economy needs to reflect the potential for productivity, however, too much money, or misdirected money, can have negative economic effects, primarily inflation, which affects the cost of living and increases poverty.
The central bank increases the level of money in the economy by incentivising commercial bank debt monetisation or directly through their own central bank debt monetisation.
House mortgages are examples of commercial bank debt monetisation whereas quantitative easing or lending directly to the government are examples of central bank debt monetisation. Quantitative easing is the process of using central bank debt monetisation to purchase financial assets, such as government debt (government bonds), in capital markets.
Who is in Charge?
Under section 52 of the RBF Act 1983, finance ministers can influence RBF decision making and, under Section 49, can discuss with the RBF matters concerning RBF debt monetisation for budget needs. Research by the Bank of International Settlements (the central bank of central banks) found that, in developing countries such as Fiji, regular meetings and consultation between government officials and central bank members are quite common.
Who has the upper hand in these discussions is debatable.
However, it would be desirable that monetary policy aligns with government (fiscal) policy objectives because, unlike central bank members, governments are democratically elected and people choose governments according to the policies that are promised to them.
Central Bank Debt Monetisation in Fiji
It is often suggested that if governments had ready access to central bank debt monetisation it would encourage hasty spending and disincentivise prudent financial management.
However, central banks have clear protocols as to how central bank debt monetisation is to be accessed by governments. In Fiji, for example, the RBF Act 1983 dictates how RBF debt monetisation is to be used to fund budget deficits and governments have and continue to use this resource accordingly.
For example, last year, the RBF, whether independently or with consultation with the Ministry of Economy, did monetise debt as stated by the 2020/21 Budget supplementary Section 1.49: The RBF introduced the following measures to support the economy during the pandemic;
- quantitative easing measures were implemented to the tune of $440.0 million; and
- RBF also purchased $280.4 million of Government bonds in the first half of 2020 to assist Government in financing the deficit.
Holders of government debt, such as FNPF, can use some of the proceeds from quantitative easing to purchase more government debt. In this way, central banks, like the RBF, can fund government budgets in an indirect way.
And the RBF plans to monetise debt again as outlined in 2021/22 Budget supplementary Section
2.47.
Going forward, the Bank (RBF) will continue to support economic recovery via both conventional and unconventional means to ensure adequate liquidity levels.
Here, ‘conventional’ refers in part to facilitating commercial bank liquidity, and ‘unconventional’ includes debt monetisation through quantitative easing and, due to Fiji’s underdeveloped capital markets, possible direct financing for the government.
Over emphasis on Commercial Bank Debt Monetisation
Central bank debt monetisation has been a crucial strategy used by other governments around the world to help finance their COVID-19 responses. The robustness of the Australian dollar has allowed the Reserve Bank of Australia to engage in $AUS176 billion ($F269b) in quantitative easing in their domestic currency during the crisis.
This figure far exceeds the amount of debt monetisation that has been carried out by the Reserve Bank of Fiji during the same period. While the Reserve Bank of Australia’s governor – Philip Lowe — revealed on March 2, this year: “In Australia, the economic recovery is well under way and has been stronger than was earlier expected”, the situation in Fiji seems continuously precarious.
Of course, one key difference between Fiji and Australia is Fiji’s concern for foreign currency which cannot be alleviated by RBF debt monetisation. An overreliance on imports has resulted in foreign currency uncertainty which limits the RBF’s role in the COVID-19 recovery.
Where Fiji has become more dependent on foreign currency debt because of the foreign currency inflow that it brings, other countries, such as Australia, can carry out large scale quantitative easing in their domestic currency.
With respect to domestic currency debt, there is perhaps too much emphasis on commercial bank debt monetisation.
Commercial banks tend to focus on the property market, financing large firms and consumer credit. These can all have the effect of increasing inflation and wealth disparity, and placing more debt burden on the shoulders of individuals.
The RBF, through such facilities as the ‘COVID-19 recovery credit guarantee scheme’, has attempted a hybrid version of debt monetisation where the RBF monetises debt, commercial banks dictate how funds are allocated and the government guarantees and subsidises the debt.
The success of such programs is yet to be determined. However, if the debt monetisation mix was tilted to include more RBF debt monetisation funding for the government, either directly or indirectly, even though governmental debt would grow, it would be domestic currency debt which is easier to navigate and, in theory, the government could better target productive sectors of the economy, such as small-scale agriculture.
Furthermore, the government can be more proactive than commercial banks in a time of crisis, and RBF debt monetisation could be a faster and more effective way to meet the social needs of the wider population.
For these reasons, there should not be such a dismissive attitude towards RBF debt monetisation and all options should be considered.
- EDWARD NARAIN is a political analyst and a researcher at Latrobe University. He is a Fijian citizen currently residing in Melbourne. The views expressed are not necessarily shared by this newspaper.
