Consumer demand has slowed despite an increase in income levels, said the Reserve Bank of Fiji (RBF) as it yet again kept the Overnight Policy Rate (OPR) at 0.25 per cent for the fifth year running.
This, it said, was indicated by lower annual growth in VAT collections and a reduction in consumption loans.
Meanwhile, excess liquidity in the financial system slightly dropped to $1.9billion in March.
The International Monetary Fund said while the liquidity level — which is about 16 per cent of GDP — made monetary policy ineffective, it would be useful in due course when funding was needed for the “large pipeline of approved investment projects.”
“Domestic demand has slowed, as evidenced by the lower annual growth in domestic VAT (Value Added Tax) collections despite the increase in income levels,” RBF announced last week.
“Additionally new loans extended for consumption purposes fell marginally over the year.”
OPR influences the prevailing interest rates offered by commercial banks and the RBF had reduced it to 0.25 per cent in March 2020 from the previous 0.5 per cent.
With the financial system awash with excess liquidity hovering at $2billion over the last five years, interest rates have remained “at historic lows”.
Liquidity remained within that range ($1.9b as of April 23) and new lending declined on an annual basis from 21.6 per cent to 8.1 per cent, with total new lending amounting to $900million in March.
This was one of the issues raised during the recent annual Article IV Consultation between the International Monetary Fund (IMF) and the Reserve Bank of Fiji as Government’s monetary policy authority.
“As long as you have excess liquidity, any measures you take will not affect behavior until you get to a point where liquidity becomes tight for some of the economic actors, for banks, banks may lend a little less if liquidity is tight. So with this excess liquidity, you’re not at that point so it limits the immediate impact of any monetary policy,” chief of IMF Mission to Fiji Marshall Mills told this newspaper.
“And that’s the concern we have further on, not immediately. Immediately, inflation is benign, foreign exchange are adequate. So we have suggested RBF bring excess liquidity down and in fact they have over the past year. It has fallen from about 22 per cent of GDP to 16 per cent so this is a good direction and we encourage them to continue on that road.”
Mr Mills said there is no “right” amount of excess liquidity.
“RBF will have to feel its way forward. Banks may want to maintain a certain excess liquidity, for example I’ve mentioned there’s a large pipeline of approved investment projects and what we call excess liquidity may be needed by the banks to be ready to meet those loans and credit lines.”
Fiji’s economic growth is currently supported by the strong performances in remittances (annual growth up nine per cent to February) and tourism.