Report: Liquidity management crucial
24 May, 2019, 8:20 am
A TIGHTER budget by the Government and better management of liquidity by the central bank has been recommended by a research report released by the ANZ Bank yesterday.
The Pacific Economic Outlook 2019 states that the Government is expected to reign in expenditure to return to a stronger fiscal position to prepare itself for the next shock.
According to the report, public demand in particular investment expenditure has been a key driver of growth this decade, however, this has been achieved by running budget deficits, which have pushed government debt higher.
It said although government debt had plateaued this year (increasing by 1.1 per cent and 0.9 per cent in the March and June quarters respectively), the bank believes the Government would begin a process of fiscal repair so it is better prepared for the next shock.
“We anticipate fiscal repair will be the new order of the Government,” the report said.
“Hence, after several years of budget deficits, we believe the Government will begin to unwind some of the stimulus and reduce expenditure (both recurrent and capital).
“The latter will allow it to return to a position of fiscal strength before the next economic shock.”
Meanwhile, the report also recommends the Reserve Bank of Fiji maintains liquidity levels that deliver on its policy objectives.
According to the report, liquidity management will be crucial in steering the economy away from recession and highlighted that while liquidity at $300million was not currently a hindrance to growth, further falls could push interest rates higher.
The report highlighted that the drop in liquidity had pushed up banks’ cost of funds, with negotiated rates on time deposits across maturities significantly higher than carded (marketed) rates of 1.5 per cent to 3.0 per cent, with commercial banks responding to higher cost of funds by lifting lending rates by an average of 1.0 per cent.
Currently the banks are exercising responsible retail and commercial lending with a reduced pool of excess reserves, whereby the alternative would be to turn on the credit tap and drain all excess reserves (liquidity), with the report predicting that taking such a step would end in a financial crisis, which would be more painful then exercising lending prudence.