The Reserve Bank of Fiji (RBF) Board maintained the Overnight Policy Rate (OPR) at 0.25 percent following its monthly meeting on 27 January.
The Governor and Chairman of the Board, Mr Ariff Ali, stated that “the latest resurgence in coronavirus cases led by the Omicron variant has softened economic activity across the globe. Consequently, the International Monetary Fund downgraded the global growth outlook for 2022 by 0.5 percentage points to 4.4 percent. Commodity prices, especially crude oil, on the other hand, continues to soar, and combined with ongoing supply chain disruptions, have sparked inflationary pressures across the globe, prompting many central banks to tighten monetary policy.”
On the domestic economy, Mr Ali relayed that “data for the 2021 December quarter depicted a pick-up in aggregate demand indicators when compared to the September quarter, supported by the gradual easing of COVID-19 restrictions, pent-up demand supplemented by higher remittances, improved employment prospects and festive season spending, as well as the optimism around the reopening of international borders. Major sectoral production such as pine wood, woodchips, mahogany, mineral water and gold also noted an increase last year supported by higher export demand.”
In the financial sector, the Governor highlighted that quantitative easing measures by the central bank combined with large foreign reserves inflows helped push banking system liquidity to a record high. Liquidity, currently at around $2,102.6 million (26/01), has helped suppress any upward pressure on commercial bank lending rates, which fell to 5.77 percent at the end of 2021 from 6.12 percent in the previous year. Encouragingly, private sector credit grew marginally by 0.3 percent after declining for the last seventeen months, driven by higher commercial bank new lending to businesses and households. Contrastingly, the level of non-performing loans in the banking system remains elevated, albeit declining in recent months.
The Governor cautioned that although tourism is expected to rebound this year, the raging Omicron variant could dent the recovery momentum. Nonetheless, the demand for international travel remains upbeat globally, and our high vaccination rate still makes Fiji a viable destination.
Mr Ali added that “notwithstanding further worsening of the pandemic and occurrence of natural disasters which pose downside risks to the economic outlook, aggregate demand and labour market conditions are anticipated to improve as tourism activity expands and hotels resume full operations from April onwards in preparation for the peak season. Positive sentiments about the economic recovery could potentially rekindle investment activity, although investors may still take a cautious approach in light of the upcoming general elections. Better adaptation to COVID-19 through the elimination of hard lockdowns and reduction in mandatory quarantine days along with continued remittance inflows will provide additional impetus to domestic demand relative to last year. Nonetheless, a return to pre-COVID-19 level of economic activity will be largely dependent on the full recovery of the tourism industry which in turn will take a few years to materialise.”
The Governor also emphasised that “the twin objectives of monetary policy remain intact with foreign reserves holdings at the end of 2021 totalling $3,201.4 million, equivalent to 9.9 months of retained imports cover. Foreign reserves are currently (27/01) around $3,153.8 million, sufficient to cover 8.7 months of retained imports of goods and services. While the rise in import prices poses challenges going forward, foreign reserves are projected to remain adequate, boosted by Government loan drawdowns and the resumption of international travel. Annual inflation was 3.0 percent in December 2021, underpinned by higher food and fuel prices which have been spurred by higher global commodity prices, supply chain disruptions, natural disasters and a pick-up in foreign demand. In the next three months, inflation will rise further due to the recent floods which is expected to raise prices of local fruit and vegetables. ”
Mr Ali concluded that “while rising food and fuel prices are concerning, a tighter monetary policy will not be able to arrest inflationary pressures that is mainly being driven by supply-side constraints. The Bank will continue to monitor economic developments as well as risks and align monetary policy if required.”