A response to the Fiji Times Front Page.
Reserve Bank of Fiji Governor Barry Whitside’s claim that a rise in liquidity means a healthy economy and increasing investment is baseless.
A rise in liquidity is not necessarily a cause or effect of a healthy economy. Liquidity is not free. Are banks and the public’s overall holdings of reserves precautionary? Further, weaknesses in the financial infrastructure and in market forces could also be a potential contributor to an increase in liquidity. For instance, an increase in liquidity could be due to broader issues such as lack of collateral due to the structure of property rights.
Moreover, it is a natural outcome that if there is fixed exchange rate regime, then increase in foreign currency assets will increase domestic liquidity. In Fiji the exchange rate is fixed and the Reserve Bank of Fiji intervenes to offset upward pressure on its desired exchange rate. This intervention will be reflected in increasing flows of net foreign assets onto the central bank balance sheet.
The government and the Reserve Bank should answer more important questions in relation to the economy. These are as follows: –
(1) What is the state of employment and unemployment in Fiji right now? The statistics from the National Employment Centre shows increasing numbers of the unemployed in the country.
(2) How is the government going to deal with $500m required to make the debt repayment in 2016?
(3) What is the state of the revenue collection and are we on target to collect the revenue projected in the budget? What is the status of asset sales provided for in the budget for 2015?
Honest answers to the above questions are fundamental to assessing the health of the economy. The government and RBF ought to pay more attention to these fundamental issues rather than using a single indicator of liquidity to wrongly assess the health of the economy.
Prof Biman Prasad