Sada Reddy: Economic indicators and implications - where to from here?
Address by Mr Sada Reddy, Governor of the Reserve Bank of Fiji, at the Fiji Institute of
Bankers' Convention, Suva, 23 October 2010.
* * *
Introduction
His Excellency the President of the Republic of the Fiji Islands, Ratu Epeli Nailatikau,
The Attorney-General & Minister for Justice, Anti-Corruption, Public Enterprise, Industry,
Tourism & Trade and Communications, Mr. Aiyaz Sayed-Khaiyum,
The President of the Fiji Institute of Bankers, Mr. Norman Wilson,
Distinguished Guests,
Ladies & Gentlemen
Good morning and thank you for inviting me to speak to you on this occasion of the inaugural
convention of the Fiji Institute of Bankers (FIB). The FIB, which will turn 20 years soon, plays
a very important role in the training and development of bank professionals in Fiji.
I must congratulate the FIB for this excellent initiative in bringing together professionals and
partners from the financial sector as well as stakeholders from the public and private sectors
towards a common interest, that is, to establish a vision and strategic direction for the
banking sector towards 2015 - the theme of today's convention.
I have great pleasure this morning to speak on the topic "Economic Indicators and
Implications - Where to From Here?"
First I will provide an overview of the current state of the economy and its future outlook,
before I move on to outlining the future policy direction for our economy.
As bankers, we can attest to the prominent role played by financial institutions in the
development of any economy. In Fiji, the contribution of the financial sector to total real
growth or total value added product of the economy is around 9 percent. As a measure of its
size, total assets of the financial sector in Fiji is around 180 percent of the country's overall
gross domestic product (GDP). This ratio has increased from about 150 percent five years
ago and shows the increasing importance of the financial sector in our economy.
In addition, the financial sector employs around 8,800 people which accounts for around
7 percent of paid employment in Fiji. An efficient and sound financial sector is essential for
economic growth. The intermediation process which facilitates the transfer of funds from
savers to borrowers, contributes significantly to raising investment, generating income,
creating employment opportunities and supporting our economy. As someone said, credit is
the oxygen on which businesses grow and survive. Therefore, as would be true in other
developing economies, our financial institutions play a very key role in the socioeconomic
development of Fiji.
Central to this process is the role of the Reserve Bank in not only ensuring that monetary
policy is appropriate but that the financial system is stable and sound. This has become more
critical in light of the impact of the recent global financial crisis. The enormous costs borne
from the negative impact of the crisis, is a lesson which has forced central banks to rethink
their monetary policy strategies and strengthen macro-prudential supervision and regulation,
in aiming to avert the adverse impact of possible future crises.
Having said this, it is noteworthy that Fiji's financial system was largely insulated from the
direct impact of the global crisis which began 3 years ago. However, the devastating
economic fallout and implications of that event on both developed and developing countries
has provided valuable lessons for small developing nations like ours. Bankers and regulators
have come under increasing pressure to implement reforms, improve supervision, curb
excessive compensation and limit their appetite for risks so that the stability of the financial
system is preserved. Nevertheless, the indirect impact of the crisis through reduced global
demand for our exports and tourism services, together with the adverse effects of the floods
and cyclones on major domestic industries, hugely impacted our balance of payments, which
deteriorated significantly early last year, prompting the Reserve Bank to put in place specific
policies as a response to the In favourable economic situation. As we saw, the economic
situation turned around and the country is now on a path to recovery.
The current economic conditions and outlook for Fiji's economy is stable. However, there are
some risks to be borne in mind, which can have possible adverse impact on the economy
should they occur. Let me share a little on recent economic developments. As a background
to domestic developments, the global economy continues to recover at a better than
expected rate. The pace of this growth, while largely driven by Asia, varies significantly
across the major regions of the world. In line with the improved outlook for the world
economy, the growth of our major trading partner economies from this year onwards are all
expected to be positive. This positive outturn augurs well for us in terms of expected
increases in visitor arrivals and higher demand for exports.
The latest economic projections for this year show that the economy is expected to grow
marginally, following a notable contraction of 3.0 percent last year. This year's marginal
growth however, reflects a broad-based recovery, with the exception of the sugar sector. The
turnaround in output is expected in the major sectors for wholesale and retail, construction,
mining and quarrying, hotels and restaurants, manufacturing, education, fishing and finance,
all of which declined last year.
Not with standing the weak turnaround in overall output forecast for this year, performances
in some of our major sectors so far have been encouraging. Tourism has recovered very
strongly. Visitor arrivals are higher by around 20 percent compared to the last two years. The
tourism industry is clearly on track to achieve its targeted 600,000 record arrivals for the
year.
Activity in the mining and export sectors is also encouraging. Exports, particularly of gold,
fish, mineral water and timber, continue to gain momentum, supported by favourable
commodity prices. The outlook for this sector is very promising and bodes well for our
balance of trade. In contrast, output in the sugar sector has been very disappointing. Sugar
production has been declining over a number of years.
The deterioration in both cane and sugar production has been attributed to frequent mill
problems which have restrained cane harvests and affected mill efficiency. Unfortunately, the
mill upgrade over the past three years has not been able to produce the desired results and
has only added to the debt burden of the Government.
However, the outlook for this critical industry is positive pending the implementation of a
range of reforms to bring the industry back to its glory days. It is encouraging to note the
Prime Minister's recent pledge to fix the industry and safeguard the livelihood of nearly
200,000 people who rely on the sugar sector. Consumer spending has picked up slightly
from levels recorded last year, as indicated by recent partial indicators. Higher Net Value
Added Tax (VAT) collections and Pay As You Earn collections indicate growth in private
consumption.
This has also been supported by strong visitor arrivals and increases in inward remittances.
Inward remittances which has fallen significantly over the last 3 to 4 years is recovering very
strongly.
Against this macroeconomic background, the Reserve Bank continues to focus monetary
policy on ensuring that the interest rate environment is appropriate and liquidity is adequate
at all times to allow credit to grow. Inflation has significantly trended downwards in recent
months as the effect of the devaluation has fully worked through the economy.
From a peak of 10.5 percent in April, inflation has fallen to 1.1 percent in September, and is
forecast to be around 4.0 percent or less by the end of the year. Foreign reserves, I am
pleased to say, have held up very well this year, helped by the strong growth in domestic
exports and higher tourism receipts as well as lower import demand. Reserves are currently
around F$1.3 billion, equivalent to 4.0 months of import cover. Not too long ago, foreign
reserves had reached critical levels of below 2 month of imports. While inflation and reserves
are stable, domestic economic recovery this year has not been as firm as earlier expected,
thus posing some concerns to our objectives and the economy's future growth. As such, it is
critical that national policies are aimed at facilitating sustainable economic growth which will
create long term macroeconomic stability.
To reiterate the views I shared at the private sector consultative forum on the 2010 national
budget as well as at the Fiji Institute of Accountants Congress in June this year - the
challenge before us is to raise growth - that is to raise investment and exports, improve
business conditions, accelerate reforms, raise productivity and diversify the economy.
For its part, the Government remains committed to providing the needed impetus to the
economy through collaboration with and providing incentives to the private sector, reduction
of operational costs, facilitating competition in the economy, caring for the poor and the
marginalised and pursuing plans to modernise and reform the economy.
The Government continues to make progress on implementing structural reforms in all facets
of the public service through various reforms including the downsizing of the civil service and
the implementation of a more accountable public financial management system. The
restructure of public enterprises is to make them more efficient and business friendly.
Investments in infrastructure also remain a key priority given the Government's push for
more investment activity. Land reforms now being implemented will greatly boost investment.
In particular this will give the farmers in the agriculture sector the opportunity to sub-lease or
lease land from the State for investment with certainty of tenure, while improving the rental
return to landowners and the State.
This may also provide opportunities for greater commercial agriculture. In partnership with
Government, the Reserve Bank continues to do its best to contribute in this national effort.
Faced with huge challenges in financial stability early last year, the Bank implemented
various policy measures which returned stability to the country's balance of payments
position. Since then, the Reserve Bank has implemented various other policy changes to
support the Government's efforts to facilitate growth in the economy.
In this regard, the Reserve Bank has taken a number of initiatives to encourage local value
added and to reduce imports of goods than can easily be produced locally. In relation to this,
the Bank offered sponsorship for training of a local chef in Malaysia. More recently, the
Reserve Bank rationalised its $40 million Import Substitution and Export Finance Facility to
make it easier for eligible businesses to access. Exporters and agricultural entities that
engage in businesses which will bring down our imports can tap this facility at concessional
rates of interest.
Importantly, we continue to partner with financial institutions to ensure that they provide an
efficient and effective facilitative role in the development of the economy. I note the
enormous progress made towards the development of microfinance in Fiji. It is encouraging
to see the active participation from banks and stakeholders from the private and public
sectors as well as nongovernment organizations in the various microfinance expositions held
so far. These expos are an opportunity for the public to learn about self employment and
rural financial services available through microfinance.
The training sessions offered by banks during the Expo events have greatly facilitated this
learning curve. The RBF firmly believes that the extension of microfinance and the promotion
of greater financial inclusion can contribute to greater economic activities in rural areas and
address poverty alleviation. I urge all stakeholders to continue their efforts towards
supporting the development of microfinance in Fiji.
The National Financial Inclusion Taskforce (NFIT), which was established in November last
year and is tasked with guiding and monitoring the development towards greater financial
inclusion in Fiji, is making good progress. The three working groups under the taskforce are
continuing diligently to develop and implement national strategies to improve financial literacy
and statistics, and develop microfinance. Some recent work by the taskforce have included
following up on a review by the Ministry of Education on how best to incorporate financial
education into both primary and secondary school curriculum.
The taskforce has also endorsed a consultancy review on a household financial competency
baseline study in Fiji. I am very pleased that the commercial banks and other financial
institutions are playing a very active role in the NFIT and its various working groups. Looking
ahead, the NFIT will continue to work with the Government and donor agencies to innovate
and encourage the use of new technologies, such as telecommunications and mobile money
to expand the reach of financial services. In this respect, the Reserve Bank, in partnership
with the two mobile companies in Fiji recently launched its E-Money Fiji Project, the first of its
kind in the Pacific region, as a new way of providing financial services using mobile phone
technology and network. It is very pleasing to note the positive uptake so far of mobile money
services by the mobile customer market.
As at September 2010, over 220,000 active users have registered with mobile money while
total e-money in circulation totalled over $670,000. With the active pace of marketing by the
mobile companies, we can expect more activity generated by the mobile phone market in the
future. More pleasing to note, is the recent new development on potential inward remittances
through the mobile phone network, which will have huge positive impact on domestic
economic activity.
The establishment of Local Advisory Boards (LABs) for foreign banks in Fiji is another critical
step to assisting banks to better understand and align their strategies to the local regulatory
and supervisory environment as well as national development objectives. Members of the
LABs themselves must have sufficient knowledge and understanding of Fiji's business and
socio-economic environment and banking industry and be aware of long term growth
strategies of Government.
To date, all LABs are in place with members having met the Reserve Bank's fit and proper
requirements. The Reserve Bank provides special induction of all LAB members so that they
can fully appreciate and understand their important role in the economy. Another key
development implemented last year was the setup of Customer Complaints Processes in
place of a Financial Services Commission and Banking Ombudsman. As outlined in the
Complaints Management Guideline of the Reserve Bank, this process ensures that customer
complaints received by financial institutions are addressed efficiently and effectively, bringing
confidence to the customer.
I urge institutions to ensure that a proper policy framework for complaints management is put
in place, to guide staff on proper handling of customer complaints. Staff training and public
awareness exercises are very critical to provide clear direction to all on each institution's
processes. More recently in May this year, the Reserve Bank implemented a new Monetary
Policy Framework, aimed at improving the effectiveness of monetary policy implementation
by the Bank. The implementation of the new framework marked the return to a market based
mechanism for monetary operations following the removal of interest rate controls and
lending policies by the Bank.
The modernisation of the framework is expected to improve the transmission of monetary
policy. To complement the changes under the new monetary policy framework, the Bank
issued a disclosure policy which requires banks to publicly disclose in a press statement, any
increase in interest spread above 4 percent.
Additionally, the banks will be required to publicly disclose a base lending rate, which will
serve as a reference rate for customers. The Reserve Bank will be issuing a statement on
the latter once consultations with banks are completed. Both these changes are expected to
benefit consumers and enhance competition in the market. This framework was very well
received by the banks and we look forward to their continuing support towards improving the
efficient and effective transmission of interest rates in the market.
Reducing the costs of bank intermediation is another important area that the Reserve Bank is
pursuing and I am pleased to say that work by a recently established joint ABIF/RBF
committee to drive the ATM/EFTPOS Interchange Project, is progressing well and work on
this is expected to be completed by the end of this year.
Ladies and Gentlemen, we have weathered the storm of the global financial crisis coupled
with several natural disasters over the last 3 years and are expected to recover from this
year onwards. Partnership between all stakeholders to ensuring practical solutions are
carried out to build our economy and nation is critical.
While much has been done in recent times, a huge part of our growth potential is still at stake
should we become complacent. As you know, the Reserve Bank has clearly ventured outside
the domain of central banking, in support of Government reforms and policies to move the
economy forward.
We hope that, as partners with the Government and the Reserve Bank, you will continue the
momentum with which you have worked, to help take Fiji forward towards economic and
financial prosperity.
Thank you.