Central bank plans to reduce outflow from foreign reserves

The graph shows how the RBF finances current account deficit. Source: FBOS, ANZ Research

A RECENT report released by the ANZ Bank states that the central bank plans to reverse or at least reduce the outflow from foreign reserves.

The Pacific Economic Outlook 2019, released last week stated the Reserve Bank of Fiji was concerned about the recent widening of the current account deficit (CAD) (Figure 5).

According to the report, the CAD is driven by an escalation in motor vehicle imports because of reduced import duty, higher fuel imports as a result of sharp lifts in oil prices as well as increased imports (via a surge in construction activity) including machinery.

Meanwhile, the report said the deficit was not fully offset by foreign direct investment (FDI).

It stated the balance of the deficit had to be financed out of the nation’s foreign reserves while the requirement to fund the deficit out of reserves grew larger over 2018.

It is relying on lower levels of liquidity from falling foreign reserves to push lending rates higher.

“As bank lending rates rise, the bank is hoping credit growth slows, which would lower demand for imported goods, in particular consumer goods, especially cars.

As CAD improves, the bank would be in a better position to accommodate higher construction activity and absorb shocks from oil and fuel price hikes,” it stated.

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