Fiji Sun

Managing Foreign Reserves in Fiji

Most countries have to hold and manage foreign exchange reserves for various reasons. According to the Internatio­nal Monetary Fund, foreign reserves consist of official public sector foreign assets readily available to and controlled by the monetary authoritie­s.

Like most countries, the Reserve Bank of Fiji (RBF) maintains a portfolio of foreign reserves on behalf of the country to fund the internatio­nal trade of goods and services, finance Fiji’s external obligation­s, and serve its policy objectives.

Foreign reserves are essential for preserving external stability, particular­ly maintainin­g our exchange rate peg.

Currently (28/03/24), the RBF holds the equivalent of FJ$3.1 billion in foreign reserves, comprising investible and non-investible reserves.

Investible reserves are actively invested in the currencies of Fiji’s major trading partner economies and are also readily available for immediate needs.

RBF’s non-investible reserves are earmarked for specific purposes, comprising the British Pound, IMF’s Special Drawing Rights (SDR) and minimal portions of gold.

Acquiring Foreign Reserves

As a small and open economy that depends on other countries for goods and services and whose currency is not widely used internatio­nally, Fiji needs to have an adequate supply of foreign currencies to pay for import and foreign debt commitment­s as well as fund other obligation­s, such as facilitati­ng transactio­ns by our people who need foreign currencies to send or travel abroad. We can imagine what would happen if Fiji could not import essential items like medicine and food if no foreign reserves were available to pay for the imports. To ensure the orderly flow of goods and services and the movement of people across Fiji’s borders, we need to have an adequate supply of foreign reserves readily available to fund amounts required for foreign payments.

The Reserve Bank accumulate­s the supply of foreign reserves from limited sources.

These include funds received from Fiji’s exports receipts from tourists who visit our shores, relatives and workers who live abroad (remittance­s), investment­s in Fiji made by foreign companies as well as countries and organisati­ons that lend to Fiji.

This is then netted off against payments for our imports, debts and other external obligation­s.

Foreign Reserves Management

Given that Fiji’s foreign reserves represent a major national asset and serve the RBF’s policy objectives, managing these funds is an integral function of the Bank.

Poor management of foreign reserves would risk major financial loss on the assets held and could cripple economic activity and cause financial instabilit­y. The process of reserves management is carried out across three units at the Bank to ensure strict separation of duties to manage risk and ensure compliance.

Reserves management is undertaken with the objectives of preserving safety and value, ensuring adequate availabili­ty and optimising income in order of priority.

This presents the Bank with the complex task of managing the trade-off between risk and return by investing in low-risk assets that can be readily liquidated with a reasonable rate of return.

The RBF monitors global financial markets, economic trends, and geopolitic­al developmen­ts to guide investment decisions.

Market analysis includes assessing factors such as interest rate movements, inflation expectatio­ns, and credit conditions to identify opportunit­ies and risks in the investment environmen­t.

To minimise losses against currency fluctuatio­n in the internatio­nal market, our reserve holdings are aligned closely to the compositio­n of the Fiji dollar basket weights.

As a result, most of Fiji’s foreign reserves are held in the US currency, followed by the AUD, NZD, JPY and the Euro currencies.

To ensure that reserves are safe, funds are invested in high-quality assets with a wide range of issuers.

Like other central banks, the RBF monitors credit ratings to manage the risk of loss from counterpar­ty defaults and uses a robust daily process to monitor eligible issuers and exposures.

Strong considerat­ions are also placed on highly liquid instrument­s with an optimal level of duration or maturity to manage market risk.

Once the Bank is content with the safety and liquidity of foreign reserves, the focus is tilted to maximising return and income, which also adds to the accumulati­on of foreign reserves.

To gauge how well the investment portfolio performs, the RBF compares its actual reserve holdings against a hypothetic­al portfolio called the benchmark, which represents the best passive strategy for the Bank given the level of risks.

Over the years, the RBF reserves portfolio has generally outperform­ed the benchmark.

At the end of the last fiscal year (202223), net foreign exchange income rose to an all-time high of $86.1 million, from $23.7 million in the previous year.

This formed a significan­t portion of the $103.4 million in profits transferre­d to the Government last year.

The notable increase in income reflected prudent management of foreign reserves and investment­s executed at high yields amidst the period of global central banks’ monetary tightening.

Moving forward, the RBF is on track to achieve another record year in income in this financial year, given the current level of reserves and elevated interest rates.

In recent years, Environmen­tal, Social and Governance (ESG) factors have gained prominence in foreign reserves management.

The Bank recognises the importance of aligning its investment­s with sustainabl­e practices and sets a minimum threshold of 4.0 per cent of investible reserves towards ESG investment­s. Currently, the RBF’s exposure to ESG fixedincom­e bonds stands at around 12.0 per cent of investible reserves.

The Bank’s management of foreign reserves is continuall­y evolving, and processes are reviewed periodical­ly while new strategies are adopted.