## MONETARY OPERATIONS AND LIQUIDITY DYNAMICS IN FIJI

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---

### Introduction and purpose
- Examines implementation of monetary policy in Fiji with focus on liquidity dynamics and implications for monetary transmission.
- Documents how persistent surplus liquidity—shaped by foreign exchange inflows and fiscal cash-management practices—has influenced transmission of the policy rate and short-term money-market conditions.
- Assesses interaction between liquidity conditions and the operational framework and discusses options to strengthen monetary implementation and transmission.

### Monetary policy framework, objectives, and constraints
- Dual mandate: external stability and price stability under the Reserve Bank of Fiji Act of 1983 (revised 2010).
- Nominal anchor: exchange-rate peg to a trade-weighted basket (Australian dollar, New Zealand dollar, U.S. dollar, euro, and Japanese yen) since 1975.
  - Historical outcomes: relatively low inflation—below 3 percent—and FX reserves typically equivalent to four to six months of imports.
- Transition to market-based instruments; Overnight Policy Rate (OPR) introduced in May 2010.
- Exchange-rate peg constrains monetary independence, placing greater operational emphasis on liquidity management and balance-sheet operations.

### Operational implementation and instruments
- Interest-rate corridor:
  - OPR: 0.25 percent since March 2020.
  - Lending Facility (repo) rate: 0.50 percent (25 basis points above OPR).
  - Deposit Facility rate: 0.00 percent (25 basis points below OPR).
  - Corridor has effectively operated as a floor system given persistent surplus liquidity.
- Conventional liquidity-management instruments:
  - Open market operations: RBF Notes (not issued since 2010) and repo transactions (no repo transaction in the past five years).
  - Statutory Reserve Deposits (SRDs): set at 10 percent of eligible deposits; function primarily as a structural anchor under large excess liquidity.
  - Foreign-exchange operations: FX purchases inject domestic liquidity; FX sales withdraw liquidity. Net FX purchases have been a dominant autonomous driver due to tourism, remittances, and official financing.
  - Standing facilities: with structural surplus liquidity, banks place excess reserves at the deposit facility and rarely access the lending facility.
- Targeted / unconventional measures:
  - ISEFF: suspended; existing loans rolled over at RBF discretion.
  - Housing Facility Scheme: active since 2012.
  - ALR and RELR: currently active although under review.
  - NDRF: closed.
  - COVID-19 credit and guarantee measures: temporary package during the pandemic.

### Recent liquidity conditions and structural drivers
- Shift toward persistently elevated excess reserves over the past decade driven by sustained FX inflows, fiscal cash-management practices, and limited sterilization.
- Pre-COVID buildup (2010–2019):
  - Banks’ reserves averaged about FJ$520 million during 2010–2019.
  - Banks’ reserves averaged approximately FJ$145 million during 2002–2009.
- Surge during 2021–22:
  - Reserves peaked at about FJ$2.6 billion in 2022.
  - Drivers: 2021 allocation of Special Drawing Rights, rapid recovery in tourism, elevated remittance inflows, and large external budget-support loans/capital grants/project financing that increased government deposits.
- Late 2023–2024:
  - Liquidity declined somewhat in late 2023 but increased again in 2024, remaining at high levels of around FJ$1.8–2.2 billion.
  - Continued accumulation of government deposits from donor-financed climate-resilience and infrastructure programs and ongoing FX inflows from tourism and remittances.
- Close relationship between government deposits and banking-system liquidity:
  - Government cash balances held in commercial banks translate mechanically into higher balances at the central bank.
  - Absence of a centralized Treasury Single Account has contributed to this persistent linkage.
- Assessment: sustained surplus-liquidity regime represents a fundamental shift from earlier cyclical fluctuations.

### Implications for monetary transmission
- Operational floor-system dynamics:
  - Excess reserves consistently exceed transactional and precautionary needs; marginal funding conditions are determined by administered central bank facilities rather than market-based interbank activity.
  - Policy interest rate has limited influence on banks’ marginal cost of funds; pass-through to short-term market rates, retail deposit rates, and lending rates is limited.
- Policy signaling weakened:
  - Standing deposit facility rate has remained at zero since 2010; policy rate has not been increased, reducing the signaling value of the OPR.
  - Effectiveness of the interest-rate channel under tightening conditions has not been tested.
- Role of sterilization and liquidity management:
  - Limited sterilization has allowed surplus reserves to persist; structural excess liquidity undermines the central bank’s ability to re-establish short-term rates as the marginal price of liquidity.
  - Regular and predictable liquidity-absorbing operations, calibrated to liquidity forecasts and aligned with the policy-rate corridor, would gradually reduce surplus reserves and increase sensitivity of short-term rates to policy signals.

### Policy recommendations and operational priorities
- Activate open market operations:
  - Regular issuance of Reserve Bank of Fiji notes recommended as a primary absorption mechanism for persistent liquidity surpluses.
  - A predictable issuance program, priced in reference to the policy rate, would establish a clear operational anchor at the short end of the yield curve.
- Restore operational link between policy rate and market rates:
  - Link the policy rate to a regularly offered central bank instrument and reinforce through active liquidity management to strengthen transmission to short-term market rates.
- Normalize interbank market activity:
  - As liquidity conditions normalize through active absorption, interbank activity and price discovery are expected to resume, enhancing monetary policy transmission.
- Address fiscal cash-management practices:
  - Consider arrangements that reduce the mechanical transmission of government deposit fluctuations into central bank reserve balances (noting the absence of a Treasury Single Account).

*Prepared by Sandra Milena Benitez Celis, Matteo Ghilardi, and Shivneel Kirpal; May 14, 2026.*

### 1. Fiji has declared an ambitious long-term vision of raising living standards,

### Overview
- Fiji’s National Development Plan and Vision 2050 aim to reach high income status by 2050 through productivity-enhancing reforms, higher investment, and greater resilience to climate-related risks.
- Estimates of Fiji’s potential output growth and implications for long-term income convergence use a production-function (growth-accounting) approach focused on supply-side capacity.

### Methodology: Production-Function Framework
- Potential output defined by augmented Cobb–Douglas production function:
  - Yt* = At Kt^α (Nt Ht)^{1−α}
  - Growth-rate form: yt = at + α·kt + (1−α)·(nt + ht)
- Historical data: Penn World Table (PWT) version 11.0 through 2023, updated with official Fiji releases where relevant.
- Baseline potential growth estimated at 3.4 percent.
- Estimated plausible range for potential growth: 2.4 – 3.6 percent.
- Capital identified as dominant driver across scenarios; TFP assumptions are main source of uncertainty.

### Factor Input Projections — Capital
- Capital input measured as capital services (rknna), approximated from capital stock growth:
  - gr_t rknna = α̂ + β̂ · gr_t rnna
  - Capital services evolve recursively: rknna_t = rknna_{t−1} exp(gr_t rknna).
- Capital stock law of motion (perpetual inventory method):
  - rnna_t = rnna_{t−1} · (1−δ) + I_t
  - Depreciation rate set to δ = 0.0884 (PWT 2000–23 average).
- Investment path uses extrapolated real gross fixed capital formation (GFCF):
  - I_t = I_{t−1} · (1 + gr_t GFCF)
  - Baseline assumption: real GFCF grows at 3.9 percent (average 2010–23).

### Factor Input Projections — Labor and Human Capital
- Labor input = total hours worked = employment × average hours per worker.
- Employment assumed to evolve with working-age population; employment rate held constant at its 2023 level in the baseline.
- Working-age population projections from United Nations demographic forecasts.
- Human capital proxied by PWT human capital index mapped from average years of schooling (s_t) with piecewise-linear returns:
  - Returns: 13.4 percent per year for first four years; 10.1 percent for years five through eight; 6.8 percent beyond eight years (PWT methodology).
- Baseline schooling assumption: annual increase in years of formal schooling of 0.05 years (average gain 2010–2023).

### Factor Input Projections — TFP
- TFP growth in baseline set equal to Fiji’s pre-pandemic average over 2010–2019:
  - TFP growth = 0.99 percent.

### Results and scenario analysis
- Baseline potential output growth: 3.4 percent.
- Scenario range for potential growth: 2.4 – 3.6 percent.
- Decomposition (medium term): largest contribution from capital accumulation, followed by TFP, labor input, and human capital.
- Pandemic reduced potential growth via lower effective labor input and productivity; post-pandemic reopening temporarily lifted potential growth.
- Alternative scenario assumptions:
  - Investment:
    - Baseline real investment growth = 3.9 percent (2010–2023 average).
    - Slower investment scenario based on 2000–2023 longer-run average.
    - Faster investment scenario illustrates upside from higher investment and improved execution.
  - Employment scenario:
    - Employment-rate growth assumed to increase to 0.3 from baseline value of 0.2.
  - TFP scenario:
    - Low-TFP scenario reflects continuation of subdued productivity over 2010–2023.

- Text Table: Potential Growth Decomposition — Alternative Scenarios
  - Baseline
    - GDP: 3.4
    - Capital Service: 1.5
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 1.0
  - Slower Investment Growth (2.6)
    - GDP: 3.2
    - Capital Service: 1.2
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 1.0
  - Faster Investment Growth (5.1)
    - GDP: 3.6
    - Capital Service: 1.7
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 1.0
  - Slower TFP Growth (0.03)
    - GDP: 2.4
    - Capital Service: 1.5
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 0.0
  - Growth in employment rate (0.3)
    - GDP: 3.5
    - Capital Service: 1.5
    - Labor: 0.8
    - Human Capital: 0.3
    - TFP: 1.0

### Is high-income convergence achievable by 2050?
- Under baseline assumptions and absent major shocks, Fiji would make substantial progress toward high-income status but would fall marginally short by 2050.
- Convergence shortfall driven by climate-related shocks and cumulative capital losses that depress income relative to the high-income threshold.
- Required growth to close remaining income gap by 2050: 3.6 percent (i.e., 0.2 percentage point higher than the baseline).
- A scenario increasing climate-related and resilience-enhancing investment yields average growth about 0.2 percentage point higher than baseline and would be sufficient to close the gap by 2050.
  - Implied growth gain primarily reflects reduced capital losses from climate-related shocks and preservation of productive capital, rather than higher TFP growth.
- Projections exclude pandemic-scale global disruptions and assume future shocks broadly consistent with historical averages.

### Policy implications and recommendations
- Sustain and prioritize resilient investment: capital accumulation is the dominant source of potential growth across scenarios.
- Prioritize composition of investment toward climate-resilient infrastructure to reduce repeated capital losses from natural disasters and enhance growth resilience.
- Policies to raise labor force participation (including female participation) and reduce net outward migration can modestly increase labor’s contribution but are limited as a primary growth lever.
- Protect and sustain capital stock through resilience-enhancing investment: small persistent disaster-induced output losses compound over decades and materially affect convergence.

*Prepared by Matteo Ghilardi and Sonam Tobgay. Sources: Penn World Table 11.0; United Nations demographic forecasts; IMF staff calculations.*

### References ___________________________________________________________________________ 15

### MONETARY OPERATIONS AND LIQUIDITY DYNAMICS IN FIJI

### Introduction and purpose
- This paper examines the implementation of monetary policy in Fiji, with a focus on liquidity dynamics and their implications for monetary transmission.
- It documents how persistent surplus liquidity—shaped by foreign exchange inflows and fiscal cash-management practices—has influenced the transmission of the policy rate and short-term money-market conditions.
- It assesses how liquidity conditions have interacted with the existing operational framework and discusses options to strengthen monetary implementation and transmission.

### Monetary policy framework, objectives, and constraints
- Dual mandate: external stability and price stability as central policy objectives under the Reserve Bank of Fiji Act of 1983 (revised 2010).
- Nominal anchor: exchange-rate peg to a trade-weighted basket (Australian dollar, New Zealand dollar, U.S. dollar, euro, and Japanese yen) since 1975.
  - Associated historical outcomes: relatively low inflation—below 3 percent—and accumulation of foreign exchange reserves typically equivalent to four to six months of imports.
- Transition from direct administrative controls to market-based instruments; introduction of the Overnight Policy Rate (OPR) in May 2010.
- Exchange-rate peg limits full monetary independence and places greater operational emphasis on liquidity management, balance-sheet operations, and accommodation of external inflows and outflows.

### Operational implementation and instruments
- Interest-rate corridor:
  - OPR: 0.25 percent since March 2020.
  - Lending Facility (repo) rate: 0.50 percent (25 basis points above OPR).
  - Deposit Facility rate: 0.00 percent (25 basis points below OPR).
  - In practice, corridor has operated de facto as a floor system given persistent surplus liquidity.
- Conventional liquidity-management instruments:
  - Open market operations: issuance/purchase of RBF Notes (not issued since 2010) and repo transactions (no repo transaction in the past five years).
  - Statutory Reserve Deposits (SRDs): currently set at 10 percent of eligible deposits; function primarily as a structural anchor in an environment of large excess liquidity.
  - Foreign-exchange operations: FX purchases during inflows inject domestic liquidity; FX sales withdraw liquidity. Net FX purchases have been a dominant autonomous driver given recent inflows from tourism, remittances, and official financing.
  - Standing facilities: lending and deposit facilities serve as operational backstops; with structural surplus liquidity, banks predominantly place excess reserves at the deposit facility and rarely access the lending facility.
- Targeted / unconventional measures (used during macroeconomic stress and now partially active/suspended):
  - Import Substitution and Export Finance Facility (ISEFF): now suspended; existing loans rolled over at RBF discretion.
  - Housing Facility Scheme: active since 2012.
  - Agriculture Loans Ratio (ALR) and Renewable Energy Loans Ratio (RELR): currently active although under review.
  - Natural Disaster Rehabilitation Facility (NDRF): now closed.
  - COVID-19 credit and guarantee measures: temporary package during the pandemic.

### Recent liquidity conditions and structural drivers
- Shift toward persistently elevated excess reserves over the past decade; structural surplus liquidity driven by sustained foreign-exchange inflows, fiscal cash-management practices, and limited sterilization.
- Pre-COVID buildup (2010–2019):
  - Banks’ reserves averaged about FJ$520 million during 2010–2019.
  - Banks’ reserves averaged approximately FJ$145 million during 2002–2009.
- Surge during 2021–22:
  - Reserves peaked at about FJ$2.6 billion in 2022.
  - Drivers: 2021 allocation of Special Drawing Rights (one-off increase in foreign reserves and domestic liquidity), rapid recovery in tourism, elevated remittance inflows, and large external budget-support loans/capital grants/project financing that increased government deposits.
- Late 2023–2024:
  - Liquidity declined somewhat in late 2023 but increased again in 2024, remaining at high levels of around FJ$1.8–2.2 billion.
  - Continued accumulation of government deposits associated with donor-financed climate-resilience and infrastructure programs, and ongoing FX inflows from tourism and remittances.
- Close relationship between government deposits and banking-system liquidity:
  - Government cash balances held in commercial banks translate mechanically into higher balances at the central bank.
  - Absence of a centralized Treasury Single Account has contributed to this persistent linkage.
- Summary assessment: sustained surplus-liquidity regime represents a fundamental shift from earlier cyclical fluctuations.

### Implications for monetary transmission
- Operational floor-system dynamics:
  - Excess reserves consistently exceed transactional and precautionary needs; marginal funding conditions are determined by administered central bank facilities rather than market-based interbank activity.
  - Policy interest rate has limited influence on banks’ marginal cost of funds; pass-through to short-term market rates, retail deposit rates, and lending rates is limited.
- Policy signaling weakened:
  - Standing deposit facility rate has remained at zero since 2010; policy rate has not been increased, reducing the signaling value of the OPR.
  - Effectiveness of the interest-rate channel under tightening conditions has not been tested.
- Role of sterilization and liquidity management:
  - Limited sterilization has allowed surplus reserves to persist; structural excess liquidity undermines the central bank’s ability to re-establish short-term rates as the marginal price of liquidity.
  - Regular and predictable liquidity-absorbing operations, calibrated to liquidity forecasts and aligned with the policy-rate corridor, would gradually reduce surplus reserves and increase sensitivity of short-term rates to policy signals.

### Policy recommendations and operational priorities
- Activate open market operations:
  - Regular issuance of Reserve Bank of Fiji notes is recommended as a primary absorption mechanism for persistent liquidity surpluses.
  - A predictable issuance program, priced in reference to the policy rate, would establish a clear operational anchor at the short end of the yield curve.
- Restore the operational link between policy rate and market rates:
  - Link the policy rate to a regularly offered central bank instrument and reinforce it through active liquidity management to strengthen transmission to short-term market rates.
- Normalize interbank market activity:
  - As liquidity conditions gradually normalize through active absorption, interbank activity and price discovery are expected to resume, enhancing the broader monetary policy transmission mechanism.
- Address fiscal cash-management practices:
  - Implicit recommendation to consider arrangements that reduce the mechanical transmission of government deposit fluctuations into central bank reserve balances (noting the identified absence of a Treasury Single Account).

*Prepared by Sandra Milena Benitez Celis, Matteo Ghilardi, and Shivneel Kirpal; May 14, 2026.*

### 1. Fiji has declared an ambitious long-term vision of raising living standards,

### 1. Fiji has declared an ambitious long-term vision of raising living standards,

### Overview
- Fiji’s National Development Plan and Vision 2050 aim to reach high income status by 2050 through productivity-enhancing reforms, higher investment, and greater resilience to climate-related risks.
- The paper estimates Fiji’s potential output growth and examines implications for long-term income convergence using a production-function (growth-accounting) approach focused on supply-side capacity.

### Methodology: Production-Function Framework
- Potential output defined by an augmented Cobb–Douglas production function:
  - Yt* = At Kt^α (Nt Ht)^{1−α}
  - In growth-rate form: yt = at + α·kt + (1−α)·(nt + ht)
- Historical data source: Penn World Table (PWT) version 11.0 through 2023, updated with official Fiji releases where relevant.
- Baseline potential growth estimated at 3.4 percent.
- Estimated plausible range for potential growth: 2.4 – 3.6 percent.
- Capital is identified as the dominant driver across scenarios; TFP assumptions are the main source of uncertainty.

### Factor Input Projections — Capital
- Capital input measured as capital services (rknna), approximated from capital stock growth using an estimated relationship:
  - gr_t rknna = α̂ + β̂ · gr_t rnna
  - Capital services evolve recursively: rknna_t = rknna_{t−1} exp(gr_t rknna).
- Capital stock law of motion (perpetual inventory method):
  - rnna_t = rnna_{t−1} · (1−δ) + I_t
  - Depreciation rate set to δ = 0.0884 (PWT 2000–23 average).
- Investment (I_t) path uses extrapolated real gross fixed capital formation (GFCF):
  - I_t = I_{t−1} · (1 + gr_t GFCF)
  - Baseline assumption: real GFCF grows at 3.9 percent (average 2010–23).

### Factor Input Projections — Labor and Human Capital
- Labor input defined as total hours worked = employment × average hours per worker.
- Employment assumed to evolve with working-age population; employment rate held constant at its 2023 level in the baseline.
- Working-age population projections from United Nations demographic forecasts.
- Human capital proxied by PWT human capital index mapped from average years of schooling (s_t) with piecewise-linear returns:
  - Returns: 13.4 percent per year for first four years; 10.1 percent for years five through eight; 6.8 percent beyond eight years (PWT methodology).
- Baseline schooling assumption: annual increase in years of formal schooling of 0.05 years (average gain 2010–2023).

### Factor Input Projections — TFP
- TFP growth in baseline set equal to Fiji’s pre-pandemic average over 2010–2019:
  - TFP growth = 0.99 percent.

### Results and Scenario Analysis
- Baseline potential output growth: 3.4 percent.
- Scenario range for potential growth: 2.4 – 3.6 percent.
- Decomposition (medium term): largest contribution from capital accumulation, followed by TFP, labor input, and human capital.
- Pandemic reduced potential growth via lower effective labor input and productivity; post-pandemic reopening temporarily lifted potential growth.
- Alternative scenario assumptions and driving mechanisms:
  - Investment assumptions:
    - Baseline real investment growth = 3.9 percent (2010–2023 average).
    - Slower investment scenario based on 2000–2023 longer-run average (illustrates downside risk).
    - Faster investment scenario illustrates upside from higher investment and improved execution.
  - Employment scenario:
    - Employment-rate growth with respect to working-age population assumed to increase to 0.3 from baseline value of 0.2 (illustrates limited scope for labor supply to be a major growth lever).
  - TFP scenario:
    - Low-TFP scenario reflects continuation of subdued productivity over 2010–2023 and materially lowers potential growth.
- Text Table: Potential Growth Decomposition — Alternative Scenarios (values preserved exactly)
  - Baseline
    - GDP: 3.4
    - Capital Service: 1.5
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 1.0
  - Slower Investment Growth (2.6)
    - GDP: 3.2
    - Capital Service: 1.2
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 1.0
  - Faster Investment Growth (5.1)
    - GDP: 3.6
    - Capital Service: 1.7
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 1.0
  - Slower TFP Growth (0.03)
    - GDP: 2.4
    - Capital Service: 1.5
    - Labor: 0.6
    - Human Capital: 0.3
    - TFP: 0.0
  - Growth in employment rate (0.3)
    - GDP: 3.5
    - Capital Service: 1.5
    - Labor: 0.8
    - Human Capital: 0.3
    - TFP: 1.0

### Is High-Income Convergence Achievable by 2050?
- Under baseline assumptions and absent major shocks, Fiji would make substantial progress toward high-income status but would fall marginally short by 2050.
- The convergence shortfall is driven by climate-related shocks and cumulative capital losses that depress the level of income relative to the high-income threshold.
- Required growth to close the remaining income gap by 2050: 3.6 percent (i.e., 0.2 percentage point higher than the baseline).
- A scenario increasing climate-related and resilience-enhancing investment yields average growth about 0.2 percentage point higher than baseline and would be sufficient to close the gap by 2050.
  - The implied growth gain primarily reflects reduced capital losses from climate-related shocks and preservation of productive capital, rather than higher TFP growth.
- Projections exclude pandemic-scale global disruptions and assume future shocks are broadly consistent with historical averages.

### Policy Implications and Recommendations
- Sustained and more resilient investment is critical: capital accumulation is the dominant source of potential growth across scenarios.
- Prioritize the composition of investment toward climate-resilient infrastructure to reduce repeated capital losses from natural disasters and enhance growth resilience.
- Policies to raise labor force participation (including female participation) and reduce net outward migration can modestly increase labor’s contribution but are limited as a primary growth lever.
- Protecting and sustaining capital stock through resilience-enhancing investment is central to closing the income gap by 2050; small persistent disaster-induced output losses compound over decades and materially affect convergence.

*Prepared by Matteo Ghilardi and Sonam Tobgay. Sources: Penn World Table 11.0; United Nations demographic forecasts; IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1fjiea2026002.pdf_