## Monetary Operations and Liquidity Dynamics in Fiji

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**Canonical URL:** [Monetary Operations and Liquidity Dynamics in Fiji](https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026052.pdf)

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### A. Introduction
- Purpose: analysis of monetary policy implementation in Fiji with a focus on liquidity dynamics under the exchange-rate peg and implications for monetary transmission.
- Key framing:
  - Small, open, import-dependent economy where external stability, reserve adequacy, and domestic liquidity are closely intertwined.
  - Effectiveness of monetary policy depends on formal framework and on how liquidity is generated and managed in practice.

### B. Fiji’s Monetary Policy Framework, Instruments, and Operational Implementation
- Institutional mandate and anchor:
  - Reserve Bank of Fiji operates under the Reserve Bank of Fiji Act of 1983, as revised in 2010, with responsibility for price stability and adequate foreign exchange reserves while supporting sustainable growth and a sound financial system.
  - Exchange-rate peg (since 1975) to a trade-weighted basket (Australian dollar, New Zealand dollar, U.S. dollar, euro, Japanese yen) is the central nominal anchor.
  - Historical outcomes under the peg: inflation below 3 percent; foreign exchange reserves typically equivalent to four to six months of imports.
- Policy-rate corridor and specific rates:
  - Operating corridor: OPR flanked by Lending Facility (repo) rate set 25 basis points above the OPR and Deposit Facility rate set 25 basis points below the OPR.
  - Current rates: OPR at 0.25 percent since March 2020; Lending Facility rate at 0.50 percent; Deposit Facility rate at 0.00 percent.
- Interaction with exchange-rate restrictions:
  - Exchange rate restrictions limit certain foreign-exchange transactions and capital movements, adding frictions that affect transmission and provide some degree of monetary independence under the peg.
- Liquidity-management instruments (conventional):
  - Open market operations: issuance/purchase of RBF Notes; in practice RBF Notes have not been issued since 2010 and no repo transaction has occurred in the past five years.
  - Statutory Reserve Deposits (SRDs): currently set at 10 percent of eligible deposits; function mainly 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 become a dominant autonomous driver of liquidity conditions given recent inflows.
  - Standing facilities: asymmetric usage under surplus liquidity—banks predominantly place excess reserves at the deposit facility and rarely access the lending facility (repo).
- Targeted and unconventional measures (used during stress):
  - Import Substitution and Export Finance Facility (ISEFF): concessional refinancing now suspended; existing loans rolled over at RBF discretion.
  - Housing Facility Scheme: active since 2012, low-cost refinancing for mortgage lending.
  - Agriculture Loans Ratio (ALR) and Renewable Energy Loans Ratio (RELR): targeted lending requirements; currently active and under review.
  - Natural Disaster Rehabilitation Facility (NDRF): closed.
  - COVID-19 credit and guarantee measures: temporary refinancing, guarantees, moratoria, prudential relief introduced during the pandemic.

### C. Liquidity Conditions and Structural Drivers
- Regime shift: decade-long move toward persistently elevated excess reserves; surplus liquidity structurally high for extended periods due to sustained foreign-exchange inflows, fiscal cash-management practices, and limited sterilization.
- Pre-COVID buildup (2010–2019) findings:
  - Banks’ reserves averaged about FJ$520 million during 2010–2019 compared with approximately FJ$145 million during 2002–2009.
  - Drivers: stronger foreign-exchange inflows (tourism, remittances, external financing) and higher fiscal deposits; sterilization operations remained limited.
- Surge during 2021–22 findings:
  - Reserves peaked at about FJ$2.6 billion in 2022.
  - Contributing factors: 2021 Special Drawing Rights allocation (one-off increase in foreign reserves and domestic liquidity), rapid tourism recovery, remittance inflows above pre-pandemic levels, and large external budget-support loans, capital grants, and project financing increasing government deposits.
- 2024 developments:
  - Liquidity remained high at around FJ$1.8–2.2 billion, driven by donor-financed climate-resilience and infrastructure programs and ongoing tourism and remittance inflows.
- Role of government deposits:
  - Persistent, close relationship between government deposits and banking-system liquidity.
  - Increases in government deposits (external loan drawdowns, donor disbursements, delays in capital spending) translate mechanically into higher central bank balances held by banks.
  - Institutional arrangements (absence of a Treasury Single Account) make government deposit movements a key autonomous driver of system liquidity, alongside FX interventions.
- Conclusion of drivers:
  - Sustained surplus-liquidity regime is driven by external inflows, fiscal cash-management practices, and the absence of sterilization operations in recent years—a fundamental shift in the monetary operating landscape.

### D. Implications for Monetary Policy Transmission and Operational Normalization
- Operating environment: pegged exchange-rate regime, limited sterilization, persistent surplus liquidity.
- Effect on transmission:
  - Surplus liquidity has left short-term rates anchored at the floor of the corridor, limiting pass-through from the policy rate to short-term market interest rates.
  - Large, persistent excess reserves have shaped the functioning of the operating framework and constrained monetary transmission channels.
- Role of liquidity management:
  - Managing the autonomous drivers of liquidity—net FX purchases and government deposit dynamics—is central to strengthening monetary policy implementation under the existing framework.
  - Operational normalization would require addressing the structural sources of surplus liquidity and calibrating instruments and practices to restore active rate-channel transmission.

### Monetary policy transmission under a floor-system operational framework
- Operational characterization:
  - The operational framework effectively operates as a floor system due to a large and persistent surplus of liquidity.
  - Excess reserves consistently exceed banks’ transactional and precautionary needs, so marginal funding conditions are not determined through market-based interbank activity but are shaped by administered central bank facilities.
  - In this setting, the policy interest rate does not influence banks’ marginal cost of funds, limiting the effectiveness of the interest rate channel.
  - Short-term money-market outcomes therefore reflect the prevailing liquidity environment rather than the policy rate.
- Weakening of policy signaling:
  - The standing deposit facility rate—the floor of the corridor—has remained at zero since its introduction in 2010.
  - The policy rate has not been increased, and in an environment of abundant liquidity and limited money-market activity this configuration has reduced the signaling value of the policy rate.
  - Reduced signaling has dampened pass-through to retail deposit and lending rates.
  - As a result, the effectiveness of the interest-rate channel under tightening conditions has not been tested in practice.

### Strengthening liquidity management to restore transmission
- Objective:
  - Restoring an effective monetary policy transmission mechanism requires re-establishing the role of short-term interest rates as the marginal price of liquidity.
- Identified structural sources of surplus reserves:
  - Persistent foreign exchange inflows,
  - Refinancing and credit-support measures introduced during the COVID period,
  - Limited use of sterilization operations.
- Recommended operational approach:
  - Regular and predictable liquidity-absorbing operations, calibrated to liquidity forecasts and aligned with the policy-rate corridor, would:
    - Gradually reduce surplus reserves,
    - Increase the sensitivity of short-term rates to policy signals,
    - Strengthen the operational link between the policy rate and money-market conditions.

### Use of open market operations and Reserve Bank of Fiji notes
- Policy tool recommendation:
  - Structural excess liquidity can be reduced through the activation of open market operations, in particular the regular issuance of Reserve Bank of Fiji notes.
- Expected outcomes from a predictable issuance program, priced in reference to the policy rate:
  - Provide an effective absorption mechanism for persistent liquidity surpluses,
  - Establish a clear operational anchor at the short end of the yield curve.
- Transmission and market functioning implications:
  - By linking the policy rate to a regularly offered central bank instrument and reinforcing it through active liquidity management, the central bank would strengthen transmission of its policy stance to short-term market rates.
  - As liquidity conditions gradually normalize, interbank activity is expected to resume, supporting price discovery and enhancing broader monetary policy transmission.

*Source: IMF Selected Issues Paper “Monetary Operations and Liquidity Dynamics in Fiji” (SIP/2026/052), completed May 14, 2026.*

### Section 1

### Monetary Operations and Liquidity Dynamics in Fiji

### A. Introduction
- Purpose: analysis of monetary policy implementation in Fiji with a focus on liquidity dynamics under the exchange-rate peg and implications for monetary transmission.
- Key framing:
  - Small, open, import-dependent economy where external stability, reserve adequacy, and domestic liquidity are closely intertwined.
  - Effectiveness of monetary policy depends on formal framework and on how liquidity is generated and managed in practice.

### B. Fiji’s Monetary Policy Framework, Instruments, and Operational Implementation
- Institutional mandate and anchor:
  - Reserve Bank of Fiji operates under the Reserve Bank of Fiji Act of 1983, as revised in 2010, with responsibility for price stability and adequate foreign exchange reserves while supporting sustainable growth and a sound financial system.
  - Exchange-rate peg (since 1975) to a trade-weighted basket (Australian dollar, New Zealand dollar, U.S. dollar, euro, Japanese yen) is the central nominal anchor.
  - Historical outcomes under the peg: inflation below 3 percent; foreign exchange reserves typically equivalent to four to six months of imports.
- Policy-rate corridor and specific rates:
  - Operating corridor: OPR flanked by Lending Facility (repo) rate set 25 basis points above the OPR and Deposit Facility rate set 25 basis points below the OPR.
  - Current rates: OPR at 0.25 percent since March 2020; Lending Facility rate at 0.50 percent; Deposit Facility rate at 0.00 percent.
- Interaction with exchange-rate restrictions:
  - Exchange rate restrictions limit certain foreign-exchange transactions and capital movements, adding frictions that affect transmission and provide some degree of monetary independence under the peg.
- Liquidity-management instruments (conventional):
  - Open market operations: issuance/purchase of RBF Notes; in practice RBF Notes have not been issued since 2010 and no repo transaction has occurred in the past five years.
  - Statutory Reserve Deposits (SRDs): currently set at 10 percent of eligible deposits; function mainly 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 become a dominant autonomous driver of liquidity conditions given recent inflows.
  - Standing facilities: asymmetric usage under surplus liquidity—banks predominantly place excess reserves at the deposit facility and rarely access the lending facility (repo).
- Targeted and unconventional measures (used during stress):
  - Import Substitution and Export Finance Facility (ISEFF): concessional refinancing now suspended; existing loans rolled over at RBF discretion.
  - Housing Facility Scheme: active since 2012, low-cost refinancing for mortgage lending.
  - Agriculture Loans Ratio (ALR) and Renewable Energy Loans Ratio (RELR): targeted lending requirements; currently active and under review.
  - Natural Disaster Rehabilitation Facility (NDRF): closed.
  - COVID-19 credit and guarantee measures: temporary refinancing, guarantees, moratoria, prudential relief introduced during the pandemic.

### C. Liquidity Conditions and Structural Drivers
- Regime shift: decade-long move toward persistently elevated excess reserves; surplus liquidity structurally high for extended periods due to 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 compared with approximately FJ$145 million during 2002–2009.
  - Drivers: stronger foreign-exchange inflows (tourism, remittances, external financing) and higher fiscal deposits; sterilization operations remained limited.
- Surge during 2021–22:
  - Reserves peaked at about FJ$2.6 billion in 2022.
  - Contributing factors: 2021 Special Drawing Rights allocation (one-off increase in foreign reserves and domestic liquidity), rapid tourism recovery, remittance inflows above pre-pandemic levels, and large external budget-support loans, capital grants, and project financing increasing government deposits.
- 2024 developments:
  - Liquidity remained high at around FJ$1.8–2.2 billion, driven by donor-financed climate-resilience and infrastructure programs and ongoing tourism and remittance inflows.
- Role of government deposits:
  - Persistent, close relationship between government deposits and banking-system liquidity.
  - Increases in government deposits (external loan drawdowns, donor disbursements, delays in capital spending) translate mechanically into higher central bank balances held by banks.
  - Institutional arrangements (absence of a Treasury Single Account) make government deposit movements a key autonomous driver of system liquidity, alongside FX interventions.
- Conclusion of drivers:
  - Sustained surplus-liquidity regime is driven by external inflows, fiscal cash-management practices, and the absence of sterilization operations in recent years—a fundamental shift in the monetary operating landscape.

### D. Implications for Monetary Policy Transmission and Operational Normalization
- Operating environment: pegged exchange-rate regime, limited sterilization, persistent surplus liquidity.
- Effect on transmission:
  - Surplus liquidity has left short-term rates anchored at the floor of the corridor, limiting pass-through from the policy rate to short-term market interest rates.
  - Large, persistent excess reserves have shaped the functioning of the operating framework and constrained monetary transmission channels.
- Role of liquidity management:
  - Managing the autonomous drivers of liquidity—net FX purchases and government deposit dynamics—is central to strengthening monetary policy implementation under the existing framework.
  - Operational normalization would require addressing the structural sources of surplus liquidity and calibrating instruments and practices to restore active rate-channel transmission.

*Source: IMF Selected Issues Paper “Monetary Operations and Liquidity Dynamics in Fiji” (SIP/2026/052), completed May 14, 2026.*

### Section 2

### Section 2

### Monetary policy transmission under a floor-system operational framework
- The operational framework effectively operates as a floor system due to a large and persistent surplus of liquidity.
- Excess reserves consistently exceed banks’ transactional and precautionary needs, so marginal funding conditions are not determined through market-based interbank activity but are shaped by administered central bank facilities.
- In this setting, the policy interest rate does not influence banks’ marginal cost of funds, limiting the effectiveness of the interest rate channel.
- Short-term money-market outcomes therefore reflect the prevailing liquidity environment rather than the policy rate.

### Weakening of policy signaling
- The standing deposit facility rate—the floor of the corridor—has remained at zero since its introduction in 2010.
- The policy rate has not been increased, and in an environment of abundant liquidity and limited money-market activity this configuration has reduced the signaling value of the policy rate.
- Reduced signaling has dampened pass-through to retail deposit and lending rates.
- As a result, the effectiveness of the interest-rate channel under tightening conditions has not been tested in practice.

### Strengthening liquidity management to restore transmission
- Restoring an effective monetary policy transmission mechanism requires re-establishing the role of short-term interest rates as the marginal price of liquidity.
- Sources of the structural surplus of reserves include:
  - Persistent foreign exchange inflows,
  - Refinancing and credit-support measures introduced during the COVID period,
  - Limited use of sterilization operations.
- Regular and predictable liquidity-absorbing operations, calibrated to liquidity forecasts and aligned with the policy-rate corridor, would:
  - Gradually reduce surplus reserves,
  - Increase the sensitivity of short-term rates to policy signals,
  - Strengthen the operational link between the policy rate and money-market conditions.

### Use of open market operations and Reserve Bank of Fiji notes
- Structural excess liquidity can be reduced through the activation of open market operations, in particular the regular issuance of Reserve Bank of Fiji notes.
- A predictable issuance program, priced in reference to the policy rate, would:
  - Provide an effective absorption mechanism for persistent liquidity surpluses,
  - Establish a clear operational anchor at the short end of the yield curve.
- By linking the policy rate to a regularly offered central bank instrument and reinforcing it through active liquidity management, the central bank would strengthen transmission of its policy stance to short-term market rates.
- As liquidity conditions gradually normalize, interbank activity is expected to resume, supporting price discovery and enhancing broader monetary policy transmission.

*Source: sipea2026052 - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026052.pdf_