Debt talk – The Fiji Times

Debt talk – The Fiji Times

IN Government’s 2024-2025 National Budget announced last month, it will be borrowing a total of $984.6million.
Of that amount, $635.5m will go towards financing its budget shortfall, called the “net deficit” in national budget speak, while $349.1m will go towards debt repayments, or the settling of maturing debt and payment of interests for those that have yet to mature.

This is a borrowing exercise that will take the total national debt to $10.91billion by July 2025, according to budget documents.

However, it’s not one that is done in a haphazard way. Nor does it involve Government going to a bank and getting served as a prime customer.

The Fiji Times approached former Reserve Bank of Fiji (RBF) governor Savenaca Narube to explain this process, given the central role that RBF plays in the process of Government borrowing.

FT: Deficit explained…
Mr Narube: When there is a deficit, it needs to be financed so Government needs to look for where it needs to borrow.
So right now, we are borrowing more locally than overseas.
That’s prudent.
There are different risks to borrowing locally and borrowing overseas. That risk is the exchange rate.
When you borrow overseas, you have to earn the exchange rate to repay your overseas debt, so you need to earn that foreign exchange.
The risk is that exchange rate may move against you, the Fiji dollar may weaken against these major currencies that we are borrowing from. That means you pay more in Fiji dollar. So that is the biggest risk in borrowing offshore. That exchange rate risk is absent in the local borrowing.

FT: Right now we have about 35 per cent of our total debt as overseas debt while 65 per cent of our debt is held locally. Is that a typical distribution?
Mr Narube: It used to be quite low on foreign borrowing and I think 35 per cent is heading in the wrong direction. We should limit it to below 30 per cent foreign borrowing against total borrowing.
When I was at the Ministry of Finance (as permanent secretary), it was quite low. It was around 15 per cent external borrowing. I think that’s prudent but I think up to 30 per cent is still quite a reasonable level.

FT: Can Fiji’s financial system afford the 75 per cent local borrowing?
Mr Narube: Yes we can in the past but I think it needs to be reviewed as time goes by.
Our overseas borrowing, most of that are from multilateral agencies. Here we are referring to the World Bank and Asian Development Bank. Most of our foreign borrowings are from the Asian Development Bank. And those borrowings are what they call concessionary (interest) rates. That’s lower than the world market rate. And that’s good for us. We could ask them to lower that concessionary rate that we get. So that’s an area we can explore, to bring the average cost of the debt down. In local borrowing, the only major lender to Government locally is the Fiji National Provident Fund (FNPF).

FT: We’re always hearing about Government bond and how the FNPF holds a lot of it. Please tell us what these bonds are and how they work?
Mr Narube: For local borrowing, Government uses two types of instruments basically. One is Treasury Bills or T-Bills as they’re known, and the other is bonds. T-Bills are very short term — six months, 12 months. That’s the duration of the bills where (Government) needs to repay by six months, 12 months…they’re very short duration for the payment of those treasury bills.
The bonds, you pay over a longer period, after three years, five years, some go up to 20 years. So that’s the biggest difference between treasury bills and bonds. What are they? Treasury bills is just a certificate that if you’re lending money to Government, they will give you a treasury bill which is a contractual legal document telling you that they will repay your money at a certain time and with interest.
And the bond is similar. Again, the instrument is a piece of paper that is a legal contract that they will pay you the principal in a much longer duration.
In the borrowing strategy, you need to have a balance between the short term treasury bills and the long term bonds. You don’t want to be borrowing short term all the time because short term interest rates are higher and you have to repay quite frequently. So the bonds can go up to 20-25 years and the interest rates are lower.

FT: What’s the role of the Reserve Bank in this?
Mr Narube: The Reserve Bank of Fiji is the registrar of (Fiji) Government debt. It issues these instruments on behalf of the Government and manages them and pays interest on the order of Government. And it does that for overseas loans as well.
There’s a unit there that does this. They go to the market for treasury bills as well as government bonds.
During a particular financial year, they will work out how much the government needs to borrow from their deficit, and they will have a strategy of how much of that is to be in treasury bills and how much will be for long term. They will work it out with the Ministry of Finance’s debt department to determine the issuing programme for the entire financial year. And during the year, they just implement that programme.

FT: So, say the Government needs to raise $10m through treasury bills. What happens next?
Mr Narube: They (RBF) will advertise that these bills are on offer, please let the Reserve Bank of Fiji know how much you want to buy.

It is open to everyone, including individuals and is often a good investment for individuals with surplus cash because the returns are higher and the security is good. “Security” in that it’s a government paper.

FT: The FNPF is often accused of funding the government by buying so much Government bonds.
Mr Narube: Well, 70 per cent of Government bonds are held by FNPF. There are concerns on whether the FNPF should be exposed to Government to that extent. I agree with that view. But on the other side, Government also guarantees your FNPF money. If something happens to FNPF, Government will pay you (FNPF members). Government guarantees the members’ funds. This is a separate issue but puts in perspective the 70per cent exposure of debt with Government guarantee. So if you look at the two, Government guarantees anything that happens to FNPF, it will guarantee members’ funds.

FT: And the risk of Government defaulting on FNPF payment?
Mr Narube: It can happen, but the chances of it happening now is quite low. It was never an issue to me and still remains quite low.

FT: Some say FNPF is Government’s cash cow.
Mr Narube: It is a cash cow but FNPF is getting return from that money, quite a reasonable return given the market rate so the members are getting return through Government’s payment of interest to FNPF. If FNPF reduces their investment to Government, and I think over time they should, if they reduce that, then I think right now, there’s very little option for FNPF to invest. So that’s the dilemma. To me right now, the credibility of government is ok, its ability to service debt to FNPF is fine and I think that’s a good reason why FNPF needs to continue to invest in Government.
And the alternative of investing somewhere else is really low, even non-existent at times because our market is small. So if FNPF for instance invests in tourism or in other things, which they have done, the risk rises quite substantially compared to buying government bonds. So the risks are quite low when you buy government bonds rather than investing in an industry like tourism. And FNPF has been hurt in some instances on that. The other option is for FNPF to invest offshore which is regulated by RBF.

FT: Looking at the Government’s 2022-2023 annual debt report released by the Ministry of Finance, the Reserve Bank of Fiji is the third biggest buyer of Government bonds after insurance companies. By July, 2023, it was holding around $694.3m in Government bonds. Is this normal, considering it was only holding around $59m in July 2019? Or what was going on there?
Mr Narube: That’s pumping money into the economy and it has happened, particularly during the COVID years. Because of the impact of COVID on other institutions that purchase these bonds from Government, RBF went in and bought the bonds. It’s part of what’s called quantitative easing, where the Reserve Bank pumps new money into the economy by doing this (buying bonds). I suggested that measure during COVID, I said put out more money into the system.

FT: What happened to money borrowed from overseas?
Mr Narube: Well, that’s in addition to this. They borrowed from overseas and Reserve Bank also gave money.
That’s new money going into the system. It’s putting more money into the system and the only institution that can do that is the Reserve Bank.

FT: Is it good for the economy?
Mr Narube: No. This should not happen under normal times. I agreed to that during COVID but now in normal times, that should ease off and the marketplace takes over the funding of Government. So I expect that to decline over time. || Debt talk || Debt talk