The Fiji Times »Printing Money – There’s more to the story


The notion of printing money came back and, again, this created some confusion. It is important to clarify, given recent discussions in parliament on how Fiji is approaching the economic challenges of COVID-19. The first thing I suggest is to avoid the phrase “printing money,” which echoes the kind of inflation we’ve seen in post-war Germany.

Even though Fiji’s central bank, the Reserve Bank of Fiji (RBF), can increase the money supply, no currency needs to be literally printed. Increasing the money supply by creating new money should be called “debt monetization”. Debt monetization is indeed carried out by all banks, not just central banks, in an attempt to finance the productive sectors of the economy.

It is important to note that commercial banks monetize debt every time they issue a loan (credit creation). Commercial bank liquidity is hailed as the best way to monetize debt, but let us not rush to rule out the possibility of RBF monetization of debt.

One of the main roles of a central bank is to manage the level of money in the economy – this is called monetary policy. The amount of money in the economy should reflect the potential for productivity, however, too much money, or money misdirected, can have negative economic effects, mainly inflation, which affects the cost of living and increases poverty.

The central bank increases the level of money in the economy by inducing monetization of commercial bank debt or directly through its own monetization of central bank debt.

Real estate mortgages are examples of monetizing commercial bank debt, while quantitative easing or direct loans to the government are examples of monetizing central bank debt. Quantitative Easing is the process of using monetization of central bank debt to buy financial assets, such as government debt (government bonds), in capital markets.

Who is in charge?

Under Article 52 of the RBF Law of 1983, Finance Ministers can influence RBF decision making and under Article 49 can discuss with RBF questions regarding the monetization of RBF debt. for budgetary needs. Research by the Bank for International Settlements (the central bank of central banks) has found that in developing countries like Fiji, regular meetings and consultations between government officials and members of the central bank are sufficient. current.

Who has the upper hand in these discussions is questionable.

However, it would be desirable for monetary policy to align with the government’s (fiscal) policy objectives because, unlike members of the central bank, governments are democratically elected and citizens choose governments based on policies that are theirs. are promised.

Monetization of central bank debt in Fiji

It is often suggested that if governments had easy access to monetizing central bank debt, it would encourage hasty spending and discourage prudent financial management.

However, central banks have clear protocols on how governments should access central bank debt monetization. In Fiji, for example, the RBF Act of 1983 dictates how the monetization of RBF debt is to be used to finance budget deficits and governments have and continue to use this resource accordingly.

For example, last year the RBF, either independently or in consultation with the Ministry of Economy, monetized the debt as noted in Supplementary Section 1.49 of the 2020/21 Budget: the RBF introduced the following measures to support the economy during the pandemic;

  • quantitative easing measures were implemented to the tune of $ 440.0 million; and
  • RBF also bought $ 280.4 million in government bonds in the first half of 2020 to help the government finance the deficit.

Holders of public debt, such as the FNPF, can use part of the proceeds of quantitative easing to buy more public debt. In this way, central banks, like RBF, can finance public budgets indirectly.

And the RBF plans to monetize the debt again as outlined in the additional section of the 2021/22 budget.

Going forward, the Bank (RBF) will continue to support economic recovery through conventional and unconventional means to ensure adequate levels of liquidity.

Here, “conventional” refers in part to the liquidity facilitation of commercial banks, and “unconventional” includes the monetization of debt through quantitative easing and, due to underdeveloped capital markets. Fiji, possible direct funding for the government.

Excessive focus on monetizing commercial bank debt

Monetizing central bank debt has been a critical strategy used by other governments around the world to help fund their responses to COVID-19. The strength of the Australian dollar allowed the Reserve Bank of Australia to engage in quantitative easing of 176 billion Australian dollars (269 billion F) in its national currency during the crisis.

This figure far exceeds the amount of debt monetization that was carried out by the Reserve Bank of Fiji during the same period. While the Governor of the Reserve Bank of Australia – Philip Lowe – revealed on March 2: “In Australia, the economic recovery is well underway and has been stronger than expected”, the situation in Fiji seems continually precarious.

Of course, one of the main differences between Fiji and Australia is Fiji’s concern for foreign currency which cannot be alleviated by the monetization of RBF debt. Excessive reliance on imports has resulted in foreign currency uncertainty that limits RBF’s role in the COVID-19 recovery.

Where Fiji has become more dependent on foreign currency debt due to the influx of foreign currency it brings, other countries, like Australia, may undertake large-scale quantitative easing in their national currencies.

When it comes to domestic currency debt, perhaps too much emphasis is placed on monetizing commercial bank debt.

Commercial banks tend to focus on the real estate market, corporate finance, and consumer credit. All of this can have the effect of increasing inflation and wealth disparities, and putting more debt burdens on the shoulders of individuals.

RBF, through mechanisms such as the ‘COVID-19 Recovery Credit Guarantee Program,’ attempted a hybrid version of debt monetization in which RBF monetizes debt, commercial banks dictating how the funds are allocated and the government guarantees and subsidizes the debt.

The success of these programs remains to be determined. However, if the debt monetization mix were tilted to include more DAF debt monetization funding for the government, directly or indirectly, even if the public debt would increase, it would be the domestic currency debt that is easier to collect. navigate and, in theory, the government could better target productive sectors of the economy, such as small-scale agriculture.

In addition, the government may be more proactive than commercial banks in times of crisis, and the monetization of RBF debt could be a faster and more efficient way to meet the social needs of the general population.

For these reasons, there should not be such a dismissive attitude towards RBF debt monetization and all options should be considered.

  • EDWARD NARAIN is a policy analyst and researcher at the University of Latrobe. He is a Fijian citizen currently residing in Melbourne. The opinions expressed are not necessarily shared by this newspaper.

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