Debt Talk – Fiji Times

The Indian government announced the 2024-2025 national budget last month, which will borrow a total of $984.6 million.
Of that, $635.5 million will go toward closing the budget deficit, known in the state budget as the “net deficit,” and $349.1 million will go toward debt repayment, meaning settling debts that are due and paying interest on debts that are not yet due.

It’s a borrowing exercise that will bring the total state debt to $10.91 billion by July 2025, according to budget documents.

However, this is not a job that is done haphazardly. Nor does the government need to go to the bank as a primary customer to get the service.

The Fiji Times contacted former Reserve Bank of Fiji (RBF) Governor Savenaca Narube to explain the process, as the RBF plays a central role in the government’s borrowing process.

FT: The deficit explained…
Mr. Narube: When there is a deficit, it needs to be financed, so the government needs to find places to borrow.
So now we borrow more locally than we borrow overseas.
This is very cautious.
There are different risks when borrowing locally and when borrowing overseas. That risk is the exchange rate.
When you borrow money overseas, you have to earn the exchange rate to repay the overseas debt, so you need to earn foreign exchange.
The risk is that the exchange rate may go against you and the Fijian dollar may depreciate against the main currency we are borrowing in. This means you will pay more in Fijian dollars. So this is the biggest risk of borrowing overseas. There is no such exchange rate risk when borrowing locally.

Financial Times: Currently, about 35% of our total debt is held overseas, while 65% is held domestically. Is this a typical distribution?
Mr. Narube: In the past, the external debt ratio has been very low, and I think the level of 35% is wrong. We should limit the external debt ratio to total borrowings to less than 30%.
When I was in the Treasury (as permanent secretary), it was quite low. It was about 15% external borrowing. I think that was prudent, but I think up to 30% is still a pretty reasonable level.

Financial Times: Can Fiji’s financial system sustain 75% local borrowing?
Mr. Narube: Yes, we could do that in the past, but I think it needs to be reviewed over time.
Most of our overseas borrowings are from multilateral institutions. Here we are referring to the World Bank and the Asian Development Bank. Most of our overseas borrowings are from the Asian Development Bank. These borrowings are at what is called a concessional rate. It is lower than the world market rate. This is good for us. We can ask them to reduce the concessional rate that we get. So this is an area that we can explore to reduce the average cost of debt. In terms of local borrowings, the only major lender to the local government is the Fiji National Provident Fund (FNPF).

Financial Times: We often hear about government bonds and that the FNPF holds a large number of bonds. Please tell us what these bonds are and how they work?
Mr. Narube: For local borrowing, the government uses two main instruments. One is Treasury bills, which are known as T-Bills, and the other is bonds. Treasury bills have very short maturities – six months, 12 months. That’s the maturity of the bills that the government needs to pay back in six months, 12 months… These Treasury bills have very short payment terms.
Bonds have a longer repayment period, usually 3, 5, or even 20 years. This is the biggest difference between Treasury bills and bonds. What are they? Treasury bills are just a certificate. If you lend money to the government, they will give you a Treasury bill, which is a contractual legal document that tells you that they will pay you back your money with interest at a certain time.
Bonds are similar. Again, the instrument is a piece of paper, a legal contract, and they will pay you the principal over a longer period of time.
In your borrowing strategy, you need to strike a balance between short-term treasury bills and long-term bonds. You don’t want to borrow short-term bonds all the time because short-term interest rates are higher and you have to pay them back more often. So bonds can be as long as 20-25 years with lower interest rates.

FT: What role does the Reserve Bank play in this?
Mr. Narube: The Reserve Bank of Fiji is the registry of government debt. It issues these bonds on behalf of the government and manages them and pays interest on them according to the government’s orders. It also registers overseas loans.
There is a department there that does this. They go to the market and buy Treasury bills and government bonds.
In a given fiscal year, they calculate how much money the government needs to borrow from the deficit and develop a strategy for how much of that will go into Treasury bills and how much will go into longer-term issuance. They agree with the Treasury’s debt department on an issuance plan for the entire fiscal year. During the year, they simply execute that plan.

FT: Suppose the government needs to raise $10m through Treasury bills. What happens next?
Mr. Narube: They (RBF) will advertise that the notes are for sale and please let the Reserve Bank of Fiji know how many you would like to buy.

It is open to everyone, including individuals, and is often a good investment for individuals with extra cash because the returns are higher and the security is better. The “security” means that it is a government-issued bond.

Financial Times: Financial market funds are often accused of financing governments by buying large amounts of government bonds.
Mr. Narube: Well, 70% of government bonds are held by the FNPF. There are concerns about whether the FNPF should be regulated to that extent by the government. I agree with that view. But on the other hand, the government also guarantees your money in the FNPF. If there is a problem with the FNPF, the government will pay compensation to you (the FNPF member). The government guarantees the members’ money. That’s a separate issue, but look at the 70% debt risk that is guaranteed by the government. So if you look at both issues, the government guarantees anything that happens to the FNPF, it will guarantee the members’ money.

FT: What is the risk of the government defaulting on payments to the FNPF?
Mr. Narube: It is possible that this could happen, but the chances of it happening right now are low. This has never been a problem for me, and the chances of it happening right now are still low.

FT: Some say the FNPF is a cash cow for the government.
Mr. Narube: It’s a cash cow, but the FNPF also gets a return on that money, which is a pretty reasonable return given the market interest rate, so the members get a return through the interest that the government pays to the FNPF. If the FNPF reduces its investment in the government, which I think they should do over time, if they reduce their investment, then I think right now the FNPF has very few investment options. That’s the dilemma. To me, right now the government’s credit is pretty good, its ability to repay the FNPF’s debt is pretty good, and I think that’s a good reason for the FNPF to continue to invest in the government.
Because our market is small, the possibility of investing elsewhere is very low and sometimes non-existent. Therefore, if the FNPF invests in tourism or other sectors (which they have done), the risk goes up significantly compared to buying government bonds. Therefore, the risk of buying government bonds is quite low compared to investing in sectors such as tourism. The FNPF has been harmed by this in some cases. Another option is for the FNPF to invest overseas, which is regulated by the RBF.

FT: According to the government’s 2022-2023 annual debt report released by the Treasury, the Reserve Bank of Fiji is the third-largest buyer of government bonds after insurance companies. As of July 2023, the bank held about $694.3 million in government bonds. Is this normal, considering the bank only held about $59 million in July 2019? Or is there something going on there?
Mr. Narube: That’s injecting money into the economy, and that’s really happened, especially during the COVID pandemic. Because of the impact that COVID had on other institutions that were buying these bonds from the government, the RBF stepped in and bought these bonds. This is part of what’s called quantitative easing, which is the Reserve Bank injecting new money into the economy in this way (buying bonds). I recommended this during the COVID pandemic, I said inject more money into the system.

FT: What about the money borrowed from overseas?
Mr. Narube: Well, that’s another matter. They borrowed money from overseas and the Reserve Bank gave money.
This is new money coming into the financial system. It injects more money into the financial system, and the only institution that can do that is the Reserve Bank.

FT: Is this good for the economy?
Mr. Narube: No. It shouldn’t be happening in normal times. I agree with that during COVID, but now in normal times, that should ease and the market would take over the government’s money. So I would expect that to decline over time. || Debt Talk || Debt Talk