In the Government’s 2024-2025 National Budget announced last month, a total borrowing of $984.6 million is planned. Of this amount, $635.5 million will be allocated to finance the budget shortfall, known as the “net deficit,” while $349.1 million will go towards debt repayments, which includes the settling of maturing debt and the payment of interest on debts that have yet to mature.
According to budget documents, this borrowing will increase the total national debt to $10.91 billion by July 2025. However, this process is carefully managed and does not involve the government simply visiting a bank.
The Fiji Times consulted former Reserve Bank of Fiji (RBF) governor Savenaca Narube to explain this process, given the central role that RBF plays in government borrowing.
When there is a budget deficit, it needs to be financed, and the government must decide where to borrow from. Currently, more borrowing is done locally than from overseas sources, which is considered prudent due to different associated risks. Local borrowing avoids exchange rate risks that come with overseas borrowing. When borrowing overseas, the risk is that the Fiji dollar may weaken against major currencies, increasing the repayment cost in Fiji dollars.
Currently, about 35 percent of Fiji’s total debt is overseas debt, while 65 percent is locally held. Narube suggests that foreign borrowing should be limited to below 30 percent. Historically, when he was in the Ministry of Finance, external borrowing was around 15 percent, which was considered prudent.
Fiji’s financial system has historically accommodated 75 percent local borrowing, though this needs periodic review. Most overseas borrowing is from multilateral agencies like the World Bank and Asian Development Bank, often at concessionary interest rates. Locally, the major lender to the government is the Fiji National Provident Fund (FNPF).
Government uses two main instruments for local borrowing: Treasury Bills (T-Bills) and bonds. T-Bills have short-term durations (six to 12 months), while bonds are long-term (three to 25 years). Treasury bills are legal documents that promise to repay the borrowed money with interest at a future date, while bonds operate similarly over longer periods. The RBF manages both these instruments, handling the issuance and interest payments on behalf of the government.
When the government needs to raise funds through treasury bills, the RBF advertises the offer, allowing individuals and institutions to invest. Government bonds, largely held by FNPF, provide reasonable returns considered low-risk compared to other investment options. There are concerns about FNPF’s heavy exposure to government bonds, but the government guarantees FNPF members’ funds, which mitigates risk.
During the COVID-19 pandemic, the RBF’s holding of government bonds increased significantly as part of quantitative easing, injecting more money into the economy. While initially beneficial, such measures should taper off in normal economic conditions, allowing the marketplace to resume its role in funding the government.
The government’s debt strategy, involving both local and foreign borrowing and managed by the RBF, aims to balance short and long-term needs while mitigating risks associated with exchange rates and market stability.