In the Government’s 2024-2025 National Budget announced last month, the country will be borrowing a total of $984.6 million. Out of this, $635.5 million will be used to cover the budget shortfall, termed the “net deficit,” and $349.1 million will go towards debt repayments, including settling maturing debt and paying interest on existing debt.
This borrowing will increase the total national debt to $10.91 billion by July 2025, according to budget documents. The process involves careful planning and management, rather than simply obtaining loans from banks.
Former Reserve Bank of Fiji (RBF) governor Savenaca Narube explains the process due to the central role RBF plays in government borrowing.
When there’s a deficit, it needs to be financed, which means the government needs to decide whether to borrow locally or overseas. Currently, borrowing is more domestic than international, which is considered prudent. Borrowing overseas involves exchange rate risks, as the Fiji dollar could weaken against other currencies, increasing repayment costs in local currency. Such risks are absent in local borrowing.
Currently, around 35% of Fiji’s total debt is overseas debt, while 65% is held locally. Narube suggests that foreign borrowing should be limited to below 30% of total borrowing for prudency. Historically, foreign borrowing was quite low, around 15% when Narube was at the Ministry of Finance.
Narube believes Fiji’s financial system can afford 75% local borrowing, though it should be reviewed over time. Most foreign borrowings are from multilateral agencies like the World Bank and Asian Development Bank, usually at concessionary interest rates lower than the global market rate. Locally, the Fiji National Provident Fund (FNPF) is the major lender to the government.
Regarding government bonds, Narube explains that T-Bills and bonds are the main instruments used for local borrowing. Treasury Bills (T-Bills) are short-term instruments maturing in six to twelve months, whereas bonds have a longer duration, ranging from three to 25 years. Treasury bills are legal documents indicating repayment at a certain time with interest, while bonds represent a longer-term repayment commitment.
The RBF acts as the registrar of government debt, issuing and managing these instruments on behalf of the government and paying interest as directed. They work with the Ministry of Finance’s debt department to determine the yearly borrowing strategy and issue program.
For instance, if the government needs to raise $10 million through treasury bills, the RBF will advertise their availability, open to individuals and institutions alike as a good investment option due to higher returns and security.
Concerns about FNPF’s substantial investment in government bonds, holding 70% of government debt, are balanced by the government’s guarantee of FNPF member funds. Despite some views that FNPF is a government “cash cow,” Narube argues that FNPF gets a reasonable return on these investments, which benefits its members.
The Reserve Bank’s significant holding of government bonds, increasing from $59 million in July 2019 to $694.3 million by July 2023, resulted from quantitative easing during COVID-19 to pump money into the economy. However, Narube believes such measures should decline in normal times, allowing the market to resume funding government needs.