Presentation to The Standing Committee on Economic Affairs by The Governor of The Reserve Bank of Fiji, Mr Ariff Ali, on The Reserve Bank of Fiji (August 2017-July 2018) Annual Report and The 2017 Insurance Annual Report
1. Thank you Honourable Chair, and Honourable Members for the invitation to present to you today, highlights of the Reserve Bank of Fiji’s Annual Report for the period 01 August 2017 to 31 July 2018, and the 2017 Insurance Annual Report. We have also prepared responses to the specific questions that we have received from the Standing Committee, and these will be part of our presentation.
2. I acknowledge with appreciation the opportunity I had last week, to present at the Workshop you had at the Warwick Resort, an overview of the roles and responsibilities of the Reserve Bank of Fiji. Having an appreciation of how we conduct our central banking activities, would augur well in understanding the information we produce in our annual reports.
3. However, may I at the outset re-iterate a quote I mentioned to you last week, a quote that has always put our role as a central bank in perspective, by the former Governor of Bank Negara, Malaysia’s central bank, who stated that “central banking is not for the faint of heart!” I further quote Alice Rivlin, a former Federal Reserve Vice Chairperson, who aptly said that the “the job of the central banks is to worry”. By the way these are statements by two women regarded as leading central bankers in the world.
B. 2017 – 2018 RBF ANNUAL REPORT HIGHLIGHTS
4. Honourable Members, as I had highlighted in my presentation to you last week, the RBF is tasked to maintain three (3) core mandates: (i) Price stability in ensuring that inflation is low and stable; (ii) External (currency) stability, in that foreign reserves level are comfortable; and (iii) Financial stability, in ensuring that the Fijian financial system is safe and sound.
5. I will therefore discuss the highlights of our 2017/2018 Annual Report under the key outcomes we achieved in ensuring the protection of these three mandates, and then provide some key updates of our financial performance.
6. Honourable Members, inflation in Fiji had somewhat subsided in the 2017-2018 fiscal year at around 3.1 percent on average, when compared to an average of 4.4 percent in the 2016-2017 fiscal year. While the supply and prices for market items were normalising after Tropical Cyclone (TC) Winston, adverse weather conditions from TC Keni and Josie and associated flooding, placed upward pressures again on prices.
7. In addition, the impact of the higher oil prices throughout 2017 and early 2018 translated to higher domestic fuel prices in the fiscal year. Honourable Members would take note that the increase in global crude oil prices and supply shortages caused by natural disasters, are beyond the control of the central bank.
8. Consequently, inflation at the end of the 2017-2018 fiscal year stood at 4.7 percent driven by both domestic and imported inflation. Nevertheless, inflation excluding alcohol, tobacco and yaqona is around 1.9 percent.
9. Honourable Chair, I stated in my presentation last year that as a small open economy dependent on imports of a variety of goods, we need to maintain a sufficient level of foreign reserves, otherwise there will be pressure on our exchange rate.
10. The International Monetary Fund (IMF) has set a benchmark on the level of foreign reserves which states that it should be sufficient to cover 3 months of imports. Given the external shocks and risks we face such as the hike in oil prices and natural disasters we experienced in April 2018, we built in an additional buffer above this benchmark.
11. I am pleased to inform you that Fiji’s foreign reserves remained above the benchmark throughout the review period. At the end of July 2018, our foreign reserves level stood at $2,161.9 million and was sufficient to cover 4.8 months of retained imports. In addition, there was approximately $553.1 million in foreign reserves held by non-bank financial institutions. Currently (31/01), foreign reserves are around $2,031.3 million, sufficient to cover 4.5 months of retained imports.
12. Honourable Chair, ensuring a safe and stable financial system is vital in the continued sustainable growth of our economy. The Reserve Bank as the financial system regulatory authority in Fiji continues to undertake relevant supervisory activities to ensure the safety and soundness of the Fijian financial system.
13. The Fijian financial system continues to expand, recording a growth of 8.1 percent (or $1.3 billion) to reach $19.8 billion in July 2018. Over the reporting period of August 2017 to July 2018, financial soundness indicators underpinned a satisfactory outlook on the stability of the financial system.
14. The commercial banking industry continues to dominate the Fijian financial system taking up nearly 50 percent of the financial system assets. The FNPF as the single largest financial institution continues to remain sound and its sustainability underpinned though recent reform actions. The insurance industry as we will highlight later in this presentation, managed to recover well from the losses arising from TC Winston and subsequent natural disasters.
15. Work on the implementation of the IMF Financial Sector Stability Review (FSSR) recommendations has started and this is expected to further strengthen the capacity of the RBF to undertake its supervisory role, and closely monitor emerging risks and vulnerabilities in the system.
16. Honourable Chair, please allow me to provide some highlights of the outcome of our 2019/2018 operations, before I move on very briefly to the 2017 Insurance Annual Report.
17. Honourable Chair, we have always emphasised when making presentations such as this, that the objective of the central bank is not to maximise profit. While profit maximisation is not our goal, making losses is also not acceptable. For important policy making institutions like us, financial losses often results in reputational risk which translates to loss of confidence of our key stakeholders, in our ability to effectively carry out our mandates.
18. For the 2017-2018 financial year, the RBF made a profit of $31.5 million and transferred to Government a total of $32.5 million which included one-fifth or $2.0 million, of the revaluation reserve account (RRA). Of the $31.5 million in profits, the RBF Board with the approval of the Minister transferred $1.0 million to the General Reserve Account to strengthen the Reserve Bank’s capital base.
19. This compares with a transfer of $29.4 million to Government ($27.3 million profits and one-fifth RAA totalling $2.1 million) for the financial year ended 31 July 2017 with a transfer of $1.0 million to the General Reserve Account.
20. As would be expected, RBF’s profit is underpinned by the income earned from our foreign reserves holdings which are invested in safe and liquid assets offshore. In the 2018 financial year, the Bank earned $45.0 million in net foreign exchange income, boosted by elevated levels of foreign reserves.
21. As a public institution aspiring to best governance and disclosure practices, the RBF was again able to sign off on its annual audited financial statements for the twelve months ending 31 July 2018, on 28 September 2018, within two months of our financial year. Following the signing of the audited accounts and in line with the provisions of the RBF Act, the Bank provided to the Honourable Minister for Economy a certified auditor’s copy of its financial accounts along with its Operations Report, on 28 September 2018.
C. 2017 INSURANCE ANNUAL REPORT
22. Honourable Chair, I will move on to provide key highlights of the 2017 Insurance Annual Report.
23. 2017 was a favourable year for the local insurers as Fiji was spared of experiencing any major catastrophe events as it did in 2016, allowing the local insurance industry to recuperate from the devastation left behind by TC Winston and TC Zena. However, claims from the 2016 events continued to be paid in 2017.
24. The risk transfer role that the insurance industry plays is key to the growth of our economy. It provides the necessary safeguard for the financial health of individuals, families, communities, businesses, financial institutions and the economy as a whole. The industry also plays an information role in providing an indication of existing risks in the economy and probability of loss, and a developmental role in the capital markets, by mobilising savings for productive use.
25. The Fijian insurance industry remain solvent way above the prudential minimum requirement, supported by good quality assets. Total assets of the Fijian insurance industry stood at $1.7 billion, an increase of 5.8 percent from 2016. Total liabilities also increased by 4.8 percent to $1.4 billion, in 2017.
26. The insurance industry’s viability position improved in 2017, with a combined after tax profit of $45.2 million for the life and general insurance sectors, a turnaround from the net loss of $8.0 million reported in 2016.
27. Total gross premium income as an indicator of volume of business increased by 3.8 percent to $323.7 million in 2017, attributed to new policies underwritten by general insurers. Life insurers however, registered a decline in gross premium income, as a result of lower premiums received for endowment products. An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its ‘maturity’) or on death.
28. In terms of claims, net policy payments and net claims paid grew to $210.7 million, in 2017. Net claims paid by general insurers increased by 8.5 percent to $97.0 million, attributed due to the ‘spill over’ payments for TC Winston claims from the previous year. Similarly, net policy payments by the life insurance sector increased by 17.8 percent to $113.7 million due to matured and surrendered life policies.
29. Honourable Chair, the Reserve Bank of Fiji continues to liaise with individual companies on the sustainability of their operations and like any other business during times of crisis, some companies’ underwriting capacity have been challenged by the impact of recent loss events. The Reserve Bank, as the regulator of the insurance industry has the necessary powers to enforce requirements to ensure that individual companies remain safe and sound, and the insurance industry as a whole continues to be stable.
30. Climate change and the imminent upsurge in insurance losses globally and in Fiji in recent years have underscored the importance of insurance affordability, challenging insurers to bridge the insurance protection gap. This has highlighted the ongoing need for the industry to not only promote insurance awareness to the general public, but to also develop and offer innovative insurance solutions that meet the needs and affordability of the underserved in our communities.
31. We note that the Standing Committee has some specific questions on these initiatives, so we will take this time to respond to your questions. If you may allow us Honourable Chair to begin with our responses to the specific questions relating to the 2017-2018 RBF Annual Report and then move on to the questions on the 2017 Insurance Annual Report, before we close with a summary.
D. RESPONSES TO QUESTIONS BY THE STANDING COMMITEE
32. Honorable Chair, we have provided detailed responses to the specific questions of the Standing Committee, and these have been provided to you.
33. I will now go through our response to each question (refer attachment).
34. Honourable Members, in closing, I wish to highlight a few key points for your noting as an update on the current economic environment:
 The inflation rate while noting an uptick to the end of 2018 remain at an acceptable level. We are fully aware of the reasons behind the increase and are closely monitoring the relevant indicators. It is to be noted that inflation excluding alcohol, tobacco and yaqona is around 1.9 percent.
 Foreign reserves continue to remain above the benchmark, and as of yesterday, 31 January 2019, foreign reserves were around $2,031.3 million, sufficient to cover 4.5 months of retained imports.
 2018 was another year of positive growth and the economy is estimated to have expanded by 3.2 percent.
 The financial system is stable with gross assets rising to $20.7 billion at the end of 2018.
35. However, in being reminded by the quote we stated earlier, that our job as central banks is to worry, it will be remiss of us if we do not acknowledge that there are significant risks to our economic outlook due to current global developments underpinned by the intensification of international trade tensions and the possibility of a larger deceleration in the Chinese economy, further financial market stress, and overall policy and geopolitical uncertainty.
36. Domestically, risks brought about by natural disasters remain elevated as we currently go through the cyclone season, with the continued need to review and implement necessary strategies for the viability of our export sector. While the RBF has no control over risks emanating from global developments, we continue to engage with relevant stakeholders in Government and the private sector on actions to mitigate domestic risks.
37. I would like to conclude by thanking the excellent team we have at the Bank, and we hope these remarks are helpful background for the Standing Committee’s review of our annual reports.
We would be happy to answer any further questions.