Reserve Bank of Fiji Governor Sada Reddy has warned of the need to keep government’s contingent liabilities under control, saying there are signs that a few institutions with government-guaranteed debts may not be able to meet their obligations.
Addressing the Fiji Institute of Accountants annual congress, Reddy said the government’s total contingent liabilities in 2009 were around $1.7 billion, equivalent to about 26.5 percent of GDP.
“This level of contingent liabilities is extremely high given the weak revenue base of the government,” he said.
Reddy said the liabilities had grown substantially over the past several years and the trend must be stopped.
“What it does is that without the government really knowing what is really going on in the institutions whose debts government has guaranteed, suddenly government is faced with those contingent liabilities coming on to the government’s books and thus, seriously compromising government’s finances.”
Reddy pointed to the collapse of the National Bank of Fiji in the mid-1990s, and in more recent times, government having to convert nearly $40 million of Housing Authority debt to equity because the authority was in no position to meet its obligations.
“This situation must not be allowed to continue,” he said.
“Government must carry out proper diligence on statutory corporations which seek government guarantees. If such organizations are not properly managed and run, government must put conditions to any guarantees it gives in future so that proper reforms are done to make these institutions financially viable so that they borrow on their own strength in the market.”
“There is a huge moral hazard problem here. The boards and management of these statutory bodies take it for granted that the government is there to bail them out if they get into difficulties. So they fail to take timely corrective actions to reform the institutions they are in charge of.”
Reddy also acknowledged the concerns raised, “rightly so”, about whether government has the capability to repay the US$150 million bond that was issued by government in September 2006.
“The government and RBF are actively exploring all possibilities to meet this repayment and Fiji as usual will meet all its foreign obligations whatever it takes.”