The conduct of monetary policy is the responsibility of the RBF. The bank targets price stability whilst attempting to ensure that an adequate supply of foreign exchange is maintained. Interest rates have been used to target the former while the value of the exchange rate and capital controls have been used to ensure that foreign reserves remain at healthy levels. Inflation for 2006 was recorded at 3 per cent, and had hovered around this figure since 2004; thus, on price stability, the RBF has had considerable success. However, its record in terms of maintaining a healthy stock of foreign reserves has not been as favourable. Fiji has traditionally maintained reserves sufficient for 6 months of merchandise import cover, but the level dropped steadily to 5.7 months of import cover in 2004 and to 3.3 months of import cover by December 2006. It had recovered, but only to 4.1 months, by April 2008.

Furthermore, the stock of foreign reserves as of December 2006 (F$823 million) included the proceeds from the bond issue of US$150 million in September 2006. The pressure on foreign exchange reserves was relieved by the ratcheting up of interest rates prior to the coup and the ratcheting up of capital controls since. The RBF has rationalized these interventions as being, ‘necessary to ensure that reserves are safeguarded under the current circumstances’.^[13] The economic decline following the last coup makes further interest rate tightening impractical.

The pressure on foreign reserves, however, predates the coup – which would only have exacerbated the problems. Both the nominal and the real (that is inflation-adjusted) exchange rates have appreciated since 2003.^[14] The nominal exchange rate is a weighted average of five currencies; namely, the Australian, New Zealand, and United States dollars, the Euro, and the Japanese yen. The weights are not disclosed (but can be readily computed from the data), and thus may be altered as an instrument of policy. Since all of the currencies in the basket have appreciated against the US dollar over the recent past, the Fijian dollar has followed suit. This has reduced the competitiveness of exports and encouraged imports, the cumulative effect of which would be reflected in terms of pressure on the current account.^[15]

There is some evidence of the Fiji dollar (FJD) being over-valued by at least 12 per cent as of 16 April 2007. This conclusion is gleaned from a simple comparison of the value of an investment in sovereign bonds vis-à-vis holding the same in FJD at home. Despite this clear evidence of an over-valued FJD, the RBF has been reluctant to devalue the dollar. This reluctance is perhaps due to a fear of destabilizing the currency, particularly when the markets have been anticipating a devaluation. Capital controls are more effective during short bouts of uncertainty, such as following a coup, as demonstrated with earlier coups. On its own, devaluation could have induced a run on the currency, forcing the authorities to devalue the currency yet further, even if this was not necessary prior to the coup. But, these strategies work only in the short term because investors find alternate means of circumventing the capital controls, or consumers go on an import binge in the face of an imminent devaluation. However, the evidence of an over-valued exchange rate existed long before the coup of December 2006.

The RBF has vehemently defended its decision not to devalue the dollar, a decision supported by the interim minister for finance. Exports have not picked up, thus capital controls remain the only option for protecting foreign reserves. The RBF has recently been easing liquidity (whilst tightening capital controls in order to protect foreign reserves) in order to stimulate domestic investment. The RBF has been directing credit to investments and rationing the supply of foreign exchange in the hope of encouraging exports. Success on this front, however, has been less than encouraging. This can be concluded from the repeated warnings by the RBF regarding the falling export income and buoyant imports – and, thus, a widening current account deficit; but the RBF has yet to acknowledge that at least some of the blow-out in the current account may be of its own making.^[16]

Employment conditions are likely to remain subdued until investment picks up. In the meanwhile, workers who have lost jobs and those with reduced hours of work are likely to face hardship. There is considerable anecdotal evidence of rising poverty, particularly within the urban informal settlements. In its February 2007 survey, the Fiji Employers Federation noted increased redundancies, reduced hours of work and temporary termination of work, all of which will increase in the absence of an economic rebound. Fiji has, since independence, witnessed an increase in the working-age population, particularly within the urban centres. Unless used, this demographic bonus could be a recipe for further social and economic problems.