Skip to content

THE NBF SAGA: how do we learn?

13/03/2012

The Fiji Times, 1996

 

The NBF has come out with a new estimate of the NBF’s bad debts: some $160 millions will have to be written off completely (i.e. this is lost forever) and provision for another $60 millions needs to be made, although some may eventually be collected.

 

This is confirmation that the financial disaster facing the NBF and theFijitax-payers is much worse than previously acknowledged.The costs toFijitax-payers will be high, coming at a time when Government, in the face of economic stagnation, has been unable to contain public expenditure.

 

The solutions being suggested (NBF restructuring, Government bonds, and Good Bank/Bad Bank idea) will not provide all the answers.  The underlying problems which helped to create the NBF disaster, are not being faced by Government.

 

The Size of the Problem

 

The financial loss to the country is enormous.  The $160 millions lost amounts, in 1996, to a third of the Government’s total operating expenditure; it is higher than the total education budget of Government; it is three times the size of the Health Budget; it is higher than the total capital development expenditure by Government in 1996 for all ofFiji.

 

Because the NBF deposits are legally guaranteed by the Fiji Government, the $160 millions lost must be paid for by the Government (i.e.Fiji tax-payers).

 

“Good Bank” and “Bad Bank”?

 

For Mr Lionel Yee and Mr McArthur, who have been charged with putting the NBF back on the road, the Good Bank/Bad Bank approach will enable the NBF to get back to its feet quickly.

 

But the “Bad Bank” terminology is misleading.  The “Bad Bank” will not carry on any normal banking business.  It will mere try to collect the bad debts which, if left with the NBF, would surely make it unworkable.

 

Separating out the bad debts simply gives the NBF an opportunity to make a fresh start, while the Government borrows money (through Government bonds) to cover the $160 millions the NBF will never recover from their borrowers.

 

How Will the Debt Be Paid?

 

Since $160 millions cannot be paid in one year, Government will borrow money (through Government bonds), which will be repaid in the future by the tax-payers.  This will increaseFiji’s public debt and put additional pressure on the Government’s public finance system.

 

Roughly, if provisions were made for the $160 millions to be paid over a 10 year period at 10 percent, the Fijitax-payers would need to provide an additional $26 millions every year. [Keep in mind that Government spends only $12 millions on drugs and medicines; less than a million on social welfare payments; half a million on the Old People’s Home].

 

These bad debt provisions may be found through reduced Government operating expenditure, reduced Government development expenditure, increased Government revenues (increased tax rates or increased economic growth), or a combination of all four.

 

Reduced Government Expenditure?

 

It is hoped that Government does not reduce the development expenditure, since this will be like shooting the cattle to save costs on a farm.

 

Government could cut costs the hard way, by reducing unnecessary expenditure on sections where there is little economic or social justification and by increasing efficiency.  Is this likely?

 

The unfortunate reality is that reduced Government operating expenditure is likely to further constrain expenditure on health, education, and social welfare- the usual easy targets for budget cuts. There will be restraints on teachers and nurses’ salaries, on expenditure on medicines, and social welfare payments.

 

The public should note that while Government easily overspends in a number of non-essential areas, it is quite successful at underspending on poverty alleviation measures. The poor will pay for the mess at the NBF.

 

Another easy option will be “across-the-board” cuts across all Government ministries, unfortunately also hitting revenue generating sections such as Inland Revenue, and others that desperately need funds to become efficient.

 

Increased Government Revenues

 

In the face of a stagnant economy, Government cannot look to general economic growth to raise revenues.  It could increase revenue by increasing tax rates, but this is likely to be extremely unpopular.  It will also hit the poorer people, given that Government’s current taxation policy favours broad-based indirect taxes rather than direct income taxes.

 

There is another danger that, to raise money quickly, Government may rush into approving new ventures such as the Namosi mine, sell of non-renewable resources for a pittance, and risk environmental disasters by hastily and uncritically accepting unsuitable waste disposal methods.

 

New NBF Strategies?

 

The NBF clearly needs to operate professionally, with proper management and accountability (as the current management are commendably attempting to do).  However, converting the NBF fully into a commercial bank may not be desirable either.

 

From its establishment, the NBF was intended to have developmental goals (such as providing banking services to the rural people, assisting small enterprises, helping Fijians in business, etc) in addition to being a commercial bank.   Following these development objectives (often under pressure from Government) must reduce profitability of any bank.

 

To convert the NBF into a purely commercial bank while making it easier for current management to become profitable, must lead to a reduced attention to development objectives.  Thus closing down unprofitable branches (just as the other commercial banks are doing) will lead to the poorer rural clients probably being denied reasonable banking services; full insistence on collateral conditions will lead to poorer and otherwise bankable clients being denied loans.

 

Yet it is not clear to what extent the development objectives lead to the NBF’s current problems: it may be important that the developing baby is not thrown out with the dirty bath-water.

 

The current management of the NBF have been asked to make the NBF a going concern, not to find out how the mess came about or how the NBF can serve development objectives (if at all).

 

It is therefore extremely important for the Fijipublic to first find out how and why the NBF fell into this major financial disaster.

 

The Reserve Bank and Police inquiries?

 

The Reserve Bank and Police inquiries will certainly help, but they serve limited objectives, and they won’t be enough.  There may have been some corruption and criminal activities, but these cannot explain the scale of this disaster.

 

The NBF had a number of “checks and balances” or “security guards” in place: the NBF Internal Management and Auditing structure, the NBF Board, the Reserve Bank, the Ministry of Finance, the Auditor General’s Office.  How did they all fail, despite the presence of some conscientious people?

 

If there was mismanagement by the Bank senior staff and bad banking practice, the public needs to know how this “bad management” was appointed in the first place, and allowed to continue?

 

Why did not the NBF Board pick up the scale of problems, or if individuals did, why were their concerns not addressed by the appropriate authorities?

 

Concerns were clearly expressed by the Auditor General’s Office and the otherwise extremely powerful Reserve Bank.  Why did not these lead to an early arrest of the rot?

 

What was the role of the Ministry of Finance? To what extent was Government pressure to follow development objectives a causal factor?  Indeed, what was the role of Government, especially given that Government basically appoints all these “checks and balances” or “security guards” which were supposed to watch over the NBF operations?

 

If the country and individuals in such positions are to learn, all these issues need to be clarified.

 

Need for Public Inquiry

 

Fijihas had many public inquiries.  None of them have ever involved such large sums as are involved in the NBF saga.

 

None involved such a wide range of relationships between an entity (its management and board) with crucial public institutions such as the Reserve Bank, Auditor General’s Office, Ministry of Finance, and Government ministries.  None involved such a volatile mixture of development and commercial objectives for the entity.

 

Yet these are important not just in the NBF affair, but also to nearly all other statutory organisations inFiji’s economy.  The proper working of these relationships is vital not just to these organisations, but also to good government of the country.

 

The Police inquiry may help, but they do not have the expertise to tackle these complex problems.  The Reserve Bank inquiry may help, but if money goes missing from a company, the “security firm” employed is hardly the appropriate body to conduct the inquiry.

 

There must be a full public inquiry to do full justice to the range of problems indicated by the NBF disaster.  The inquiry must be by an impartial and knowledgeable team, not an “inside job”.

 

The inquiry should not be a witch-hunt looking for scape-goats.  Rather, the major objective must be to try and ensure that the country learns from the mistakes and thatFijitax-payers do not face similar disasters year after year at enormous cost.

 

If Government is unwilling, for whatever reason, then the President’s Office is surely justified in initiating such an inquiry, in the public interest.

 

Advertisements

Comments are closed.

%d bloggers like this: