New Zealand's influence in the Pacific region country had been "chiselled away" to the point that "the viability of our operations was under threat", Mr McCully said yesterday.
The two countries had agreed to post a new diplomatic counsellor in each other's respective capitals. Deputy heads of mission would be added later.
"We'd got to a point where our viability was under some threat. This will give us the ability to conduct closer to a normal range of activities," Mr McCully said.
Neither country has top level representation in place after a third New Zealand high commissioner was deported from Suva in November last year and Wellington followed suit, sacking Fiji's representative here.
New Zealand representation in Suva has dwindled to an acting head of mission, two immigration officials and two NZ Aid officials.
The small staff had put "a huge limit" on what New Zealand could do in Fiji and compromised its historical position as a regional hub for the Pacific, Mr McCully said.
Installing another high commissioner was "the next step for consideration."
"I'd want to be quite sure that we are able to see such a person remain in place," he said.
"We've had three come home and it would be a bit negligent of me to simply dispatch a high commissioner without making sure the conditions were in place to be reasonably confident that person would stay."
The new appointments did not signal a change to New Zealand's substantive policy on Fiji, including continuing sanctions.
"But it does signal the determination to improve the relationship and in particular to be able to agree to disagree about some things," Mr McCully said.
Yesterday's announcement was the first significant bright spot in diplomatic relations between the two countries since Commodore Voreqe Bainimarama carried out a military coup overthrowing the democratically elected Fijian Government in 2006.
"I've been disappointed that we haven't been able to get on to a somewhat more constructive footing with Fiji," Mr McCully said.
"We do strongly disagree with some aspects of their operation. But countries that disagree with each other have over a long period of history learned how to maintain diplomatic relations."
Labour leader Phil Goff said the changes were absolutely necessary because the relationship had "practically ground to an end".
"New Zealand simply couldn't carry out its normal consular, immigration, police liaison or other functions that need to occur between the two countries," Mr Goff said.
However, further reconciliation could only happen if Commodore Bainimarama made steps to further democratic and constitutional measures and enhance human rights.
"There is nothing that Frank Bainimarama has done in recent times that creates the basis for New Zealand making reciprocal gestures to build up that government-to-government relationship," Mr Goff said.
"You can't run a relationship on the basis of your key staff being liable to be deported without good cause."
Nik Naidu, a spokesman for the Coalition for Democracy in Fiji, said the changes were a positive step.
"If we try and rescue them as best we can, maybe some common sense will prevail," Mr Naidu said.
However, the Fijian military regime had done nothing positive.
"They've entrenched themselves, it's getting more draconian in its operations and it's getting harder on opponents," he said.
- The Dominion Post
Is it time for Judith Collins to go?Related story: Judith Collins looking isolated