Top banker’s plan to fix foreign exchange crisis
David James speaks to the Governor of the Bank of PNG about the country’s foreign exchange woes.
Getting foreign exchange is a challenge for Papua New Guinea business, and all eyes are on what the central bank is going to do. The Governor of the Bank of Papua New Guinea, Loi Bakani, says the bank is determined to obtain more foreign currency to address the backlog.
But he has also criticised claims that PNG’s foreign exchange problem can be solved by allowing a free float of the kina.
“Once we free the backlog, that will free up the market to operate smoothly, both for the in-flows that are coming from the exports and of course to meet the normal demand for imports and service payments,” Bakani says.
“It is the backlog that is creating this issue for us and I think we all appreciate that we have to find a way to look at it.”
Bakani has confirmed the strong fundamentals of the PNG economy.
He says PNG had experienced 14 years of positive GDP growth, adding that between 2010 and 2015 GDP grew by over 69 per cent.
He rejects the suggestions of ‘some commentators’ that the increase in GDP is inflation-driven, saying that, over that period, real GDP (after inflation is taken into account) has grown by 59 per cent.
He says that, because of the growth in the economy, “there is a lot of space for government” to “stay within the limit of 35 per cent or 30 per cent (debt-to-GDP ratio)”.
Bakani is critical of commentators who argue that a free float of the kina will solve PNG’s foreign exchange problem. He points out that the kina has depreciated significantly since 2012.
“A depreciation of such magnitude is a clear reflection of the supply– demand situation.
“Given the fact that PNG is an importdependent country, the kina has depreciated significantly. We know that the supply-anddemand responses to the depreciation of the kina are very, very low. It is therefore very difficult to know what exchange rate will clear the market.
“It is really an issue that the inflows are lower than the outflows. Basically the supply of foreign currency is lower than the demand.
“The central bank’s role is very difficult. It has to tread a fine line between movements in the kina exchange rate, and it also has to maintain its objective of price stability (for the national currency). That is a dual objective of managing an exchange rate.”
The fundamentals of the economy are strong. Sentiment is driving the short-term issues that we have now.
Loi Bakani … critical of commentators who argue that a free float of the kina will solve PNG’s foreign exchange problem.