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.

Paradise - - Strictly Business -

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.

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