Restricting the margins at which the kina can be traded against the US dollar has had little positive effect, with some companies struggling to pay bills, as the central bank reportedly restricts the purchase of US currency, Manufacturers Council of Papua New Guinea CEO Chey Scovell tells Business Advantage PNG.

Source: Bank of PNG

Companies seeking to pay bills are being told they can only buy in five thousand kina amounts, the Chief Executive of the Manufacturers Council of Papua New Guinea, Chey Scovell, has told Business Advantage PNG.

‘In one instance, a company with a bill of K2.1 million (US$840,000) was told it would have to buy in three to four instalments over ten to fifteen weeks,’ he said.

‘It’s absurd,’ Scovell added.

‘This is an example of a single manufacturer. There are hundreds of businesses in the same boat.

‘Somewhere, somehow, policy advisors have not taken a holistic view of the market and that’s particularly concerning when you’re talking about the Central Bank.

Pressure on business

Manufacturers’ Council of PNG’s Chey Scovell

‘There is a lot of pressure on local businesses as they find they cannot pay their suppliers.

‘This is adding to the cost of business, and it has failed to reduce some of the inflationary pressures.

‘I’m also bemused that the Bank of PNG has the staff to vet applications and decide on which company should get priority over another. How can they choose between a local food manufacturer who needs to bring in inputs and someone who wants to bring in bottled water or wine?  It’s very frustrating for our members.

‘It also seems that retailers and wholesalers are finding it much easier to buy foreign currencies to bring in their cheap finished goods and foodstuffs, but not home-grown industries.’

Winners and losers

Former PNG Treasury adviser Paul Flanagan tells Business Advantage PNG there are ‘winners and losers’ from the decision to lift the exchange rate and effectively peg the kina to the US dollar, but says there are equally effective alternatives.

‘If they were to keep the spread at 75, but bring the rate down 15 per cent to where it was on 4 June, that would certainly restore things in terms of the exchange rate itself.’

He says his research shows the big losers are exporters, with a significant proportion of this group being the rural poor living in the Highlands, who are exporting coffee, cocoa or palm oil overseas.

‘In Goroka, if a farmer turned up to sell a bag of coffee on 2 June, they would have got K6.00 per kilo and a few days later they were getting K4.60. Most of this change was from the exchange rate decision.  So, that’s a very significant reduction in income.

Former PNG Treasury adviser, Paul Flanagan

‘On the other hand, urban consumers importing a kilo of rice could benefit, as they should be able to buy that rice up to 15 per cent cheaper.’

Economic necessity

Prime Minister Peter O’Neill has supported the Bank of PNG decision, observing that there previously ‘large variations in the difference between the benchmark rate set by the central bank and that traded by the commercial banks’.

Meanwhile, the Governor of the Bank of Papua New Guinea, Loi Bakani, told members of the Port Moresby Chamber of Commerce and Industry this week that the introduction of the Kina trading band was necessary for economic stability.

He said financial dealers were trading the Kina away from the interbank mid-rate, resulting in a spread of around 600 basis points.

Flanagan agrees that while the spread (the difference between the buy and the sell rates) is wider in PNG than in other countries, the amounts being traded are smaller.

‘Maybe some action in narrowing that band was warranted but there might have been other ways to do that.  Actions were possible for improving the efficiency of the foreign exchange market through other mechanisms rather than dictating a method of a 75-basis point spread.’

More competition, more information

Those actions, he says, include allowing more foreign exchange dealers to provide greater competition. Competition can drive down margins and thereby narrow the band.

‘What I’m hearing from business is that is it more important to get access to funds than to limit the banks’ margins.’

‘Sometimes even just better information about particular areas can be effective,’ he says.

Just making people aware of what the charges are being applied by different operators can improve the market, he says.

Setting the rate

‘If they were to keep the spread at 75, but bring the rate down 15 per cent to where it was on 4 June, that would certainly restore things in terms of the exchange rate itself.  And moving back towards the market rate would help deal with the quantitative rationing we are now seeing.’

Chey Scovell agrees:

‘What I’m hearing from business is that is it more important to get access to funds than to limit the banks’ margins.’