Central Bank Governor, Loi Bakani, says Papua New Guinea is facing economic and financial challenges due to the outbreak of COVID-19. He speaks exclusively to Business Advantage PNG about how the Bank of PNG is responding.

Bank of PNG’s Loi Bakani. Credit: BAI

Business Advantage PNG (BAPNG): What is the status of PNG’s foreign exchange reserves?

Loi Bakani (LB): The level of reserves is around US$2.1 billion (K6.9 billion), sufficient to cover 9.3 months of non-mining imports and 5.4 months of total imports. In 2019, the inflows into the reserves were from a US$300 million loan from Australia, a US$100 million Asian Development Bank (ABD) Health Sector Loan and a US$150 million World Bank Loan. In 2020, we expected inflows from the traditional donor agencies to fund the Government’s response to COVID-19.

BAPNG: Is the Bank still intervening in the FX market?

LB: We are looking at US$30 to US$60 million per month. At this time, our priority is to serve the foreign exchange requirements for COVID-19 expenses, including the Health Department. The Bank will continue to provide US liquidity to the market and this is guided by prevailing market conditions. Good inflows in 2019 and intervention by the Bank has reduced the backlog and waiting time to less than two months. However, new import orders continue to increase, resulting in the total order book remaining above K1.3 billion.

‘In the longer term, government is pushing to get P’nyang and Wafi-Golpu, which will add some confidence and provide some positive signals to investors.’

BAPNG: How will things improve with forex?

LB: The COVID-19 situation will have a negative impact on our exports as a result of disruption to supply in the non-mineral sector and low prices for most our export commodities.

We expect inflows from donor countries to fund the COVID-19 related measures. We are eligible for over K1 billion from the International Monetary Fund under the rapid credit facility dispersion. We are looking at signing some documents as a prerequisite to gain access to the funding.  In the near term, government is pushing to get two projects, P’nyang and Wafi-Golpu, which will bring capital inflows, add some confidence and provide some positive signals to investors.

BAPNG: Should the kina depreciate to open up the foreign exchange markets?

LB: This is a prescription for a well-developed economy; it doesn’t work well in Papua New Guinea and we know it. The kina has been depreciating at a gradual pace and we are now below 30 cents against the US dollar in nominal terms. However, the real exchange rate shows that the kina remains strong, although not at an overvalued level of 20 per cent as some commentators say. The kina can move, it is just that we have a one-sided market. In fact, there is nothing stopping the currency from moving.

PNG is an import-dependent economy and any large depreciation – although it will have a positive impact on our exports – will be more harmful because it will increase prices and affect our businesses and livelihood.

A depreciation in the exchange rate must be accompanied by reforms in other sectors of the economy.  The Bank is currently in talks with the Australian Treasury to engage market experts from Australia to review and help us improve the domestic interbank market to function as a price setting mechanism [that could] work better than the current arrangement.

BAPNG: You have cut interest rates by 200 basis points, two per cent. Will there be further cuts?

Bank of Papua New Guinea. Credit: Devpolicy

LB: The COVID-19 has impacted our economy negatively.  For the Bank it is important that our monetary, financial and payments system remains stable and people have confidence in our banking services. That is why the Bank cut interest rates or eased monetary policy to ensure that there is adequate supply of money in the banking system that can serve the businesses and individual requirements.

We made the decision to cut interest rates by 2 per cent because inflation has been trending down in recent years to currently below 3 per cent and the economy needed stimulus given the current situation. The Bank will continue to monitor developments and take appropriate actions if required.

BAPNG: Does that mainly apply to loans to business?

LB: Yes. Banks, Savings and Loans have responded to the measures taken by the Bank by providing relief to their clients through reductions in the interest rates for different products as well as in the servicing of their loans. The banks have announced rescheduling of loans for three months and reduced fees.

BAPNG: Why have you introduced quantitative easing (QE), buying back government debt?

LB: QE is an unconventional monetary policy tool used by central banks worldwide to conduct open market operation. We will buy back from investors government securities in exchange for cash into their bank accounts. QE adds money supply to the banking system and at the same time increases the central bank’s assets in its balance sheet.

In the case of superannuation, rather than wait three months, unemployed people will soon be able to access their own contributions to super funds now, up to K10,000. It is just personal contributions they can access, the employee component. The super funds will need liquidity [available money], so they will be looking to liquidate some of their investments in government securities.