Papua New Guinea needs greater flexibility in the exchange rate says Rohan Fox, Lecturer and Research Fellow at the University of Papua New Guinea’s Division of Economics. He also believes APEC 2018 Summit will provide a boost but not enough to spark a general recovery.

Business Advantage PNG: The kina seems to have stabilised, where do you expect it to go?

UPNG’s Rohan Fox

Rohan Fox: As mentioned in this year’s PNG 100 CEO poll, access to foreign exchange remains the greatest concern for businesses. As long as this remains the case, the kina will not go up—or at least, it would be very strange if it did.

‘I would suggest that the main reason for the foreign exchange shortages is a lack of flexibility in the exchange rate.’

Whether it stays the same or goes down could depend on who forms government after the 2017 elections. A new government may be more inclined to ask for international assistance, and may be more open to moving to a more flexible exchange system, which would result in a lower kina. If the same government is returned, we could likely see a return of the status quo, with minimal exchange movement, at least in the short-term.

Business Advantage PNG: PNG has a trade surplus and a current account surplus but a capital and financial account deficit—largely because of the financial outflows associated with the PNG LNG project. Is there much that the government can do about that?

Fox: I would suggest that the main reason for the foreign exchange shortages is a lack of flexibility in the exchange rate. Of course, more flexibility would mean more immediate problems both for inflation and for government finances, and it may be argued that the cost of this outweighs the cost on economic activity resulting from foreign exchange rationing. So it depends on priorities.

From the point of stimulating economic growth and reducing the foreign exchange backlog, I believe devaluation could achieve this. From the point of stability, it is less clear. The main cost of depreciation is higher inflation, such as a higher price for rice. There is also higher international debt servicing for government. But this is partially offset or hedged by greater kina return for resources.

Business Advantage PNG: The Bank of PNG has said negotiated project agreements in the resource sector have: ‘resulted in instances where they have been used by the project developers to obtain preferential treatment and concessions from the State in a very uncoordinated manner.’ Do you have any thoughts on what strategies are available to counter that?

Fox: It does seem that resource companies have negotiators that are able to divorce their own companies from large portions of risk, while getting the PNG government to accept this risk themselves. The IMF does say in their 2016 Article IV that there is considerable scope for improving the fiscal regime for extractive industries and that ‘tax arrangements for PNG’s mining and petroleum sectors are very generous compared to other resource-rich countries and do not reflect the maturity of the PNG resource sector.’

‘There is a lot of infrastructure that is getting built for APEC.’

Given how important these negotiations are to government finances, perhaps investment in building skills and coordination in this area needs to be given higher priority. And perhaps there needs to be a greater degree of scepticism instilled about the terms of these agreements. The BPNG Governor’s statement does seem like an acknowledgement of this and a call to step in this direction.

Business Advantage PNG: How significant do you think the APEC 2018 meeting will be for PNG’s economy?

Fox: There is a lot of infrastructure that is getting built for APEC, and I think this will affect the economy to a similar degree that the infrastructure that was built for the 2015 Pacific Games did. The Leaders Summit will put the spotlight on PNG, and one would hope this leads to a spike in tourism, and that international investors will focus their attention on PNG.

Tourism has the potential to be a major industry in PNG, based on the beauty of the country and its people. But the problems of today—lack of infrastructure and high perceptions of crime and violence—will take a long time to tackle. If foreign exchange is still an issue by then, it will also be more difficult to entice foreign investors. It will be hard to guarantee that those investors can get their money out again, due to the foreign exchange restrictions.

‘PNG does have a good record for interest repayments.’

A further downside is the diversion of government attention. I think people underestimate the cost of running not only APEC but the cycle of meetings in the lead up to APEC. Of course I’m hopeful, but I don’t think an APEC meeting has ever changed a hosting country’s economic fortunes in the past. Maybe it will for a few businesses in Moresby, but broad APEC-led growth seems unlikely to me.

Business Advantage PNG: The yields on government paper are very high, especially when you look internationally. Would it be possible to market government paper internationally, or is that unrealistic?

Fox: PNG does have a good record for interest repayments, but as I understand it getting domestic bonds purchased by foreign investors is generally difficult or impossible for a country of PNG’s level of development. That said, the Pacific Islands Forum has recently floated proposals for regional financing, which could be promising.