With a new strategy to manage Papua New Guinea’s foreign exchange shortages expected soon, the Bank of Papua New Guinea’s Acting Governor, Elizabeth Genia, has moved to reassure business leaders that a devaluation of the country’s currency is not on the cards.

The Acting Governor of the Bank of PNG, Elizabeth Genia, during the 2023 Investment Conference. Credit: Stefan Daniljchenko/BAI

‘There will be no devaluation of the kina,’ the Bank of Papua New Guinea’s Acting Governor, Elizabeth Genia, told delegates at the 2023 Business Advantage Papua New Guinea Investment Conference in Brisbane earlier this month.

While she acknowledged that ‘the rationing of foreign exchange, and its absorption almost completely by the largest of our businesses, cannot continue,’ she said that ‘a hard, sharp devaluation is in no-one’s interest.’

‘We, as an independent central bank, must carefully balance the needs and wants of all of our stakeholders. All have differing costs and benefits when it comes to the value of the currency.’

Thoughtful and prudent

She emphasised that the bank was taking ‘a thoughtful and prudent approach to the necessary adjustments needed to realign the kina supply with demand.’

This has involved working with the International Monetary Fund to develop what she described as ‘a roadmap to a more market-clearing exchange rate regime and a more effective monetary policy framework.’

‘The extent of the overvaluation is subject to great uncertainty, ranging from 13 per cent to 26 per cent’

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Whatever the nature of this roadmap, expected in coming weeks, Genia moved to reassure the audience that the central bank remained independent and that ‘any further adjustments will be undertaken with care, consultation and transparency, and with the full intention of minimising the impact on any disadvantaged group.’

Gradual depreciation

While a ‘hard, sharp devaluation’ is not expected, other experts speaking at the conference agreed that the kina was overvalued and that a gradual devaluation should be expected.

‘We do think it will be depreciate but in a gradual way,’ said Justin Smirk, Senior Economist at Westpac.

‘The extent of the overvaluation is subject to great uncertainty, ranging from 13 per cent to 26 per cent,’ observed Marcel Schröder, PNG Country Economist at the Asian Development Bank, who noted that, because the country’s foreign reserves were ‘more than sufficient,’ forex supply issues were therefore now likely due to ‘administrative issues’.

Westpac’s predicted valuation for the kina for the next 12 months is shown in red in the above graph. Credit: Westpac

Offshore funds

Genia referred to one of the key factors that she believes has contributed to PNG’s long-standing forex shortages:

‘We continue to be concerned about the level of funds held offshore and the impact that has on our access to foreign exchange. We as a nation want to be able to provide more foreign exchange to our small companies, particularly our small PNG national-led companies that often lose access in preference to big international companies.

‘We want our domestic companies to thrive, and for our wealth to be held onshore.’

Impact

‘The Governor also made a veiled reference to the forex- and governance-related issue with Puma Energy, PNG’s major fuel supplier and larger forex buyer, which resulted in the Declaration of Emergency by Petroleum Minister Kerenga Kua late last month.

‘We know this has impacted very negatively on you, the business community, and our communities throughout Papua New Guinea,’ she told the conference.

She emphasised that the issue was ‘broader than simply one of foreign exchange’:

‘We need to consider the structure and nature of our industry base, the way we manage imports and … of our foreign investment. It is important to stress that the responsibility to do this rests with a number of key stakeholders, not simply the bank.’

Marcel Schröder produced figures that illustrated exactly the impact, with PNG experiencing a ‘marked slowdown’ in imports since late 2022, especially in machinery, which suggested that business ‘was either postponing or not undertaking investment,’ he suggested.

David Lawrence, Chairman of PNGX, the country’s stock exchange, gave another example of the impact. While the appetite from offshore investors was there to invest in PNG’s capital markets, including in the new corporate bond market, he told the conference that the forex issue was ‘the biggest barrier to foreign investors investing in the market.’