The Bank of Papua New Guinea, the country’s central bank, is undergoing notable changes. Its Chairman, David Toua, comments on what’s behind the changes, the challenges faced by the bank and the road ahead for foreign exchange.

Bank of PNG Chairman, David Toua

The staff of the Bank of Papua New Guinea (BPNG) have had to endure significant upheaval over the past two years, with the appointment of an Independent Advisory Group (IAG) to review the Central Bank Act, the subsequent Act amendment in December 2021, and commencement of phase two of the IAG review, which is currently underway.

The two most senior figures in the bank, the Governor and Deputy Governor, were retired as the result of Act amendments, and a significant structural change was legislated that altered the composition, and powers and responsibilities of the BPNG board.

The situation right now is that we don’t yet have a permanent Governor, nor do we have any Deputy Governors in place, and several board vacancies remain to be filled. Protracted delays with these appointments are not ideal and we, the Board, are working diligently with the appropriate authorities to have these in place as soon as possible.

‘Arguably, the most profound change is the elevated responsibility of promoting employment and economic growth in addition to maintaining price stability, in the process of formulating and implementing monetary policy.’

Despite this, the staff continue to manage the financial system and monetary policy, whilst also facing uncertainty as to the final iteration of the Central Bank Act and dealing with the extra responsibilities resulting from the Act amendments so far.

How we got here

If you were around in the mid 1990s, you may remember the parlous state of the economy at the time. High inflation, a rapidly declining kina, a deficit in the balance of payments, and only a few weeks’ of foreign exchange left to trade.

Something drastic had to happen, and it did.

The late Sir Mekere Morauta ushered in the Central Bank Act 2000, ring-fencing the BPNG and allowing it the autonomy and independence to effect monetary policy reform and manage the economy towards better times.

That Act has stood the country and the institution in good stead. BPNG as a leading national institution is not broken, far from it. It remains robust, provides timely interventions when required, maintains healthy reserves, and manages monetary policy in a manner appropriate to our unique economic circumstances.

Changes

You might ask why change the Central Bank Act at all? That’s not for me to answer, but I will say this: BPNG is making the changes an opportunity to review and reset, to introduce greater transparency and accountability, to become more stakeholder-focused, and to strengthen and modernise its functionality as a Central Bank of the future.

‘Longer term, we need to move to a freely floating currency’

Perhaps the most obvious change brought about by the recent Act amendments relates to the decision-making structure and hierarchy of the Bank. Where once the Governor was also the Chairman of the Board, and the final arbiter on all major decisions, that authority has been transferred to the Board of Directors, chaired by one of the external Directors.

Arguably, the most profound change is the elevated responsibility of promoting employment and economic growth in addition to maintaining price stability, in the process of formulating and implementing monetary policy. Having a binary responsibility to manage and balance both price stability and economic growth presents a very new and significant challenge to the bank.

Forex shortages

BPNG is well aware of the issues faced by business in accessing foreign exchange. There are many varied and somewhat complex reasons for this but the fundamental issue is that there is not enough supply of foreign exchange to meet the demand for it.

We all know about the country’s heavy reliance on imports and our vulnerability to shock from global events. In order to cushion PNG from these shocks, it has been necessary for the BPNG to maintain our currency at a certain value and to provide regular currency interventions to ensure necessary flows.

Longer term, we need to move to a freely floating currency, but we can’t do that overnight and we do need to find a sensible way forward if that is to happen.

Things will be different in future if we have more competition in the financial markets, there is significantly more foreign direct investment, and more project revenue is domiciled. The central bank certainly has a role to play in ensuring market conditions can support those developments but BPNG cannot do it alone.

Perhaps there is a way forward in the planned IMF program signed by the PNG Government. The basic premise of the program is that PNG will make a gradual move to greater exchange rate flexibility and introduce appropriate mechanisms to enhance monetary policy transmission. The central bank supports such a move, but it will have to be done carefully and advisedly.

Ultimately, if we manage things appropriately, if all stakeholders buy into the changes, then we will be closer to the trading conditions we all want and deserve.

David Toua is Chairman of the Bank of Papua New Guinea. This article is an edited extract of his speech to the Australian PNG Business Forum earlier this month.