The ANZ Bank last month predicted the kina will fall by up to 10% in value by the end of 2014, in anticipation of income from the LNG project. Paul Barker looks ahead several years to when that income begins to have ‘a substantial impact’.

The Institute of National Affairs’ Paul Barker

While it’s unusual for a bank to be publicly forecasting currency movements, the fall in the value of the kina over the last few months was predictable.

The fall—as outlined by the ANZ Bank’s Daniel Wilson—was related to the declining inflows associated with the PNGLNG construction and as a result of lower commodity prices.

Over the next months, if commodity prices stay largely down, the kina will continue to drift downwards, unless the Bank of PNG is ready to commit a further significant portion of its dwindling reserves to counter that trend.

When LNG comes into production in later 2014 most of the proceeds will remain offshore, repaying debts and going to the main shareholders so, although boosting GDP substantially, it will have a modest initial impact on the current account, and government revenue.

LNG production is likely to provide a slightly positive effect on reserves and the value of the kina, but not a substantial impact until revenue starts to flow more substantially in the later years of this decade.

But it will only make a substantial impact if the Government hasn’t pre-committed all these funds with overseas project borrowings, (although these would themselves bring an initial inflow of foreign currency, albeit also a liability).

Mixed blessing

Whether the fall of the kina is a good or bad thing depends upon your perspective.

‘For households on fixed incomes, and many urban members of the informal economy, the weaker kina sees costs of imported goods, including food products, rise and increases hardship.’

Businesses and households generally favour stability.

The recent fall in the kina has provided a parachute to some of the industries suffering from lower commodity prices, although for those industries requiring substantial imported inputs, whether plant and equipment, or livestock feed and fertiliser, the weaker kina imposes costs as well as providing gains.

For households on fixed incomes, and many urban members of the informal economy, the weaker kina sees costs of imported goods, including food products, rise and increases hardship, as well as driving pressure for increased wages, which can in turn further pressure those businesses which are relatively marginal.

Higher imported food prices would provide some boost to rural households producing and selling local fresh produce.

If the kina rises in coming years, rural households will suffer, particularly as the majority of production in most crops (other than palm oil, tea etc) comes from micro-enterprises.

The Sovereign Wealth Fund  is one of the key measures aimed at ameliorating that impact, but the Fund will only be of positive value if it is managed much more wisely and made more accountable than the mineral resources stabilisation fund, which was exhausted in the mid-1990s.

That’s why the fund is so critical to PNG’s long-term prospects.

Paul Barker is Director of Papua New Guinea’s industry think-tank, the Institute of National Affairs.