The sharp fall of Papua New Guinea’s currency, the kina, over the past few months is a cause for concern, with Manufacturers Council of PNG CEO Chey Scovell describing it as a ‘real kick in the guts’ for local manufacturers.

Since the start of July, the kina has gone from being worth to AUD$0.4855 to just AUD$0.4076 this week—a fall of 16%. Over the same period, the kina has fallen 13.7% against the US dollar—from US$0.4438 to US$0.3830.

Typically, a weaker kina makes imports more expensive, but can also make the country’s exports more price-competitive. However, it also increases the cost of essential imported inputs for local manufacturers.

Daniel Wilson, ANZ’s economist for Asia-Pacific, told Business Advantage PNG that PNG’s current account deficit, recently revised up from 2.7 billion kina to just under 7 billion kina for this calendar year, is ‘the fundamental driving force behind the depreciation,’ he says.

Wilson says the deficit is being driven by lower exports and sustained imports, which are putting pressure on PNG’s currency.

‘The deficit creates a structural demand for foreign currency (to pay for imports) that outweighs the demand for local currency and therefore the kina depreciates,’ he says.

‘If this pattern persists, without additional foreign currency inflows through the financial/capital account being channelled through banks, there should be continued pressure on the kina to depreciate.’

It’s unclear if the circumstances surrounding Ok Tedi Mining Ltd, a major source of import receipts that are converted into kina, has influenced recent falls.

Fall predicted

‘We’ve been predicting this for the last six months,’ says Dominic Beange, Investment Fund Manager at Kina Funds Management. ‘We’ve been calling for a weaker kina. We’re basically back to where we were two years ago.’

Beange notes that the kina is not the only currency to have depreciated against the US dollar, which has strengthened as the US economy has shown signs of recovery over the last 12 months.

In his latest Monetary Policy Statement, released this week, PNG’s central bank Governor Loi Bakani confirmed Daniel Wilson’s analysis.

‘The depreciation reflected a higher import demand and lower export receipts,’ he said. ‘Combined with lower foreign direct investment inflows as the construction phase of the PNG LNG project winds down.’

Impact on inflation

The weakening kina is putting some pressure on PNG’s inflation rate, predicted by the Bank of PNG to run at 5.5% for the full year and 6.5% in 2014.

Bakani also noted, that while the current account deficit was putting pressure on the kina, other factors, such as lower domestic demand and cheaper sources of imports, were putting downward pressure on inflation.

Positive signs for the future?

The Bank of Papua New Guinea is also suggesting that the current account deficit is very much a temporary phenomenon, with future income from the PNG LNG project likely to fix it.

‘In the medium term, the current account is projected to record surpluses due to revenue inflows from the mineral sector, including the LNG project.’

Loi Bakani also expects a lower kina to have a ‘positive impact’ on the price of PNG export commodities and is advising producers to ‘take advantage of this to increase their production volumes.’