The Papua New Guinea kina is starting to experience a very gradual erosion against its key trading currency, the US dollar. While economists expect further weakness ahead, the Bank of PNG’s Acting Governor Elizabeth Genia tells Business Advantage PNG she sees no cause for panic.

Chart showing US dollar against the PNG kina over the past year, and the recent reduction in the (mid-rate) value of the kina over the past two months. Credit: Xe.com

In light of the Bank of Papua New Guinea’s (BPNG) pending plans to gently return the kina to convertibility – meaning trading on foreign exchange (FX) markets without restriction – PNG’s currency is expected to continue its gradual deprecation over the next 18 months.

While the kina has remained static against the US dollar (at US$0.2840) since February 2022, PNG’s currency has demonstrated some modest, weakness against the greenback since early May, moving from US$0.2840 to US$0.2800.

The BPNG’s Acting Governor Elizabeth Genia views recent changes as an attempt to get a more balanced foreign exchange market.

‘There are grounds for the kina to depreciate in a gradual and in a measured way, but any talk of a devaluation is unfounded,’ she tells Business Advantage PNG.

Currency impact

Elizabeth Genia, Bank of PNG’s Acting Governor: Credit Australian Digital Commercial Association

While PNG Chamber of Commerce and Industry President (PNGCCI) Ian Tarutia acknowledges recent recommendations by policy advisers that a significant devaluation of the kina is needed, he warns against a full-blown devaluation.

In an open letter to PNG’s Treasurer, Ian Ling-Stuckey, Tarutia states that devaluation would only exacerbate the shelf prices for goods, which he estimates have already gone up 20 per cent.

While Genia doesn’t expect the kina to suddenly unravel against the US dollar, she concedes the level of ‘pass-through’ in a lower exchange rate would be quite high, and ultimately resulting in higher prices for consumers.

That’s because a weaker currency raises the price of imports – a significant component of PNG’s overall demand for FX – and makes capital imports for infrastructure projects more expensive, while increasing margins for exporters.

‘That would be of the greatest concern to the BPNG, the impact of those higher prices on businesses and livelihoods,’ she notes.

Why has the kina lost ground?

ANZ’s Kishti Sen.

According to Westpac PNG guidance issued in June, recent weakening of the kina reflects the BPNG’s attempts, under an International Monetary Fund (IMF)-supported program, to increase provision of FX to the market and remove of FX restrictions and administrative barriers in order to reduce FX backlogs.

Sohrab Rafiq, the International Monetary Fund’s PNG Resident Representative, tells Business Advantage PNG that recent kina movements reflect more FX entering the market.

‘This should help reduce kina overvaluation that the IMF estimated to be 13 per cent in the published March 2023 report,’ he says.

What will help sustainably reduce kina overvaluation, adds Rafiq, is dealing with FX shortages. This is supported by provisions of FX from the BPNG to authorised FX dealers. These provisions are currently on target to be US$600 million to the end of June, US$900 million by September and US$1.2 billion by December, under the IMF program.

Where to from here?

Westpac’s Senior Economist Justin Smirk and Westpac PNG Treasurer Jonathan Prince foresee a gradual, managed deprecation of the currency to US$0.2757 by the end of 2023, and to a low of US$0.2640 in late 2024.

By comparison, ANZ’s Pacific Economist Kishti Sen expects the kina to fall to US$0.2712 in December 2023, 4.5 per cent lower than its 2022 level.

However, Sen expects foreign investment beyond 2023 to be the biggest driver of the kina appreciating against the US dollar.

Resource-led rebound

Prime Minister Marape recently told delegates at a breakfast briefing that a lower exchange rate would increase the attractiveness, for investors, in PNG’s five mega-resource projects, estimated to cost around US$30 billion.

Sen predicts a repeat of the scenario experienced during the construction phase of the PNG LNG project, when expenditure saw the Kina/US$ appreciate by 27.4 per cent to a high of US$0.4893 in the third quarter of 2012 from US$0.3842 first quarter 2011.

‘Local suppliers, workers and contractors plugged into the proposed Papua LNG project, expected to commence early 2024, will need to be paid in local currency,’ Sen tells Business Advantage PNG.

‘This will increase demand for kina, shifting its value higher from mid-2024.’

Westpac’s Senior Economist Justin Smirk will be a speaker at the 2023 Papua New Guinea Investment Conference, taking place on 10 and 11 August in Brisbane.