David Toua, Chairman of the Bank of Papua New Guinea, details how the central bank is tackling the economy’s most pressing issues, including foreign exchange, government debt, and the digital future of banking.

David Toua addressing the 2024 PNG Investment Conference. Credit: Stefan Daniljchenko/BAI

The current challenges we face regarding foreign exchange have been building for over a decade, since the first attempts to peg our currency high were made as the last resource boom came to an end.

These were thought to be temporary measures, but as we all know, they remained firmly in place for far too long.

This board inherited an unenviable position.

We simply cannot continue to keep the currency artificially high.

The impact of foreign currency shortages

Foreign currency shortages have been a persistent handbrake on growth, leading to lower investment, reduced competition in key sectors and ultimately higher prices.

The IMF has estimated Papua New Guinea’s economy would be US$3.0 billion larger had we not introduced currency rationing in 2014.

“The central bank continues to intervene in the foreign exchange market to alleviate demand pressures. We will continue to act with caution and with a careful eye on the benefits and costs of our actions.”

Much of that growth would have been in the non-resource sector.

The restrictions have stopped our national companies from growing and has taken jobs and wealth from our citizens.

Thanks to the ongoing restrictions, particularly related to resource projects, much of our export revenue is not repatriated to Papua New Guinea.

Instead, it is held offshore, contributing to the accumulation of unmet foreign exchange orders with our commercial banks and our Authorised Foreign Exchange Dealers.

In 2023, foreign currency inflows amounted to around US$5.6 billion in contrast to total export receipts of around US$14 billion.

Had even half of that US$14 billion been brought onshore, we would be in a far stronger position this year.

Watch David Toua’s full speech from the 2024 Busines Advantage PNG Investment Conference here.

The Bank’s policy response

In 2023 we began a focused program to return the kina to a convertible trading currency.

This process has been slow and cautious and reflects our deep understanding of the impact currency movements have on both our exporters and our importers.

We must balance the interests of all parties with the resources we have at our disposal.

While in 2023 we more than doubled the amount of foreign exchange in the market, it was still not enough to satisfy unmet demand.

So an important part of our response has been to carefully and slowly adjust our currency, taking measured steps to ensure the least disruption to our businesses and to give them opportunities to adapt to new circumstances.

Contrary to comments made, the bank doesn’t premeditate annual devaluation targets.

The Bank is engaged in a careful and managed process to regularly and frequently assess the need for adjustments to our currency to manage the competing needs of all businesses in our economy.

We do this prudently and without making the sorts of alarmist statements to the media.

We know that the economic situation we see today is not reflective of our situation in a few months’ time, let alone years.

As it is, the central bank continues to intervene in the foreign exchange market to alleviate demand pressures.

We will continue to act with caution and with a careful eye on the benefits and costs of our actions.

While outstanding orders remain at a monthly average of around K1.2 billion, the time in meeting these orders has been reduced to 4-6 weeks, and I hope you are seeing these changes in your business engagements with your commercial banks.

How Government spending is affecting our economy

The total level of Government debt is currently K57 billion, or 50.5 per cent of GDP, of which around K31 billion is domestic and K26 billion is external.

To put this in perspective, coming out of COVID Fiji’s debt-to-GDP ratio is around 83 per cent of GDP. Indonesia’s is 45.3 per cent, while in Malaysia it is 60.3 per cent.

So, in and of itself, it is not a remarkable statistic.

The Government has reined in spending and this quarter it was lower than this time in 2023 by around K1 billion.

In the six months to June 2024, the Government recorded a surplus of K246.5 million, compared to a deficit of K2.8 billion in the corresponding period of 2023.

Fiscal policy appears to be working alongside monetary policy and foreign exchange management to help moderate inflation and stabilise our economy.

What’s next for the Bank

A major priority for us is modernising our national financial backbone to support a diverse and thriving finance sector.

The launch of three new banks demonstrates confidence in our economy.

Still, there is more we can do to create an environment for greater financial inclusion, and this includes developing the backbone infrastructure that supports the growth of the financial services sector.

We want as many new participants as our market can support, and particularly ones with a focus on inclusion for those in rural and remote locations.

We are looking carefully at our payment’s infrastructure, and the role the Bank plays in supporting the entrance of new participants, products and services.

We need to make sure we are ready for the innovations we can expect over the coming decade.

Going forward, we expect more use of biometrics, and our Financial Analysis and Supervision Unit has recently released guidance to help commercial banks use digital identity products.

We can expect virtual cards and cardless transactions to replace physical cards, and smartphones will be used in even our remotest areas.

At the Bank of PNG, we are preparing for this digital future.

David Toua is Chairman of the Bank of Papua New Guinea, PNG’s central bank. This is an edited version of his address to the 2024 Business Advantage PNG Investment Conference, which took place on 12 and 13 August 2024. The full speech can be found in full here.