Professor Stephen Howes Addresses Foreign Exchange Shortage in Papua New Guinea

By: PNG Business News May 22, 2023

Photo: Professor Stephen Howes. Credit: Australia National University

Papua New Guinea is grappling with a foreign exchange shortage, resulting in higher imports and lower exports, according to economist Professor Stephen Howes from the Australia National University (ANU) Development Policy Centre. Speaking at the 38th Australia-PNG Business Forum and Trade Expo in Port Moresby, Professor Howes highlighted the country's loss of competitive economic gains from the 1990s during the resource boom between 2000 and 2014 as a major contributing factor.

"The country is faced with a foreign exchange (forex) shortage largely because PNG lost its competitive and hardline economic gains from the 1990s during the resource boom between 2000 and 2014," Professor Howes explained.

While the growth of the economy and forex was observed following the boom, the real exchange rate remained persistently high over the past decade, exacerbating the shortage. This high exchange rate has both boosted the economy and contributed to the scarcity of forex.

"The PNG Kina has depreciated from 2013 to 2020 according to statistics from the Bank of Papua New Guinea (BPNG), however the real exchange rate has remained high," Professor Howes stated.

The depreciation of the Kina was primarily driven by an increase in imports and inflation, impacting the country's forex reserves over the last decade. The highest depreciation rate, amounting to 14 percent, was recorded at the end of 2015, coinciding with Papua New Guinea hosting the 2015 Pacific Games, where significant infrastructure spending occurred.

"In the last three years, the kina had hardly moved against the US dollar, however it did appreciate by 17 per cent over other currencies on a trade-weighted basis, which included a depreciation rate of zero per cent from the end of 2021 to September 2022," Professor Howes noted.

The resource boom generated increased revenue for Papua New Guinea; however, the real exchange rate offset the economic shortages that followed, significantly impacting forex availability.

"The Kina was floated in 1995 to make PNG exports competitive on the international market. The Kina value is now determined by demand and supply in the foreign exchange market," Professor Howes explained.

Regarding the exchange rate policy of the Bank of Papua New Guinea, Professor Howes clarified that the central bank was not obligated to meet all market demands and did not require buyers to bid for forex or set prices. This policy primarily aimed to control inflation, limiting the growth of the country's forex reserves in preparation for future resource booms.

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