Impact of depreciating kina on economy, people


THE kina has been depreciating since 2012 by almost 36 per cent against the United States dollar. The National Business reporter GEDION TIMOTHY asked economist Paul Barker, pictured, the director of the Institute of National Affairs, to explain its impact on the economy and the people.

YES, the kina has been falling steadily, if relatively gently, against the United States Dollar  (USD) since 2012, although sometimes strengthening during that period against the Australian dollar (AUD), as the AUD also weakened, especially since mid-2014 (partly as they’ve also been affected by their falling commodity prices – iron ore etc).  From 2002 to 2012 the kina had been appreciating firmly against the USD and most currencies (but not the AUD which had also been strengthening during this period).
The previous decade from the early 1990s, the kina had been falling more heavily, despite various new resource projects having commenced in that period.
The rise in the kina from 2000 to 2012, driven substantially by strengthening commodity prices and latterly also the contraction phase of the PNGLNG, helped keep a firm check on (imported) inflation (although local demand driven inflation was pushing up various prices, notably for real estate and rentals).
But imported products (capital goods for businesses and consumer goods for households) were becoming more affordable, while it was putting a dampener on exports and the earnings for local producers of agricultural export products or agricultural or processed import replacements. It was also restraining the earnings for businesses engaged in tourism that were marketing their products in US dollars.
So this appreciation of the kina against most currencies (other than AUD) was improving the living standards of those on fixed salaries, who were already homeowners, or didn’t have to pay out the ever rising rentals during that period.
But a large portion of the population who  depend on agricultural incomes, although enjoying generally stronger world agricultural commodity prices during that period, weren’t fully benefiting from it, as the commodities were largely priced in US dollars, which had weakened against the kina.
Since 2012 the falling kina has provided some relief to agricultural producers and traders, at a time when agricultural commodity prices have largely fallen and become generally low again, by at least improving the kina value against the dollar. Indeed, when the kina was artificially pushed back up for a period in mid-2014, this came as somewhat a blow to much of the agriculture sector and many tourism operators and domestic processors, who were seeking relief from the high kina exchange rate of the previous period.
As always, there are winners and losers. The agricultural producers (of export crops and import replacements) would largely have preferred to see the kina slide to its market level earlier, rather than be shielded by the Central Bank’s continued protective measures over the past two years. On the other hand, importers and many consumers, including of capital equipment, enjoyed the seemingly artificially strong kina, except that it contributed to the uncertainty which prevailed, discouraging remittances back into kina and potential new investment, which might have eased the foreign exchange squeeze suffered by importers and most businesses since around mid-2015.
At the end of the day, the kina must find its natural level, but it is also important to try and ensure stability, and avoid disruptive volatility, where possible.
For the time being, the downward pressure is likely to continue, at least until the market for kina returns to some equilibrium.
Years of strong kina pushed up the demand for imports, but over the past months imports have been at a level nearer that of 20 years ago, when the economy was much smaller.  Import levels need to return to an affordable level for the economy, somewhere between the two.
It will time to return to that level, as foreign exchange earnings are restored and the backlog of overseas trade credit and other outstanding dues subsides.
With the kina likely to be lower, at least for a while, until commodity prices and earnings appreciate and major new project investments proceed, households will experience some imported inflation, with further increases in the cost of imported goods and services, often passed on in other goods that also involve imported components.
However, as stated, that lower kina exchange rate, if sustained, will also provide an ongoing stimulus to some of the key employment and income earning industries in PNG, potentially providing the stimulus for longer term investment in these industries, so long as other aspects of the investment environment are sound.
This is critical, in terms of diversifying the PNG economy away from just the extractive industries which may, in due course, provide sound revenue for the State once investment costs have been largely repaid (as with PNGLNG), but provide limited employment or sustainability for broad-based economic activity across the country.

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