Understanding reasons behind depreciating kina


LET me emphasise some of the reasons behind depreciation of the kina against some of the world’s major currencies and a number of policy interventions required to drive the appreciation of the kina against these currencies.
Depreciation (or currency depreciation) is the decrease in the value of one currency in terms of other currencies. The opposite of currency depreciation is currency appreciation.
The reasons behind the depreciation of the kina against major currencies such as the US dollar are many, but a few of the reasons are:
1. Increased levels of off-shore borrowing – In recent years, the Government had propped up government finance to finance mainly infrastructural development in the country, the decentralisation policy, free education and free healthcare services and the investment activities of state-owned enterprises. This had also propped up foreign debt, which is currently resulting in the increasing demand for foreign currency required for debt servicing costs and in turn driving up the foreign exchange rate and resulting in the depreciation of the kina relative to other currencies such as the US dollar.
2. Lower commodity prices – Recently, crude oil and mineral prices have experienced sharp declines attributed to easing global economic climate, led by China, and an appetite for technological advancements in energy use such as a shift to solar energy consumption and the development of fuel-efficient engines of motor vehicles, ships, boats, earthmoving equipment and aeroplanes at the back of green economy policies and standards.
As crude oil and mineral prices take nose dives, it is negatively impacting export revenue and reducing the demand for kina leading to its depreciation on the foreign exchange market relative to other currencies such as the US dollar.
3. The use of foreign currency accounts (FCA) – The Government is keeping LNG revenues in FCAs as per agreements reached between the PNG government, ExxonMobil (developer) and project financiers.
The use of FCAs means revenues and debt plus debt-servicing costs are all reflected by the capital and financial account on the balance of payments, but the actual transactions are done using foreign currencies in the FCAs. In the meantime, foreign debt sourced to finance the government’s share in the PNG LNG project through the purchase of a 10 per cent stake in Oil Search shares stands at around A$1.29 billion (PGK5.16 billion) amid ongoing interest payments.
While borrowing is necessary, adjustments are required such as shifting to more local sources and implementing the public-private partnership (PPP) model in the transport, construction, procurement, retail and professional services.
With direct borrowing, the domestic market has the appetite to prop up government finance and investment given the very high level of liquidity. This will enhance efficiency and productivity of domestic capital, resulting in improved profitability for banks and non-bank financial institutions. In turn, demand for foreign currencies will subside thereby minimising adverse movements on foreign exchange rates.
The government can also enter into a PPP model in the development of infrastructures. It can opt to partner with a private investor in the development of an infrastructure and then allow the investor co-own and profit from the industry up to an agreed maturity date at a predetermined benefit distribution ratio.
For example, the development of the Pacific Marine Industrial Zone (PMIZ) in the Madang province can be structured to allow a private investor to invest alongside the PNG Ports Corporation and the national government. This will legally allow the same party to co-own and rip profits alongside PNG Ports Corporation from the operations of the infrastructure up to a pre-determined majority date when the principal amount plus interest equivalent to or slightly above and over the prevailing interbank lending rate (ILR) will be retired.
This will introduce a user-pay system and discourage free-rider problem during a certain period of time and eventually transfer it to the government (or public) in the long term. This will also introduce greater care and responsibility for the use of expensive and significant infrastructures.
It is up to the government to decide for what is the best intervention forward.

Mike Haro,
Port Moresby

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