Imbalance in market causing forex shortage, says Barker

INSTITUTE of National Affairs (INA) executive director Paul Barker says foreign exchange (forex) has remained very tight for a few years (since 2017).
He said it was one of the major impediments to business and investment in PNG.
Barker said the underlying issue had been the imbalance in the markets.
This was associated partly with rigidities in the setting of exchange rates and the unusual scenario of a very strong positive current account balance where only a portion of exports earnings are remitted back to PNG.
“While servicing of major commercial overseas debt prevails, it combined increasingly with the need for servicing the growing foreign public debt,” Barker said.
“The foreign exchange that has been available has effectively been rationed, with priority expenditure taking precedence, including fuel, food and debt servicing, while remitting dividends overseas has largely been on hold for several years.”
He said concerns had sometimes been expressed that “certain privileged persons” were able to secure precedence, including for major overseas expenditure and acquisitions.
“But I won’t comment on that further,” he said.
Barker said most businesses require foreign exchange for various purposes.
“Even exporters needed to pay for replacement plant and equipment, sometimes for technical inputs,” he said.
“And undue constraint can also handicap their capacity to produce and export.
“It becomes a vicious circle.”
Barker said the situation had shown signs of improving in 2018 and 2019, with the recovery in export earnings and some temporarily additional foreign exchange being released through foreign borrowings and the sovereign bond. “But 2020 saw the collapse in prices of several major export commodities,” he said.
“This included liquefied natural gas/oil, copper and vegetable oil at the start of the year.
“It was associated with the severe fall in demand linked to the Covid-19 pandemic and was not balanced by the strengthened gold prices, particularly following the closure of the country’s second largest gold mine, Porgera.”