Cash flow positive in 2014

 THE Government, at the end of last year, had a positive cash flow position sufficient to meet its commitment, Bank of PNG Governor Loi Bakani says.

He said that following a claim that the Government ran out of funds or had cash-flow problems to meet 2014 expenditure commitments.

“The problem regarding the processing of payment through cheques (like for teachers leave entitlements) was not due to insufficient funds. 

“Rather, it may be due to procedural error in processing the cheques in the new National Payments System – the Kina Automated Transfer System (KATS),” he said.

Bakani said the KATS was very reliable in ensuring compliance to clearing and settlement payment processes, and urge the cheque issuing departments to exercise diligence and care in the execution of the payments under the new payments system. 

He emphasised an important point regarding the exchange rate regime. 

“The regime remains a floating exchange rate regime and not a pegged exchange rate as some commentators and sectors of the business community have portrayed in relation to the introduction of the exchange rate trading band.  

“The only changes effected by the introduction of the exchange rate trading band, is to reduce the exorbitantly high margins of foreign exchange trading by the authorised dealers to 75 basis points, above and below the interbank market rate, and it has nothing to do with the exchange rate regime.  

“This change provides a transparent direction to price foreign exchange inflows above the interbank rate, and below for outward payments. 

“Since the introduction of the trading band on  June 4, the kina has depreciated by 6.6 per cent from US$0.4130 (K1.07) to US$0.3855 (K1), indicating that the foreign exchange interbank market is functioning as in a floating exchange rate regime.”

Bakani said there had been inflows of foreign currency but were not sufficient to meet the high demand. He urged the commentators to observe the trend in the kina exchange rate over longer time horizon rather than focus and draw conclusions on a one year development. 

“The kina has depreciated by 20.4 per cent from its high of US$0.4845 (K1.26) at the peak of its appreciation in 2012.  

“The sharp depreciation of the kina therefore would have benefitted and encouraged the exporters to increase production and exports.  

“More depreciation is good only if there is a supply response of the agricultural export commodities, otherwise it will be inflationary. 

“In PNG, there are structural constrains such as transportation, production capacity and market accessibility to address the supply response, not only commodity prices.

“The level of gross foreign exchange reserves was K6011.1 (US$2,347.3) million as of Dec 31, 2014.  

“This level is sufficient for 8.2 months of total import cover and 11.3 months of non-mineral import cover, which are still very comfortable compared to the IMF’s conventional measure of 5 months import cover.  

“The decline in reserves level from end of 2013 was due to intervention in the foreign exchange market by the Bank of PNG to assist in meeting the demand for foreign currency and to service the Government’s foreign currency needs.”