Effect of foreign currency shortage

Editorial, Normal

The National, Wednesday September 2nd, 2015

 THE current shortage of foreign currency supply has been of grave concern to big importing companies in Papua New Guinea.

Despite an assurance by the Bank of PNG that trading of foreign currency has returned to normal following its interventions, the big players such as Puma Energy, Trukai Industries and Digicel remain doubtful.

And they have every reason to doubt the central bank’s assurance, especially when they have backlogs of overdue payments to their overseas service providers.

The current fuel crisis highlights this very issue with Puma Energy forced to limit its purchases of petrol to the Port Moresby market. 

“Due to the lack of liquidity in the Forex (foreign exchange) markets, Puma Energy has only been able to convert very limited amounts if local currency into USD (US dollars) to pay for its supplies,” the company said in a statement this week.

According to BPNG Governor Loi Bakani, there is high liquidity within the domestic market but a shortage of foreign currency supply. However, Bakani sees the shortage as short term and hopes to clear the backlog of orders in the foreign exchange market and start on a better footing in the coming months.

Similar concerns were expressed by the business and wider community earlier this year about the weakening Kina.

The central bank maintained that the situation was manageable and the Kina would remain a floating currency. The majority of the world’s currencies are floating as contrasted to fixed currencies. 

Such currencies include the most widely traded currencies: the United States dollar, the Japanese yen, the British pound, the Swiss franc and the Australian dollar.

There are economists who think that in most circumstances, floating exchange rates are preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis. 

However, they also engender unpredictability as the result of their dynamism.

In certain situations, fixed exchange rates may be preferable for their greater stability and certainty. 

Another option worth considering is “pegging” the kina to the US dollar or Australian dollar.

The advantages of pegging the kina are that speculators are unable to influence or manipulate the currency level.

The financial authorities are able to bring down the interest rate or boost public spending through deficit financing, without being constrained by how the currency markets will react.   

Another benefit is that business people are able to import and export products at prices fixed either in the US/Australian dollar or the kina, with certainty as to how much these prices will be worth in terms of the other currency.

Another pertinent question: Would a devaluation of the kina help the PNG economy?  

There are plus and minus factors.  

Exporters would gain, as they may receive more revenue in kina terms.

Thus, oil revenues would go up, and the incomes of coffee and oil palm smallholders may increase.

However, it is unlikely that a kina devaluation would have such a major effect in increasing the demand and volume of exports overall.  

This is because the demand for many of our major export items – petroleum, gold, copper, palm oil, coffee, copra and cocoa – is not dependent on the kina prices.  

The demand for commodities depends more on the state of economic growth in the major countries. 

There are, on the other hand, some disadvantages arising from a devaluation.  There will be pressures for higher inflation.  

Consumers will find that imported consumer goods such as food items will cost more. Producers will also find their cost of production rising due to the increased cost of imported inputs and parts. 

The producers will pass on their increased cost and will jack up the prices of their final products, adding to consumer-price inflation.

A devaluation would also cause the level of foreign debt to go up. 

Companies with foreign-exchange loans would be in trouble, and a larger share of the government’s expenses would have to be allocated to servicing its foreign debt.

Having a strong local currency helps in paying off the foreign debt easier while a devaluation works in the opposite direction.