Forex shortage worrisome

By DANIEL EALEDONA
PAPUA New Guinea’s foreign exchange shortage is causing higher imports and low exports, an economist says.
Australia National University (ANU) Development Policy Centre director Professor Stephen Howes speaking at the 38th Australia-PNG Business Forum and Trade Expo in Port Moresby said: “The country is faced with a foreign exchange (forex) shortage largely because PNG lost its competitive and hardline economic gains from the 1990s during the resource boom between 2000 and 2014.”
Howes said that while this was understandable and saw the economy and forex grow at similar rates following the boom the real exchange rate remained relatively high over the last 10 years boosting the economy but also contributing to the forex shortage.
A shortage of foreign exchange is a decrease in a country’s supply of foreign currency which is used by businesses for trade, and is caused by an underdeveloped manufacturing sector.
“The PNG Kina has depreciated from 2013 to 2020 according to statistics from the Bank of Papua New Guinea (BPNG), however the real exchange rate has remained high,” Howes said.
The depreciation of the Kina was caused by an increase in imports and inflation and this has affected the country in the last decade with the highest depreciation recorded at 14 per cent at the end of 2015, according to BPNG statistics.
This was also the year the country hosted the 2015 Pacific Games with big spending on infrastructure – the country was virtually spending more than it was making.
Howes said in the last three years, the kina had hardly moved against the US dollar, however it did appreciate by 17 per cent over other currencies on a trade-weighted basis, which included a depreciation rate of zero per cent from the end of 2021 to September 2022.
He said the resource boom saw the creation of increased revenue for the country, however, the real exchange rate compensated for the shortages in the economy post resource boom, which greatly affected forex.
Howes said the Kina was floated in 1995 “to make PNG exports competitive on the international market. The Kina value is now determined by demand and supply in the foreign exchange market.
Howes explained that the BPNG exchange rate policy had no obligation to meet all market demand and the Central Bank did not ask buyers to bid for forex nor act as a price setter and this had led the “Kina being stuck” with the sole purpose of this policy to control inflation, but not growing the country’s forex for when the next resource boom happens.