IFC loan will not resolve foreign exchange crisis

Letters, Normal
Source:

The National, Thursday April 21st, 2016

 LET me jot some points on the issues of the current economic crisis faced by Papua New Guinea.

Recently, the Australian business blog ran a report with the title “PNG is broke”. 

Indeed, PNG is broke as the evidence is everywhere. 

The O’Neill Government is now turning to the International Finance Corporation (IFC) to provide an undisclosed loan facility to replenish the foreign exchange market.

From my personal observations, I think the current economic problems are related to previous decisions. 

First is the Gas Ministerial Committee’s decision of mid July 2011 to knock-off a 10 per cent import tariff on all procurement destined for the PNG LNG Project. 

The revenue from this particular basket would have amounted to the billion. It was cheaply off loaded onto the hands of the developer.

Second is the monetary intervention by the Central Bank in 2014 which introduced to a trading band on the exchange rate. 

This decision was highly criticised by the International Monetary Fund (IMF) which stated that the exchange rate wasn’t free floating but adopted a crawling peg regime. 

The latter is used by the Chinese economy to boost export markets. 

However, in PNG the appreciation was brought on by the construction phase of the PNG LNG project and still no market was suppressed as exports were all raw materials.

Third, the purchase of a 10 percent stake in Oil Search Limited  by the Government using a $1.29 billion UBS loan has tied a substantial percentage of foreign exchange on debt servicing costs. This is a huge leakage in the foreign exchange market and is the main fuel on the foreign exchange crisis.

Therefore, the IFC loan will not help solve the current nightmare as the foreign exchange crisis have huge backlogs which will quickly absorb the funds given PNG economy is not diversified.

However, the Government can sponsor internal strategies like cutting public expenditures especially on development budgets in the short term. 

 

Mike H, Via email

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