IMF to address foreign exchange issues

The International Monetary Fund has initiated an outreach programme to clarify its role in Papua New Guinea because of misconceptions on its involvement. Fund resident representative SOHRAB RAFIQ explained to reporter ZARA KANU LEBO that its primary objective in the country is to address foreign exchange issues and ensure the fiscal sustainability of the Government’s public finances through budget repair and policy enhancements.

Q: Would a market-driven exchange rate sort out the issue of foreign exchange shortage?
RAFIQ: Under the IMF programme, what we refer to as Kina convertibility, is essentially ensuring that anyone requiring access to foreign exchange should be able to obtain it. In other words, it guarantees accessibility to foreign exchange. If we examine PNG’s situation since 2014, the exchange rate against the US dollar was relatively unchanged. Consequently, individuals seeking to purchase US dollar from the Bank of Papua New Guinea (BPNG) would need to acquire it at that rate. However, that the exchange rate didn’t adjust sufficiently over a decade, posed concerns for BPNG regarding their foreign exchange operations. To mitigate these concerns, they regulate foreign exchange distribution, leading to shortages.

Q: Does the forex issue hinder growth?
RAFIQ: The most significant obstacle to growth in PNG over the past decade has been the shortage of foreign exchange. This has resulted in slower economic expansion than what may have materialised, leading to a shortfall in job creation. Essentially, it stands as the primary short-term impediment to progress.

Q: What is the value of the Kina in the overall economy?
RAFIQ: Our IMF report published in December 2023, indicates that the Kina is overvalued. Gradually adjusting the exchange rate to remove the overvaluation would help reduce the pressure on the country’s foreign exchange.
The price of foreign currency from BPNG is cheaper than it should be because the exchange rate is overvalued.
This is important because this country has built up its foreign exchange reserves when it sells resources and commodities, people work hard, the country exports and accumulates forex.
You want to sell this forex to the private sector at a price that reflects the market, which in turn is reflective of the effort and resources that has gone in generating the forex reserves and the only way you can do that is by having an exchange rate that is more reflective of the broad economy.
This would also make it fairer and equitable on the people of this country.
It would also help support households who work in the agriculture sector, and ensure they receiver a fairer price for their product when they export.

Q: What are the IMF’s priorities and what does it hope to achieve?
RAFIQ: Over the last decade, the primary reason for the limited private sector investment has been the forex issue. Business surveys conducted over the past couple of years consistently rank it as the top one or two concern.
While there are other challenges such as law and order issues, our focus, as outlined by the IMF programme, is on addressing the forex issue.
This is identified as the most significant short-term obstacle to growth.
Successfully resolving this issue would remove a major barrier to economic progress.
In the short-term, we are addressing the issue of the overvaluation of the Kina.
The BPNG should gradually work towards rectifying this overvaluation at a pace that the economy can sustain.
Given that the exchange rate system has been in place since 2014, sudden changes could lead to economic volatility and uncertainty, which we aim to avoid.
We provide financing for a programme spanning 38 months, totalling around US$1 billion (about K3.7 billion).
This financing is disbursed every six months, subject to a review. If all targets and program requirements are met during the review, the subsequent disbursement is released on schedule.

Q: From your perspective, what can you say about the economic situation of PNG?
RAFIQ: PNG’s economy continues to grow, and the country has a comfortable level of foreign exchange reserves. Our financing serves two main purposes. One, it acts as a catalyst for additional donor financing. An IMF programme typically catalyzes funding from other donors, leveraging additional resources. Our financing comes with very low-interest rates, making it an affordable option. Two, despite PNG’s already comfortable level of foreign exchange reserves, our financing further strengthens this position. This is significant because when implementing crucial reforms, such as those related to the exchange rate and broader fiscal policies, it is essential to do so from a position of strength. Having ample foreign exchange reserves helps to mitigate any potential risks that may arise, ensuring that the reform agenda remains on track. This underscores the importance of the IMF’s presence in PNG.

Q: What is the IMF programme and how will it help the economy?
RAFIQ: There are three pillars to the government’s reform agenda that is being supported by the IMF programme. The first is to deal with the FX issues and reform and modernize the operations of the BPNG and monetary policy. Second, we want to ensure the government public finances are on a sound, fiscally sustainable footing so we are engaging with the government to undertake budgetary repair. And three, the medium to long term aspiration is to put in place with policies that will enhance governance and transparency.
Together these policies will promote sustainable growth and prosperity and create an enabling environment for private sector investment.

Q: Why is the Government deep in debt and how can it be controlled?
RAFIQ: During the Covid-19 pandemic, the Government intervened to support the economy because global economic activity came to a halt, leading to a decline in growth worldwide. When such circumstances arise, it’s the Government’s responsibility to provide assistance to prevent further distress among businesses and households.
The Government’s role during an economic crisis is to intervene and mitigate its impact. Due to the pandemic, the Government had to spend significant amounts to support the economy. However, with economic activity halted, tax revenue also declined due to the slower economic growth, reduced jobs, and less private sector spending. This produced a budget deficit. Now, the challenge is how to gradually reduce this deficit without harming the economy’s growth. There are two approaches. One is to rapidly reducing the deficit by cutting expenditure entirely. However, this approach could have adverse effects on the entire country and its economy. Second, which we favor and the Government is doing, is to gradually reduce the deficit by waiting for the economy and tax revenue to recover. Additionally, obtaining low-cost financing can help finance the deficit while making gradual adjustments over time, and ensuring the economy continues to grow. This is where the IMF assistance comes into play – to support the Government in navigating these challenges by providing cheap concessional financing that gives the country breathing room and ensuring a sustainable fiscal path forward. The IMF provides cheap concessional financing, allowing the government to gradually reduce the fiscal deficit over time. By making incremental adjustments to the deficit, we ensure minimal negative impact on the economy. Sudden spending cuts could severely harm the economy, so it’s essential to implement small adjustments. This is where concessional financing becomes crucial.

Q: What is PNG’s current status in the IMF programme?
RAFIQ: Programme performance has been strong so far, which is a credit to the reform-minded agenda of the Government. The challenge is to keep up the reform momentum. The IMF is ready to assist in any way to ensure that happens.