BPNG is cautious of depreciating foreign exchange rate, Researcher says

THE depreciation of the exchange rate is an option the Bank of PNG may be “cautious” to undertake to remedy the ailing economy, an economist says.
Australian National University Development Policy Centre research officer Rohan Fox said there were positive and negative outcomes in the option.
“A low exchange rate stimulates production and consumption of domestic goods, while a high exchange rate stimulates consumption of foreign goods,” he said.
“Many goods we consume are Chinese because historically, their exchange rate has been low. So lots of countries, including  Papua New Guinea, buy their goods from China because they are cheap.”
Fox also said a low exchange rate also meant that foreign goods found it difficult to compete against local goods, thus, it favoured domestic producers.
“This is the kind of effect that economists hope that the exchange rate depreciation will produce in countries – stimulate domestic production and domestic businesses,” he said.
“However, on the other side of the equation, a low exchange rate means that more people will have to shift their consumption toward potentially more expensive domestic goods, or if a good is not produced in large quantities domestically, they will have to use up more of their hard-earned cash in paying for more expensive foreign goods like fuel or rice. In the 1990s, the floating of the exchange rate also arguably occurred too fast, not allowing many businesses and people time to adjust to the new exchange rate.
“I believe that BPNG is cautious of taking this on due to the history of what happened in the 1990s – the fact that it will hit elite Papua New Guineans hard.
“A lower exchange rate would also mean that entities that have foreign debt have to make higher repayments.
“The BPNG  also has written that they do not believe that Papua New Guineans will increase their agricultural production in response to the greater returns on offer.”