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Kina Weakens, Cost of Living Increases in PNG

Papua New Guinea’s economy continued to grow for the 13th consecutive year in 2013 and inflation remained below forecasts. On account of low international commodity prices and high demand for imported goods and services, the kina depreciated against the major currencies to the benefit of PNG farmers and exporters, though it has put pressure on domestic prices and prompted the Bank of Papua New Guinea to introduce new measures to stabilise the kina exchange rate. To support this growth and in consideration of the inflationary pressures, the Bank continued to take a cautious approach by maintaining the monetary policy signaling or Kina Facility Rate (KFR) at 6.25 percent.

The growth however has slowed in recent months as the kina declines in value against major currencies like American and Australian dollars. The decline in kina value is reported to be causing an increase in the cost of living in PNG. Prices of basic goods and service had increased markedly and is expected to further increase until real LNG revenue starts flowing in. The decline in the kina value has been attributed to PNG’s large and growing current account deficit and broader strength in the US currency according to the ANZ’s Singapore-based Economist Daniel Wilson.

It is likely to contribute to a much higher inflation outcome, but it will give only a modest boost to the nation’s exporters, according to the analysis from ANZ. As the value of the kina weakens against the US dollar, imported goods such as capital equipment will cost more. This analysis is supported by the Bank of Papua New Guinea’s March Monetary Policy Statement, which predicted an annual headline inflation of 5.5% for 2013, up from last year’s modest 1.6% rate.

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