It is a season of surveys across the Pacific. Governments, international organisations, industry bodies and chambers of commerce are surveying the private sector to assess the impact of the COVID-19 pandemic.
While the sample size of most of those already published has been small, the hope is that the results will inform the type of support provided by governments and multilateral agencies in the middle to longer term.
The Pacific Trade and Invest (PTI) Business Monitor is surveying a small number of businesses every two weeks over a six-month period.
In its most recent report (the second in the series) released in early June, PTI says the impact COVID-19 is having on businesses is starting to decline; 88% reported this impact compared to 91% in survey one. The second survey had 143 respondents, all online and all decision makers or owners in small and medium sized enterprises (SMEs).
Almost three-quarters of businesses in Fiji reported a “very negative” impact from COVID-19. Across the board, 90% of businesses reported a decline in revenue of some magnitude.
70% of businesses were confident they will survive COVID-19 but half do not expect revenue to return to pre-COVID levels until next year or later. A quarter of businesses expect to return to business as usual this year.
The three main challenges identified by respondents were not knowing how long the crisis will last, the impact of closed international borders and poor cash flow. A lesser challenge was a lack of knowledge and skilled staff.
40% of the respondents said they needed support to access new markets, either locally or overseas, slightly more than in the first survey.
The PTI survey also asked respondents about their mental health. Nearly a quarter of them said that COVID-19 is having a very negative impact on their mental health, and almost two-thirds said it is having a negative impact.
The Fiji National Provident Fund continues to be concerned by low levels of savings by its members on retirement and the need to extend its coverage to the informal sector.
The FNPF says that in 2019, 66 per cent of its members due to retire at some point over the next ten years have balances below F$10,000 (US$4561).
It says 88 per cent of its members earn below F$30k (US$13,864) per annum and 49 per cent withdraw funds for housing and other related family assistance within the social benefits scheme of the fund.
However on a more positive note, 32 per cent of members continue to consistently contribute to savings within the fund. FNPF highlighted 3,200 members have not fully complied with payments.
In terms of extending its coverage to the informal sector, the FNPF hopes to better assist its 125,000 members who fall into this category.
A detailed breakdown of this figure showed that 8,000 are farmers, 2,500 seasonal workers, 9,000 taxi drivers and 25,000 are domestic workers.
The reality of the discovery is that 128,000 members are retiring with low balances and 125,000 of these work in the informal sector.
FNPF CEO Jaoji Koroi stated: “the reality is now a problem and talking about it with the stakeholders should give us ideas of what can we can do to address these issues.”
The FNPF says these groups are susceptible to social problems, are unable to afford social protection and continued cycle of old age poverty.
Meanwhile the International Social Security Association (ISSA) has opened a branch in Fiji, hosted at FNPF, which aims to foster better social security and protection for the Pacific region.
Currently only Samoa and Fiji are members of ISSA, although the Association hopes other regional countries will join.
“ISSA is an organisation recognised for looking after social security and protection for countries all over the world and FNPF has a lot to learn from them,” Jaoji Koroi said at the branch launch.
It has been three months since the Bank of Papua New Guinea (BPNG) adjusted the Kina Facility Rate (KFR) for the first time in more than six years. The KFR is intended to serve as the interest rate at which funds can be lent or borrowed overnight between banking institutions. In July, BPNG lowered the KFR by 25 basis points (bps) from 6.25 per cent to 6 per cent and then in August cut the KFR again by 50 bps to 5.5 per cent.
There are two main price indices used to measure inflation in PNG: the quarterly consumer price index (CPI), released by the National Statistical Office (NSO); and BPNG’s own monthly Retail Price Index (RPI). According to BPNG, the first KFR cut in July was motivated by the RPI in the first three months of 2019 indicating an average deflation of 2.3 per cent. However, as shown in Figure 1, prices in the economy measured by CPI during this period registered 4.5 per cent inflation, showing an entirely opposite price trend when compared to the RPI.
Figure 1: Inflation measures (CPI vs RPI) in PNG (%)
The official explanation provided by BPNG on the second rate cut in August was also puzzling. Governor Loi Bakani’s press release in August stated: “In view of the on-going improvement in economic activity in the second quarter of 2019, with non-mineral private sector activities remaining robust and stability in other macroeconomic indicators, including inflation and exchange rate, [BPNG] decided to further ease its stance of monetary policy.” The statement goes against the standard practice of counter cyclical monetary policy. If economic activity was robust, the central bank should have considered lifting not reducing the KFR (with the aim of making borrowing more costly and thus slowing down economic activity and pushing down prices).
But does any of this matter? Three months after the first easing, only one commercial bank in PNG, Bank of South Pacific (BSP) has revised its ‘indicator lending rate’ (ILR) downward while other banks have kept their respective ILR and deposit rates unchanged. Moreover, the BSP’s ILR was only revised downward by 10 bps, compared to the 75 basis point reduction in the KFR.
Why is KFR pass-through so limited? The simple fact is that due to excess liquidity, banks hardly need to access the overnight money market, rendering the KFR impotent as a policy lever. Figure 2 shows the increasingly abundant excess liquidity in the PNG banking system (that is, short-term assets that are in excess of the banks’ liquidity needs).
Figure 2: Excess liquidity and the loan-to-deposit ratio
The question then becomes, why is there excess liquidity?
Figure 2 also shows that on average, for every 1 kina received by commercial banks as a deposit from 2002 to 2019, only about 0.5 kina is loaned out to the market. The lack of lending in the economy is due to PNG’s structurally low lending environment, underpinned by a large unbanked population and less favourable business environment, although in recent years it has started to show some improvement. Furthermore, there is a massive spread between the very high rates at which funds are lent out by the banks, and the very low rates depositors receive on their accounts. Limited competition in the banking sector in PNG contributes to the persistently high interest spread (Figure 3). Competition in the banking industry has been further curtailed by the acquisition of ANZ Retail by Kina Bank in mid-2018, which has reduced the number of retail bankers to just three. The spread shown in Figure 3 (that is, the difference between the lending and deposit rate) is in fact one of the highest in the East Asia and Pacific region, which explains why PNG’s banks are the most profitable in the region.
Figure 3: Deposit and lending rates and interest spread (%)
To get the KFR to work and, more importantly, to deliver economic growth, the government and central bank must reduce the interest rate spread and increase the demand for credit by creating a more favourable investment environment and allowing more competition to take place in the banking industry. Until then, any adjustments to the KFR, whatever the reasons, will achieve little.
This article appeared first on Devpolicy Blog from the Development Policy Centre.
Dek Sum is an Associate Lecturer at the Development Policy Centre, based at the University of Papua New Guinea, where he is a Visiting Lecturer and Project Coordinator for the ANU-UPNG partnership.
New Zealand-based Samoan entrepreneur and marketer Stella Muller has learnt some difficult lessons about when to hold on and when to loosen the reins as she has built her two businesses, Bright Sunday and Hot Samoan Boys. The vision behind Bright Sunday was to create a brand and marketing agency that was Pacific-owned, staffed and driven, Muller says. “What we are saying is that we are a collective of creatives that can offer Maori and Pacific ideas and strategies and ways of thinking for the world to access, because we’re an untapped source of creative potential.
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