PNG foreign exchange dilemma

BSP’s Robin Fleming

As the Papua New Guinea 2022 General Election is well underway, the International Monetary Fund and leading banks say PNG has failed to manage its foreign exchange problems well. 

IMF joins BSP Financial Limited and Westpac bank to say PNG governments – past and present – failed to manage the shortage of US dollars and other currencies in the financial markets with the country continuously facing a growing demand against supply. 

“PNG’s exchange-rate arrangements are crawl-like,” according to the IMF, with BSP adding that at present, banks were dealing with a surge in demand, driven by the corresponding surge in demand for fuel products. 

Standard and Poor’s (S&P) last month stated that PNG maintained extensive foreign-exchange restrictions that are symptomatic of a currency that persists above the market-clearing exchange rate. 

The global indices company says the depreciation of the PNG Kina against the US Dollar, falling around 15 per cent since 2015, is not supported by the Bank of PNG’s weak monetary policy flexibility and this weakness mainly reflects the limited transmission of monetary policy settings to the interest rates faced by borrowers. 

At present, the country’s largest commercial bank BSP Financial Limited has a total outstanding back order of K120 million(US$34 million) to give to customers, due to a large demand with the recent increase in general business activities in the county and the rising fuel costs associated with the Russia-Ukraine conflict. 

Another commercial bank, Westpac, confirmed that its PNG operation maintains an FX order book which consists of customer orders that cannot be transacted immediately. 

However, the volume of orders has been stable and wait times have improved. 

BSP Financial Limited Group chief executive officer Robin Fleming said for those large corporate customers are having their orders filled within four weeks, retail customers with orders under K25,000 (US$7,097) generally within a day or so, and other retail customers can expect to be paid within four weeks. 

“The increasing quantum of fuel related orders though is putting pressure on the market as banks such as BSP look to balance the need to provide foreign currency to fuel suppliers against providing current to other corporate and retail customers,” he said. 

Shortage of foreign currency is not a new problem in PNG as it is one underpinned by the unstable policies and changes in government over the years which delays the start of new resource projects or project suspensions due to negotiation issues. 

This week, former prime minister Peter O’Neill and Prime Minister James Marape argued during their election campaigns on the country’s state of the economy but have not addressed the elephant in the room, the issue of forex. 

In March, Marape announced that the country’s Central Bank has a record K10 billion(US$2.8 billion) of foreign reserves that can enable large retailers to have easy access to US dollars for their purchases. 

With Papua LNG starting to ramp up, the banks anticipate that in the medium term the FX market will move towards a balanced position.