The Bank of Papua New Guinea this week made a surprising move to support a weakening currency, at the same time acting to restrict the margins being made by the country’s foreign exchange dealers.
Responding to what its Governor Loi M Bakani described as ‘a market failure in the trade and transacting of foreign currency,’ the central bank issued an instruction to the country’s banks, and other foreign exchange dealers, to restrict their US dollar exchange rates to a ‘trading band’ 75 basis points (or US cents) either side of the reserve bank’s official US$0.4130 reference rate.
In effect, this instruction instantly raised the value of the kina against the US dollar by around 20%, as it was trading as low as US$0.340 only last week.
Under the bank’s new instructions, foreign exchange dealers will be obliged to buy and sell the kina at no less than US$0.4055 and no more than US$0.4205. Should the bank’s reference rate change, the 75 basis point trading band will apply to the new price.
‘This change should not in any way affect the smooth functioning of the foreign exchange authorised dealers; the banks, financial institutions and money changers dealing with foreign currency,’ said Governor Bakani in attempt to reassure the markets.
‘We are advising our clients, in particular those who have been looking to purchase foreign currency at a better rate, to now do so … A 20% rise in the value of the kina doesn’t happen every day.’
‘The trading band has no reflection on the stability of the banking system and the Central Bank’s capacity to serve the foreign currency needs of the country.’
‘We still maintain a floating exchange rate regime where the inter-bank rate is determined by the supply of and demand for foreign currency in the market.’
Impact on liquidity and bank margins
PNG’s largest bank, BSP, issued a statement this week relating the changes.
‘Short term liquidity may be adversely impacted as customers get used to the new levels and BPNG has provided assurances that they will be monitoring the situation,’ read the statement. ‘We are advised that BPNG will review the trading band in the next three to six months.’
‘The move will severely impact the income of the banks, which have been making very substantial earnings from their foreign exchange activities,’ Dominic Beange, Investment Fund Manager at Kina Funds Management Ltd, told Business Advantage PNG.
Time to buy
The Central Bank today bought US$50 million, indicating it was not against using the usual central bank tactic of using reserves to buy the currency.
‘In the end, market forces should come to bear,’ said Beange.
In the meantime, what is bad news for the banks, however, may be good news for those looking to buy foreign currency.
‘We are advising our clients, in particular those who have been looking to purchase foreign currency at a better rate, to now do so,’ says Beange. ‘A 20% rise in the value of the kina doesn’t happen every day.’
This article was sourced from www.businessadvantagepng.com