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Foreign exchange controls affect Papua New Guinea business as ANZ calls for changes to kina trading range

As Papua New Guinea’s business community continues to face foreign exchange shortages, ANZ Bank has called for a relaxation of the enforced trading band for the kina. Meanwhile, analysts say the kina is facing further downward pressure from the US dollar.

Since the Bank of Papua New Guinea, the country’s central bank, restricted the trading range for the PNG kina and the US dollar in June 2014, ANZ analysts Glenn Maguire and Dan Wilson say the kina has depreciated by 13 per cent.

As a result, they argue in ANZ Research’s September Papua New Guinea Fiscal Update, the kina’s prescribed trading band is constraining the ability of the currency to decline and insulate the economy from falling commodity prices.

The call comes as business leaders estimate that at least K1.5 billion is waiting to be converted into US dollars, causing frustration and resulting in a ‘rationing’ of foreign currency.

The impact has affected PNG financial institutions and exporters, ‘as banks continue to see a build-up of FX orders with very little levels of activity and continued shortages of FX supply which in turn affect importers’, agrees the latest analysis from Kina Funds Management Research.

In recent weeks, both the President of the PNG branch of the Australia–Papua New Guinea Business Council, Phil Franklin, and the President of the Lae Chamber of Commerce, Alan Macleay have observed that PNG’s foreign currency situation is affecting the ability of businesses to purchase goods and services from Australia, compelling some companies to extend credit to their subsidiaries or delay purchases.

Long and increasing delays in accessing foreign exchange by importers are causing costly disruptions to business activities, which highlights the need to improve the foreign exchange allocation mechanism to ‘rectify’ the foreign exchange market imbalance, according to the World Bank’s latest East Asia and Pacific Economic Update.

Back orders
Franklin estimates about K1.5 billion in foreign currency orders with PNG-based commercial banks was awaiting processing.
While dealers are unwilling to confirm just how many orders they are, one of the five licensed dealers in PNG told Business Advantage PNG that the estimate of K1.5 billion is ‘conservative’.

David Kelso, Managing Director of Moni Plus, one of the smaller foreign currency dealers, estimates there could be a total of K3 billion of orders for bank clients waiting to be processed.

“The commercial banks only report to the central bank the orders they have under their prudential limits. The established limits applied by our central bank are very conservative compared to other countries,’ he told Business Advantage PNG.

One of PNG’s largest forex dealers, Bank of South Pacific, is coping with this situation by maintaining a ‘dialogue with our customers to ensure that critical payments are prioritised where possible, Group CEO, Robin Fleming told Business Advantage PNG.

Kina appreciating
But while the Kina has depreciated against the US dollar, it has appreciated significantly against other currencies, most notably by 34% against the Australian dollar and 34% against the Malaysian ringgit, points out economist at the Australian National University, Canberra, Paul Flanagan.

Combined with the fall in oil prices, Flanagan argues the appreciations ‘are a major factor for why imported inflation is so low and why inflation in PNG is so reasonable.

‘However, this also means the PNG economy is now much less competitive relative to its neighbours. Without returning to a more competitive position, there will be continuing pressures on PNG’s balance of payments and foreign exchange reserves.

He says a primary focus on the US dollar exchange rate can be misleading and too much emphasis has been given to maintain PNG foreign exchange reserve levels around the US$2 billion mark.

‘When small PNG businesses can no longer open foreign exchange accounts (due to the Vostro account review which is now being audited but has not yet been completed), this ultimately also hurts sustainable growth.’

Downward trend
Bankers and analysts say if the trading band were to be totally removed, there would be ‘a significant fall’ in the currency.

‘There is a need for a faster rate of depreciation of the Kina–related to actual market-based exchange rates–and based on a broader set of currencies than just the US dollar,’ says Flanagan. ANZ and others agree.

‘A downward adjustment to the PGK exchange rate on a trade-weighted basis would help the country remain competitive on the export front and attractive to foreign investment, notes ANZ’s most recent PNG Fiscal Update.

Flanagan says the current low levels of inflation are actually an opportunity to accelerate a move down in the Kina.

Until then, the expectation is that then Kina will continue to depreciate.

’We maintain our view that the PNG Kina will continue its downward momentum in relation to the US$ and will fluctuate in relation to other foreign currencies over the next six months,’ notes Kina Funds Management Research’s most recently monthly report. Kelso agrees.

‘What we see in the immediate future is a gradual decline of the Kina over the next few months. Whether this resolves the situation is, in my view, unlikely.

‘The supply and availability of hard currency still remains the major issue in our market.’

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