In Papua New Guinea (PNG), the struggle to secure foreign exchange (FX) has been a significant issue for businesses, individuals, and government alike for over a decade. This persistent challenge has been recognized as the top constraint faced by businesses, particularly since the decline of high commodity prices in 2014, which has further compounded the FX shortage.
The inability to freely convert the local currency, kina, into foreign currencies has complicated transactions related to imports, profit repatriation, and servicing external debts. As a result, a significant backlog of FX orders has developed, causing economic agents to wait for months to gain access to foreign currency. The overall effect has been a notable decrease in import volumes during periods from 2013 to 2016, which only began to recover until 2019, before declining again due to the impacts of the COVID-19 pandemic and continued rationing measures.
Currently, while the Bank of Papua New Guinea (BPNG) has taken steps to manage the exchange rate through a crawling peg arrangement, the situation remains challenging. The latest International Monetary Fund (IMF) program has aimed to inject more U.S. dollars into the economy, coupled with rising commodity prices and improvements in production within the mineral and petroleum sectors. These efforts have modestly increased FX inflows, leading to a recent improvement in access, with the wait times for FX orders reportedly decreasing to four to five weeks.
Despite some positive developments, concerns about FX shortages persist. Brian Bell Chief Executive Officer Cameron Mackellar expressed ongoing difficulties for businesses seeking foreign currency to procure goods and services from overseas. The government’s commitment to resolving FX rationing, however, lacks a clear deadline. Mixed signals from BPNG regarding the priority of certain FX orders suggest that rationing may remain a long-term issue if not adequately addressed.
To remedy these challenges, a multifaceted approach is needed:
1. Enhanced government support for the non-resource sectors, particularly agriculture and manufacturing, is crucial to boost export production and generate foreign reserves.
2. Addressing socio-economic issues such as political instability, poor infrastructure, and deteriorating utility services can create a more favorable environment for foreign investment.
3. The government may need to negotiate with firms in the resource sector to channel FX earnings back into the local economy instead of offshore accounts to strengthen FX reserve inflows.
4. Utilizing resource revenue in domestic currency accounts rather than offshore can help improve FX reserve flows.
5. Setting a definitive timeline for the end of FX rationing can guide BPNG in managing the exchange rate, ensuring that FX demand and supply are balanced, and gradually restore full convertibility to the kina.
In conclusion, PNG’s situation regarding foreign exchange shortages requires immediate and comprehensive action. While the road ahead may be challenging, a concerted effort towards addressing structural issues and enhancing foreign currency access could bring optimism as PNG works to stabilize and invigorate its economy. With committed leadership and strategic focus, the upcoming year could mark a significant step toward the goal of a fully convertible currency and a rebound from a decade-long period of constraint.
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