The Bank of Papua New Guinea presented to the Port Moresby Chamber of Commerce and Industry the September 2023 Monetary Policy Statement at the Hilton Hotel on the 4th of October 2023.
Ms. Elizabeth Genia, Acting Governor of the Bank of PNG, said: "I would like to thank the POMCCI for inviting the Bank of Papua New Guinea to present the September Monetary Policy Statement over breakfast this morning. Thank you also to the Hilton and to your staff for looking after us so well.”
“I would also like to acknowledge my predecessor, previous Governor of the Bank of Papua New Guinea, Mr. Loi Bakani,” said Ms. Genia.
“We are all impacted by the Bank’s Monetary Policy Decisions, and the Bank needs to express those decisions simply and clearly,” she stated as she highlighted key topics, namely the Bank’s outlook for growth and inflation and recent adjustments to the Monetary Policy Framework.
She also touched on the exchange rate and foreign currency availability and later, some broader issues.
GROWTH OUTLOOK
Ms. Genia said PNG’s economy is likely to grow at a rate of around 2.5 percent this year.
This growth rate is lower than the forecasts from both the IMF and the Mid-Year Economic and Fiscal Outlook (MYEFO), “and that is OK, it’s important for the Bank to be able to independently assess the economic outlook,” she said.
The Bank of Papua New Guinea made assessments a few months after the IMF issued their forecasts, and after the MYEFO was released, the bank updated the information to incorporate into the GDP assessment, she said. This included the likely impact of the delay in re-opening the Porgera Mine on the country's growth forecasts.
“But more important than the percentage point difference in the forecasts, which of course is a constant source of debate among economists, is the source of the growth,” Ms. Genia said.
A projected slowdown in the global economy may see a decline in international commodity prices and this will affect PNG’s traditional growth sectors, she said. In the short term, growth will be driven domestically by the non-mineral sector - the real economy - with growth prospects picking up significantly in both the mineral and non-mineral sectors again in 2024, she added.
ON INFLATION
Inflation peaked above 6.0 per cent in September of last year but eased to 3.4 per cent in December and was as low as 1.7% in March, Ms. Genia noted.
She said 1.7 per cent “is a very low CPI, or headline inflation number, and it masks a lot of the underlying price increases the Bank of PNG have seen in the country's economy over the last 3 to 4 years.”
“Mid-2020 and the arrival of COVID-19, headline inflation increased very quickly and stayed relatively high through to September of last year,” she added.
That two-year-plus period saw significant price increases “that have since moderated, but we have still seen a very large increase in the cost of living and in the cost of doing business - for our SMEs and for our multinationals,” Ms. Genia said.
“There is a mixed message with inflation recently. One of the main reasons is the recent strength in the US Dollar against most of the major traded currencies around the world. As you know, the value of the PNG Kina is set against the US dollar, and this means any change in the value of the US dollar affects our purchasing power in other currencies.”
“The US Federal Reserve has been consistently raising their interest rates to rein in inflation. They paused in September at between 5.25 per cent and 5.5 per cent, but since April 2022, the Fed has increased their policy rate eleven times. This has resulted in a significant flow of funds into the US Dollar to take advantage of those higher interest rates. Australian interest rates have also been rising but not at the same rate, and this led to the selling of Australian Dollars to buy US Dollars.”
The Australian Dollar has declined around 15 per cent this year, to around 64 cents against the US Dollar currently compared to more than 76 cents a year earlier, she noted. “This has been very good news for the Kina-Aussie cross rate.”
“While the Kina has been depreciating against the US Dollar and is more than three per cent lower this year, the Kina has been appreciating against the Aussie Dollar and is close to six per cent higher over the last 12 months,” Ms. Genia said.
“In addition, another major source of imports is China, and the Chinese Yuan has also depreciated against the US dollar - by around five percent since the beginning of this year, and this has also helped to keep inflation down,” she noted.
Australia and China are two of PNG's significant trading partners, and the strengthening Kina against their respective currencies has contributed to lower imported inflation, Ms. Genia said.
Moving away from the US Dollar strengthening against other major currencies, other contributing factors to the lower headline inflation figure have been the subsidies in school fees and in fuel, she said.
“BPNG have now reached the end of fuel subsidies and can expect those international currencies to rebalance against the US Dollar and at some point, this will result in inflationary pressures building and a drop in the value of the Kina-Aussie cross rate.”
The Bank of Papua New Guinea is only too aware of this, and acknowledge inflationary pressures are on the horizon and they will continue to build, Ms. Genia said.
“This small window of easing inflationary pressure is temporary and we are watching closely for when things start to turn. Looking at these inflationary pressures emerging, appropriate action will be taken but for now, the Monetary Policy Stance is neutral,” she added.
ADJUSTMENTS TO THE MONETARY POLICY FRAMEWORK
BPNG know and understand the pressures that individual, the business community, are facing the country's economy, Ms. Genia said. “Its job is to balance the pressures falling on all parts of society – on individuals, on families, on communities, and on small, medium, and large businesses,” she said.
As part of the Government’s economic reforms to stabilise the economy, BPNG is working with the IMF to introduce changes to the Monetary Policy Framework, Ms. Genia said.
The first action, in August this year, was to introduce the Bank’s first Fixed Rate Full Allotment Auction for the 7-Day Central Bank Bill at 2.0%.
“High liquidity - essentially, too much cash sitting with the commercial banks - has been a major issue for the Bank of PNG in implementing Monetary Policy and in being able to influence market interest rates,” she said.
The introduction of the 7-Day Bill is intended to absorb that excess liquidity and improve interest rates by bringing them closer to the rates set by the Bank of PNG, Ms. Genia added.
“When the Central Bank raises interest rates via the Kina Facility Rate, the effect SHOULD be felt in terms of higher lending costs and in higher rates paid on deposits. This is how it works in most countries around the world. But in PNG, there is increase passed on to depositors,” she noted.
No country will see a 100 percent pass-through from a change in Central Bank rates to deposit rates and to lending rates, but PNG “has a particularly weak transmission mechanism through to deposit rates,” Ms. Genia noted.
“BPNG's aim is to improve this situation, so that there is some level of pass through to those deposit rates as well as to lending rates,” she said.
AVAILABILITY OF FOREIGN CURRENCY
September was a very difficult month for foreign currency inflows and the Bank “has an important role to play in balancing the inflows of foreign currency with the demand for imports through our FX intervention program,” Ms. Genia noted.
After many years where the allocation of foreign currency was around USD 40 million per month, in 2023 the Bank significantly increased that allocation to USD 100 million per month, she said.
“In May of this year, BPNG increased this to almost USD 300 million in an attempt to meaningfully decrease the volume of foreign exchange orders, clearing one billion Kina of outstanding orders. This is by far the most significant support provided to the foreign exchange market in many years and there is prudency in keeping with the ability to maintain the FX reserves at an appropriate level,” Ms. Genia said.
“The BPNG is committed to supporting the Kina through this adjustment phase lower in the exchange rate. The inflationary impact of a lower Kina is first and foremost in everyone’s mind at the Bank, this depreciation needs to be undertaken steadily, and it also needs to be undertaken purposefully.”
“The theory says to test the sensitivity of foreign currency inflows increasing in response to the lower exchange rate. However, in practical terms is to know that a Final Investment Decision on Papua LNG and the re-opening of Porgera will ease some of the pressures seen in PNG’s foreign exchange market and the Government is working in the background with both these projects to ensure they get started,” she said.
“September was a particularly difficult month for inward flows and the Bank is currently looking at what can be done to assist with the intervention program through to the end of the year,” Ms. Genia said.
There will be better times ahead turning into mid-2024, she said, as the Government “is also working very hard, to ensure having the right policy settings to lead into that growth.”
BROADER ISSUES
Ms. Genia also gave an update on the IMF Program.
The end of August was a very important deadline for the Central Bank to meet structural benchmarks on
- Moving towards greater flexibility in the exchange rate, and
- Introducing the Fixed Rate Full Allotment auction through the 7-day CBILL and start to absorb some of the excess liquidity in the banking system.
“Both benchmarks I am happy to say have been met and if needed we will look at making further adjustments in the months ahead to the Monetary Policy Framework and the exchange rate regime to ensure we have the correct policy setting for both,” she said.
On the Phase II IAG Report, Ms. Genia said it is nearing completion, and just as the reforms from the Phase I review strengthened the Governance of the Central Bank and resulted in the amendments to the Central Banking Act in 2021, the Phase II report will likely see further reforms to the roles and to the functions of the Central Bank.
The Phase II Report will primarily look at the Bank of Papua New Guinea’s role in the broader development of the financial system, she said.
She also noted the Bank of Papua New Guinea turns 50 on November 1st this year “and will be celebrating its Golden Anniversary - a milestone the nation itself will reach in just under two years’ time.”
“The official establishment of the Bank of Papua New Guinea as the country’s Central Bank in November 1973 was one of the essential steps needed before ultimately achieving Independence in 1975,” she said.
"Our story is inextricably linked with the history of our country and 50 years on, the Bank continues to play an important role in the stability of our financial system and in its future development.”
"This significant milestone marks an important time to reflect on the challenges we have faced, to look back on our trials and on our triumphs and to acknowledge the challenges ahead – challenges that are to be embraced, because with challenge - comes opportunity,” Ms. Genia added.
"Just as in the early 2000s when the Bank underwent a series of significant reforms introduced by the Mekere government to strengthen both the Bank and the financial system, we are now seeing similar reforms being considered and introduced to prepare us for the next 25 years and I look forward to being able to share some of that change with you over the next 12 months as we move through our 50th year.”
"I remain, as always, available to meet and discuss these and other issues relating to the Bank,” said Ms. Genia.
