Bank of Papua New Guinea (BPNG) Governor Elizabeth Genia recently outlined the September 2024 Monetary Policy Statement, amid the ongoing economic challenges and the central bank's strategies to stabilize the nation's economy.
The presentation took place on October 7th at the Royal Papua Yacht Club in Port Moresby.
Reflecting on the previous March Monetary Policy Statement, Governor Genia noted the persistent inflationary pressures that necessitated tough monetary decisions.
At that time, the Kina Facility Rate (KFR) was at a historic low of 2.0%. However, she reported that the central bank has since adopted a tightening stance, raising the KFR to 4.0% in September amid the need for price stability.
"We are maintaining our headline inflation projection at 5.0% for 2024, with underlying measures at 5.5%," Governor Genia stated.
While headline inflation has decreased to 0.1% in mid-2024, core inflation measures indicate persistent pressures, particularly from domestic goods.
"A tighter monetary policy stance is necessary to manage these inflation risks," she added, referencing potential global commodity price shocks.
The recent adjustments, including increasing the Cash Reserve Requirement from 10% to 12%, were aimed at tightening liquidity in the banking system. This resulted in rising yields on Treasury Bills and a notable steepening of the yield curve for the first time in years.
These measures help enhance the effectiveness of the monetary policy transmission mechanism, Governor Genia explained.
“The Kina Facility Rate was increased to 2.5% in May, accompanied with an increase in the Cash Reserve Requirement from 10% to 11% of all deposits held with the commercial banks. These complementary measures were designed to absorb some of excess liquidity from the banking system and to assist in strengthening the monetary policy transmission mechanism.”
“In further addressing the long-standing issue of the excess of liquidity in the financial system, the Cash Reserve Requirement was further increased to 12% in June.”
“The more recent increases in the KFR to 3.0% in August and to 4.0% in September helped alleviate some of the pressure on the steepening in the yield curve while aligning our overnight policy rate with those of our major trading partners,” she added.
Genia observed that wholesale interest rates on government securities have returned to pre-COVID levels. However, commercial banks have been slower to adjust their deposit rates, with indicator lending rates ranging from 7.20% to 11.70%.
"The excess liquidity remains a challenge, but we are exploring various policy options to address this," she noted.
Domestic Economic Outlook
On the broader economic outlook, Governor Genia expressed cautious optimism, noting that construction activity and higher agricultural prices, particularly for cocoa and coffee, are contributing to this growth.
“It has been a very difficult year for businesses in PNG. We do, however, believe the worst is behind us. We expect growth for 2024 to land at around 3 percent, driven mainly by the mineral sector, and while the non-mineral sector has experienced a slower expansion, it has been driven by construction activity and higher prices for some agricultural exports, notably cocoa and coffee. Government spending, particularly on construction, has also supported growth this year.”
Genia continued with PNG’s growth forecast for 2025 and 2026 of around 4.3 percent and 3.7 percent, respectively, reflecting increased capacity and full year production from the Porgera gold mine and construction activity in other resource projects.
“The prices of PNG’s agricultural exports remain high, but most are easing from their 2022 peaks. Gold and copper remain strong, while other metals are easing. Oil and gas prices have come down from COVID pandemic highs as supply increases, helping to moderate global inflationary pressures but potentially reducing profitability for PNG’s extractive industries,” she added.
Foreign Exchange:
Governor Genia also said the difficulties in sourcing foreign currency “remain a significant concern."
The introduction of a crawl-like exchange rate arrangement and a weekly foreign exchange auction aim to improve access to FX liquidity. Despite net outflows in the foreign exchange market, she reported that interventions by the Bank have gradually improved the situation.
“We also introduced a weekly Foreign Exchange Auction in May 2024, to provide more frequent and predictable access to FX liquidity – providing increased transparency to the market with those intervention funds used for essential orders only.”
Genia said even though progress has been slow, she was pleased to report these reforms have had a positive impact.
“Access to foreign exchange has very gradually improved, and, while outstanding orders remain high, the extent of the Bank’s intervention with its foreign reserves means there is more foreign currency available in the market, though the excess of demand for foreign currency over that actually available, remains high.”
"Over the eight months to August, inflows into PNG’s domestic FX market amounted to PGK12.8 (or US$3.4) billion, while total outflow was PGK17.4 (or US$4.6) billion. As a result, there was a net outflow of K4.6 (or US$1.2) billion which was primarily met by BPNG’s intervention of K3.8 (or US$1.0) billion.
“We are currently intervening in the domestic foreign exchange market with US$125.0 million each month and we will continue to support the market, with that level of intervention, for as long as is needed.”
Legislative changes to Central Bank Act:
Genia also noted recent legislative changes to the Central Banking Act, which will see the establishment of a new Monetary Policy Committee. This committee “will enhance the independence of monetary policy decisions and require transparency in its operations.”
"We are in a period of transformational change," Governor Genia affirmed, underscoring the need for coordinated efforts between the government and private sector to address structural challenges hindering business growth.
She acknowledged the difficult landscape businesses are navigating but expressed hope for improvement in the second half of the year, driven by various sectors.
"Our focus is on ensuring these reforms are implemented effectively, allowing businesses to access foreign currency and contributing to long-term prosperity for all Papua New Guineans."
BPNG Business Sentiment Survey:
The Bank’s Business Sentiment Survey, conducted in July 2024, suggested that firms are operating in a very high-cost environment which is adversely impacting on their operations.
Governor Genia said: “Prices are expected to remain high while efforts are being made to source cheaper alternatives to manage costs and increase revenue and profit margins.
“It has been a very difficult year but we are expecting further improvement in the second half driven by higher activity in construction, agriculture, wholesale and retail, finance and insurance, and mining sectors.”
She added: “The challenges you face are not unique to PNG; but they are made more difficult by our domestic barriers to business, including excessive red tape and poor infrastructure.”
Attendees included government representatives, CEOs of financial institutions, and members of the diplomatic corps.
