Kina overvalued and one option is to have dual exchange rate, says economist

The kina is more than 20 per cent overvalued, according to economist Marcel Schroder, speaking to a joint University of Papua New Guinea/ANU event in Port Moresby. One option is to introduce a dual exchange rate for a limited time.

The fall off in tax revenue, especially mining taxes. Source: ANU, UNPNG

‘When people talk about an over-valuation of the kina, it is really hard to know by how much,’ said Marcel Schroder, a lecturer in economics at the Development Policy Centre in the Australian National University (ANU).

‘We updated (our estimate) last year, 2016, and it is still about 22 per cent overvaluation.’

He said this year the estimated overvaluation of the kina will be increased.

Schroder acknowledged that, for an economy like PNG that lacks diversification, there are arguments against letting the currency fall.

‘There are (some) good reasons not to devalue. One is that it could be inflationary. It means that imports will be more expensive, especially when it comes to essential imports like rice and pharmaceuticals—poor people are already struggling. That is not a good outcome.’

Elastic

The question is whether the economy is ‘elastic’: able to rebound from the re-pricing of the currency. ‘In theory, when the exchange rate depreciates it stimulates exports,’ said Schroder.

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‘Revenue from mining petroleum taxes, which peaked at K4 billion during the boom, has almost disappeared.’

‘But PNG has no [export] manufacturing, so what do we export? We are price takers when it comes to commodity prices.’

One option, according to the 2017 PNG Economic Survey, which was co-written by Schroder, ANU economists Rohan Fox and Stephen Howes, and UNPG economist Nelson Atip Nema, is to retain the current kina rate for essential imports and depreciate the kina by 20 per cent for all other transactions.

Schroder believes empirical evidence suggests that, over the medium term (typically two years), exports will be stimulated by devaluation.

‘It is easy to wait for the next commodity price hike, or LNG project. But it is a bit defeatist and the costs in the short run really damage the economy.’

Credit

The ANU’s Marcel Schroder

Schroder claimed an overvalued exchange rate lowers economic growth, and investment in future projects ‘because businesses find it hard to find foreign exchange for crucial intermediate goods and capital goods.’

He said the shortage of foreign exchange is putting PNG businesses that purchase internationally under pressure. Many need to wait between eight and 16 weeks to have their foreign exchange orders processed.

‘That is quite a long time. Credit lines are usually between 14 and 30 days. So they are banking on the patience of overseas suppliers.’

Most PNG businesses have built ‘very good credit records in the past’, he said, so overseas suppliers are prepared to be patient.

‘They can continue with their operations but they miss out on many opportunities. Also, many businesses are multinationals.

‘Businesses are spending a lot of time trying to find foreign exchange.’

‘Being foreign companies, they would like to take at least part of their profits back home. They are not able to do this. This causes frustration.’

Schroder said businesses are spending a lot of time trying to find foreign exchange. Any cost is ‘passed on to consumers.’

PNG’s non-resource GDP. Source: ANU and UNPNG

 

Comments

  1. Hi Marcel Schroder,
    We need critical solution at this time, kina is dropping rapidly. I believe that some of the factors that
    caused this to happen were, too much govt unneccseeary spending, K2 billion notes printed by PNC govt during election time, drop commodity of price and high level of fraud involved in illegal activities.

    Regards,

    Max Pawa Pundia from BSP

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