Forex squeeze: is Papua New Guinea’s stable kina a liability?


Papua New Guinea’s currency, the kina, has held up during the COVID-19 crisis. But some economists believe that it should fall in value to create essential foreign exchange.

The Central Bank rejects claims it is propping up the kina. Source: BAI

As a thinly traded currency, Papua New Guinea’s currency, the kina, has been protected from some of the volatility affecting world markets in the face of COVID-19, but that presents its own set of problems.

In spite of the kina falling steadily against the US dollar over the past decade (it’s currently valued at US$0.292), some experts think PNG’s currency may still be over-valued.

Edward Faber, the Asian Development Bank’s Country Economist for PNG, describes PNG’s well-documented and long-standing foreign exchange shortages as a ‘symptom’ of the kina’s exchange rate.

‘If the exchange rate was adjusted to its market-determined equilibrium, there would no longer be any shortages,’ he tells Business Advantage PNG. ‘In other words, it would reach a point at which supply and demand equalised: that is, the equilibrium.’

Faber says the COVID-19 crisis is affecting commodity prices. ‘That is an added shock for the PNG economy. If PNG’s exchange rate were more flexible, it would be able to adjust to such shocks better, thereby reducing quantity imbalance.

‘Keeping the kina overvalued may maintain or increase the foreign exchange backlog, or lead to a drawdown of international reserves’

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‘For example, since the oil price has slumped, tax revenue from the PNG LNG project is expected to fall, resulting in reduced foreign exchange flow to PNG.’

A report by the World Bank: East Asia and the Pacific in the Time of COVID-19, also claims that PNG’s currency needs to fall to address imbalances in the economy.

‘Keeping the kina overvalued may maintain or increase the foreign exchange backlog, or lead to a drawdown of international reserves,’ the report says.

‘To ensure macro-fiscal sustainability, it is important for the authorities to begin addressing the overvaluation of the kina more decisively and resume fiscal consolidation in the medium term.’

So far, the kina has held steady against most currencies, according to Kina Securities. Against the US dollar it has fallen by only 0.5 per cent over the last month. It is up against the Australian dollar, rising by 5.3 per cent over the month, the British pound (up 2.8 per cent) and the New Zealand dollar (up 2.7 per cent). It is slightly weaker against the Japanese yen (down 1.4 per cent over the month).

Depreciation is needed

The kina may especially struggle to hold its own against the US dollar. David Brown, the former Chief Investment Officer for Nasfund, says that there could be a prolonged period of a high greenback.

‘Emerging markets across the board are not looking good for a prolonged period.

‘With places like PNG with the least developed capital markets, it could be a real problem for their currency. That could lead to real problems: expensive imports and much reduced revenue and prospects of revenue.’

Thin market

The Bank of Papua New Guinea’s Loi M Bakani

The PNG currency is freely floated, as the Governor of the Central Bank, Loi Bakani, has repeatedly pointed out. But it is no certainty that the kina will depreciate. The thinness of the market means that the interplay of supply and demand, evident with the currencies of the developed world, does not occur in PNG.

Bakani told Business Advantage PNG that he rejects claims the central bank is stopping the movement of the kina. He said the problem is the country’s interbank market (a network utilised by financial institutions to trade currencies between themselves.) ‘At the moment, there’s no interbank market, so the price [for the kina] cannot be set,’ he said.

PNG’s former Treasurer, Charles Abel had previously commented that the ‘stickiness of the exchange rate’ is because the market is small. ‘You only have a limited number of players; the market is not deep.’

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