The recent decision by the International Monetary Fund (IMF) to approve US$918 million (K3.2 billion) in new funding to Papua New Guinea is helping to fast-track a solution to the country’s chronic foreign exchange shortages. Business Advantage PNG spoke with Sohrab Rafiq, the IMF’s new PNG representative, to learn more.

Will the kina’s ascent along with the US dollar start to unravel along with plans to slowly float the kina?

An International Monetary Fund (IMF) team will be in Port Moresby over the next few months to help the PNG government develop a jointly-agreed comprehensive reform roadmap for the country’s foreign exchange (FX) system. The roadmap, which will also involve the Bank of Papua New Guinea (BPNG) and the Department of Treasury is expected to be ready by 31 August 2023.

Sohrab Rafiq, the IMF’s recently appointed PNG representative, tells Business Advantage PNG that solving PNG’s FX shortage will remove the single biggest issue holding back business growth and foreign investment in the country.

In addition to fixing the FX problem, he says, the proposed roadmap will also include significant Central Bank reforms to promote economic growth.

The PNG government has already received an initial US$88.3 million (K310.9 million) in IMF funding. According to Rafiq, remaining funds will be spoon-fed to PNG over the next 38 months, following half-yearly reviews by the IMF.

The pace of change

IMF’s newly appointed Resident Representative, Sohrab Rafiq, during a press conference in Port Moresby in April 2023. Credit: Belinda Kora

While the IMF supports the return of a floating kina – determined by the market forces of supply and demand for foreign exchange – Rafiq stresses that it can neither be fast-tracked nor can it be looked at in isolation.

‘Despite the PNG government’s commitment to moving ahead on the reforms, we accept that slippage in the rate of policy reform is a potential risk, especially given economy’s exposure to global economic events beyond its control,’ says Rafiq, who is the IMF’s first PNG representative in 25 years.

‘We want PNG to return to a floating kina from a position of strength.’

He stresses that genuine kina convertibility – meaning it can be traded on forex markets without restriction – needs to be gradual and done together with other reforms to ensure the market and institutions are ready and that the kina doesn’t experience sudden devaluation.

In addition to a convertible kina, he notes foreign investors also want to see greater guidance from the Central Bank on key policy setting reforms, notably interest rate certainty.

‘Contrary to market opinion, we suspect the exchange rate could go either way and, depending on when it adjusts, it could go up as well as down.’

Sudden depreciation?

While the IMF does not make forecasts on exchange rates, Rafiq believes budgetary repair, strengthening the governance and anti-corruption frameworks, as well as simultaneous reforms to the FX mechanism and monetary policy, would reduce the kina’s exposure to sudden deprecation.

‘Contrary to market opinion, we suspect the exchange rate could go either way and, depending on when it adjusts, it could go up as well as down,’ he says.

Instead of immediately allowing the kina to trade on FX markets without restriction, Rafiq argues that a more flexible exchange rate is in the best interests of a resource exporting country like PNG over the longer haul.

The BPNG, which is responsible for PNG’s exchange rate regime, agrees, and in its latest Monetary Policy Statement (MPS) committed to helping address the imbalance in the FX market and enhance exchange rate flexibility.

It’s also in the best interests of PNG, argues Professor Stephen Howes, Director of the Development Policy Centre at the Australian National University, to remove the current allocation of FX based more on the size of an order book than price signals.

Howes believes some depreciation of the kina is also inevitable once FX supply finally increases, as does the Institute of National Affairs’ Executive Director, Paul Barker.

Even the BPNG Acting Governor Elizabeth Genia notes in her March Monthly Policy Statement that allowing the kina to ‘find its market clearing rate … may exert downward pressure on the exchange rate to depreciate.’

How did we get here & what’s the current state of play?

Bank of Papua New Guinea building in Port Moresby. Credit: BAI

A decision by the Bank of PNG in June 2014 to impose an exchange rate margin within which the kina could trade, resulted in major FX shortages.

• Lost convertibility of the kina led to major deterioration in PNG’s terms of trade between 2014 and 2016.
• Subsequent FX rationing led to excessive delays and arrears in current international payments.
• Since November 2020, the kina’s exchange rate has stabilised within a two per cent band against the US dollar.
• With the US dollar up against other currencies, the local currency has increased 11.2 percent against the Australian dollar over the past year.
• According to the Bank of PNG, the backlog of unfulfilled FX orders in PNG at 24 March 2023 was K1.486 billion (US$422 million).
• Last November, the BPNG increased its monthly supply of FX to US$100 million from around US$70 million.
• Recent IMF commentary suggests PNG’s record high gross foreign reserves of US$4 billion – double the level deemed to be adequate – may be part of a future FX solution.
• IMF forecasts a path to a surplus PNG budget by 2027.