CANBERRA - The good news is that Papua New Guinea’s inflation rate is falling. And good progress continues on financial inclusion initiatives and technical improvements in the banking system.
The bad news is that the September 2017 monetary policy statement by the Bank of PNG (BPNG) – the central bank - is the worst for more than a decade.
It is out of touch with the economic pain being felt by many people and businesses in PNG. Even worse, it tries to cover up its contribution to that pain.
There are three major deficiencies in this statement. The next three articles will deal with one major deficiency at a time as each is substantive and somewhat technical.
The three deficiencies are:
Deceptively denying that there is a foreign exchange shortage and blaming it on the private banks;
Pretending that printing money isn’t a problem by using erroneous statistics; and
Killing private sector credit growth.
This is sad news for the people of PNG. PNG needs to acknowledge its poor policy settings if it is to improve its economic prospects from being the worst in the East Asia and Pacific region.
The six monthly central bank monetary policy statement was released on 30 September.
The 14-page document follows the usual structure with two exceptions, both of which attempt to explain the bank’s unfortunate behaviour in creating exchange rate shortages and printing money to finance the government’s budget deficit.
In an extraordinary attempt to pervert the truth, BPNG argues “the bank’s assessment of foreign exchange market data shows that the total supply of foreign currency, including the central bank’s intervention, was more than sufficient to clear the outstanding daily orders in the spot market.”
In other words, there really aren’t any foreign exchange shortages.
Contrast this with the views of one hundred of PNG’s CEOs who, when surveyed, said foreign exchange shortages were considered the most critical issue faced by businesses in PNG.
Why is it that businesses are saying their greatest challenge is foreign exchange shortages, but BPNG says things are fine? Are PNG’s businesses lying? Or is BPNG now into ‘fake news’?
If there has been K4.5 billion in cumulative net foreign exchange flows why haven’t PNG’s international reserves increased remarkably?
Instead, they have fallen dramatically.
So after providing a deeply flawed and misleading information, BPNG tries to shift blame. It states:
“However, the authorised foreign exchange dealers (AFEDs) claim that the inflows are not enough to meet the demand for foreign exchange and the imbalance continues to persist. The outstanding orders by AFEDs reflect frontloading of orders, preference for serving small orders and others not backed with the required kina funds.”
So it is the private banks fault! None of the explanations is credible. For example, why is there a problem having a “preference for serving small orders” (which is arguably a good thing rather than just looking after big businesses)?
BPNG’s foreign exchange actions have reduced PNG’s imports to half previous levels in nominal terms and even less in terms of the economy. This killing of PNG’s imports is the most dramatic in PNG’s history.
BPNG’s actions continue to descend down a slippery slope and indicate an extreme anti-small business approach.
No option of trade financing means small businesses can’t continue for that crucial period between placing an order and being able to sell the product.
Big businesses can cover this cash flow gap but smaller ones often cannot.
This banning of trade financing is a devastating policy for small to medium sized enterprises that are trying to start new businesses.
Such actions by BPNG are a growing reason for PNG’s forecast economic performance being the worst in the entire East Asia and Pacific region.
In summary, the latest monetary policy statement from BPNG uses misleading statistics to cover up serious policy flaws in the conduct of monetary policy.
Denying foreign exchange shortages is foolish.
Blaming shortfalls on the private banks is playing games.
And the actions to stifle imports hurts growth. Stopping dividend payments kills foreign investment. And banning trade financing seriously hurts small and medium sized enterprises.
The first step forward is to acknowledge that there is a problem. BPNG is in a fantasy land but one that is having very adverse real world implications.
Bank of PNG, you are killing growth in Papua New Guinea.