BANK OF PAPUA NEW GUINEA
Overview of Foreign Exchange
issues in Papua New Guinea
by
Mr. Rowan Rupa &
Mr. Wilson Onea
BANK OF PAPUA NEW GUINEA
HISTORY OF KINA
BANK OF PAPUA NEW GUINEA
►1975
-
- “HARD KINA POLICY”
-
INDEPENDENCE
►1976
-
PEGGED TO AUSTRALIAN DOLLAR
SEVERAL REVALUATIONS
►1978 TO 1988
-
PEGGED AGAINST IMPORTED
WEIGHTED BASKET OF
CURRENCIESTO AUD DOLLAR
►1988 TO 1994
-
PEGGED AGAINST A TRADE WEIGHTED
BASKET OF CURRENCIES.
►1994 TO 2010
-
KINA FLOATED
(10th October 1994,Kina floated following devaluation
of kina by 12.0% on the 12th September 1994)
TRANSITION TO
FLOATING REGIME
BANK OF PAPUA NEW GUINEA
♦ REASONS FOR TRANSITION
►
IMPRUDENT FISCAL MANAGEMENT
►
RECOURSE TO DOMESTIC FINANCING
►
OIL PRICE SHOCK
►
ACCOMMODATIVE MONETARY POLICY
►
LOW RESERVES LEVELS
►
BOUGAINVILLE CRISIS
►
THE TRANSITION FROM FIXED ER REGIME TO FLOATING ER
REGIME IS A SENSITIVE ISSUE AND BPNG HAS TO MAINTAIN UTMOST
CARE, DISCRETION AND MAINTAINENCE OF PUBLIC CONFIDENCE
THE FLOATING EXCHANGE
RATES REGIME
BANK OF PAPUA NEW GUINEA
►
VALUE OF KINA DETERMINED BY DEMAND AND SUPPLY
CONDITIONS OF THE MARKET
►
EXCESS SUPPLY (EXPORTERS)
TENDENCY FOR KINA APPRECIATION
►
EXCESS DEMAND -
TENDENCY TO DEPRECIATE
►
EQUILIBRUM RATE IS WHEN DEMAND AND SUPPLY
CONDITIONS MEET
►
KINA IS AUTOMATICALLY ADJUSTED
MARKET INFRASTRUCTURE
& TRADING
BANK OF PAPUA NEW GUINEA
►
OPEN CRY AUCTION WAS ABOLISHED IN AUGUST 1995
►
SCREEN BASED SYSTEM INTRODUCED. BID AND
OFFERS
ARE PLACED ON REUTERS SCREEN
►
BPNG TAKES THE ROLE AS A BROKER
►
DEDICATED LINES STRAIGHT TO DEALING ROOMS
►
RECENTLY INTRODUCTION OF A STRAIGHT THROUGH
PROCESS UNDER THE NEW RESERVES MANAGEMENT
SYSTEM ( DEALING TO SETTLEMENTS)
►
CURRENCY QUOTED IS PGK/USD.
►
BANKS CAN MATCH OTHER CURRENCIES DEMAND AND SUPPLY IN THEIR
OWN BOOKS. THIS IS REFERRED TO AS INHOUSE TRADES.
►
WHEN BANKS CANNOT MATCH ORDERS INHOUSE, THEY PLACE THEIR
ORDERS IN THE MARKET. THIS IS REFERRED TO AS THE INTERBANK TRADING .
BANK OF PNG ROLE IN THE
FOREIGN EXCHANGE MARKET
BANK OF PAPUA NEW GUINEA
►
BROKER
►
OPEN MARKET OPERATION THROUGH ITS INTERVENTIONS
‘BANK OF PNG INTERVENES TO MAINTAIN PRICE STABILITY
(ER…INFLATION)…MAINTAINS A SMOOTH
TRANSITION OF THE “TREND EXCHANGE RATE’
►
REGULATOR AND SUPERVISOR
►
“LENDER OF LAST RESORT” … SUPPLIER OF DOLLARS /
KINA
►
THE GOVERNOR IS SOLELY RESPONSIBLE FOR
INTERVENTIONS IN THE FOREIGN EXCHANGEMARKET
TOOLS THAT GUIDE BPNG’S
INTERVENTION
BANK OF PAPUA NEW GUINEA
►
OPEN POSITION OF BANKS DAILY (SYSTEM LIQUIDITY)
►
KINA TRADE WEIGHTED INDEX ( DIRECTION)
►
EXCHANGE RATES PRESSURE INDEX (OUT LOOK)
►
EXCHANGE SETTLEMENT ACCOUNTS (SETTLEMENTS)
►
RESERVE LEVELS (FUNDING)
►
OTHER DEVELOPMENTS REPORTED BY BANKS (FLOWS)
REGULATION OF FOREIGN
EXCHANGE MARKET
BANK OF PAPUA NEW GUINEA
►
BANKS AND FINANCIAL INSTITUTION ACT (2000)
►
LISCENSING CONDITIONS
-Corresponding banks, dealing rooms, Fit and proper Test
►
PRUDENTIAL LIMITS
-10% OF CAPITAL BASE ON SINGLE CURRENCY
-15% OF CAPITAL BASE ON OVERALL CURRENCY POSITION
►
PENALTIES
►
INFORMATION DISCLOSURE
►
CHALLENGES OF MANAGING A
FLOATING EXCHANGE RATES
BANK OF PAPUA NEW GUINEA
►
SEASONALITY AND CYLICAL FLOWS
-Market imbalance between exporter and importer flows leads to
uncertainty in short term policy direction
-Mineral taxes receipt are received quarterly (April,July,October)
-Demand for foreign currency driven by Consumption for goods and
material inputs (esp Petroleum)
-Needs close scrutiny and open dialogue with real sector.
CHALLENGES OF MANAGING A
FLOATING EXCHANGE RATES
BANK OF PAPUA NEW GUINEA
►
MARKET STRUCTURE & LEGISLATION
-Bank are Deposit taking institution and under the Central Banking Act can
clear their FX transaction with each other using the Exchange Settlement
Account with BPNG.
-Other Non Banks participating in the FX market cannot clear or
settle funds using the Exchange Settlement
-A special clearing account is made available for them with special rule.
-Needs a new automated clearing system to supplement high value
transaction in the foreign exchange market
CHALLENGES OF MANAGING A
FLOATING EXCHANGE RATES
BANK OF PAPUA NEW GUINEA
►
MONETARY POLICY & FISCAL POLICY
The most important ingredient in managing FX in a floating regime is synchronizing
fiscal policy with monetary policy
-
-Political pressure to spend leads to fiscal slippages and increased liquidity in the
banking system….inflation
-Compels Central Bank to intervene and issue new bills and ease pressure on the
kina and sterilizes liquidity
Alternatively,
Fiscal surplus leads to loan repayment & Debt restructure….liquidity shrinks… BPNG
intervenes
Needs close liaison and dialogue with Department of Treasury
BANK OF PAPUA NEW GUINEA
CHALLENGES OF MANAGING A
FLOATING EXCHANGE RATES
MARKET SIZE AND PARTICIPANTS
>The are only five licensed foreign exchange dealers
>All have internal limits less than the prudential limits. This create liquidity
problem in the market.
>The size of the market is small. Banks therefore use information to price
aggressively or to price to the disadvantage of the competitor.
> Challenge is to tighten market rules and broaden market.
BANK OF PAPUA NEW GUINEA
CHALLENGES OF MANAGING A
FLOATING EXCHANGE RATES
EXCHANGE RATES & BPNG’S BALANCE SHEET
>Appreciation of the kina leads to realized losses on the balance sheet
>Depreciation of the kina leads to realized gains on the balance sheet
>Mitigating effects on the movement of kina influences foreign currency liquidity
and therefore price and subsequently monetary policy action.
>Trying to find the optimal exchange rates that will minimize effect balance sheet
losses/gains and kina stability remains a big challenge.
Insufficient Research
Need quality research followed by good implementation
BANK OF PAPUA NEW GUINEA
THE LIQUEFIED NATURAL GAS
>THE LNG PROJECTS LIFE IS AROUND 50 YEARS
>THE LNG PROJECT WILL INCREASE GOVERNMENT EXPENDITURE AND
LEAD TO GROWTH AND INCREASE IN WELFARE.
>ACCORDING TO A JOINT STUDY BY BPNG, CENTRE OF POLICY STUDIES
THE GOVERNMENT HAS THREE SPENDING OPTIONS OVER THIS PERIOD
A)
CONSERVATIVE APPROACH – SAVE REVENUE BONANZA AND ONLY
BUDGET WITHOUT PROJECT………………..KINA EFFECT STERILISED
B)
PASSIVE EXPENDITURE PATH – USING REVENUE EARNED TO SPEND
TODAY…………………….KINA EFFECT STABILIZED
C)
ACTIVE EXPANDSORY POLICY- BORROW NOW AND USE FUTURE INCOME
TO REPAY LOANS…………………KINA DEPRECIATION
In all during the construction phase, the kina will appreciate during the construction
phase due to demand for labor and raw material inputs
BANK OF PAPUA NEW GUINEA
THE LIQUEFIED NATURAL GAS
>Sector effects: construction, manufacturing, transport, service sector will
increase during the construction phase. This most affected will be the
Agriculture sector (Kina appreciation) – “Dutch Desease”
>Conduct of Monetary Policy will be much easier if the Government takes a
conservative path.
>Creation of Sovereign Wealth Fund. ( Joint Committee between DOT and
BPNG)
>Seek Australian Government assistance in setting up a Sovereign Wealth
fund.
> In summary, there is still no clear fiscal path and the SWF is still on the
tables
BANK OF PAPUA NEW GUINEA
END
KINA & INTERVENTION
200,000,000.00
NET INHOUSE FLOWS
NET INTERVENTION
USD
0.38
150,000,000.00
0.37
50,000,000.00
0.36
-
-50,000,000.00
0.35
-100,000,000.00
0.34
-150,000,000.00
-200,000,000.00
0.33
-250,000,000.00
-300,000,000.00
0.32
PGK/USD
NET FLOWS & INTERVENTION ('K'm)
100,000,000.00
Kina
MAJOR INFLOWS
500000000
MINING
AGRICULTURE
450000000
400000000
350000000
300000000
250000000
200000000
150000000
100000000
50000000
0
DATES
MAJOR OUTFLOWS
FINANCE & BUSINESS
RETAIL
PETROLEUM
CONSTRUCTIONS
400000000
350000000
K'MILLIONS
300000000
250000000
200000000
150000000
100000000
50000000
0
DATES
WHOLESALE
OUTSTANDING ORDERS
200000
180000
160000
UNFILLED BUY ORDER
UNFILLED SELL ORDERS
140000
K'm 000
120000
100000
80000
60000
40000
20000
0
DATE
MARKET DEVELOPMENTS
UNFILLED SELL ORDERS ( weekly total)
BPNG INTERVENTION (weekly total)
PGK/USD
PGK/AUD
800,000.00
0.4400
700,000.00
0.4200
500,000.00
0.4000
K'm
400,000.00
0.3800
300,000.00
200,000.00
0.3600
100,000.00
0.3400
-
-100,000.00
0.3200
DATES (WEEKLY)
PGKUSD,PGKAUD
600,000.00
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Overview of Foreign Exchange issues in Papua New Guinea