Businesses, individuals and governments have faced difficulties obtaining foreign exchange (FX) in PNG over the last decade. Over this period, businesses have frequently listed this as the top constraint they are facing. What is the cause of this long-standing problem and what more needs to be done to finally eliminate foreign exchange rationing?
A shortage of FX has been apparent since the end of high commodity prices in 2014. Since then, importers, investors and the government have not been able to freely convert kina into foreign currency to pay for imports, to repatriate profits and dividends, and to service external debts, respectively. A large backlog of FX orders has built up, meaning that economic agents have to queue for months to access foreign currency. As a result, as Figure 1 shows, the volume of imports fell between 2013 and 2016. There was some recovery up to 2019. But then imports fell again due to the outbreak of coronavirus pandemic and further rationing.
FX shortages and rationing means that the FX market is not clearing, and indeed the kina became very rigid or stuck over the last decade, hardly changing at all. With the current International Monetary Fund (IMF) program, the kina, while still managed by the Bank of Papua New Guinea (BPNG) through a crawling peg arrangement, has been made more flexible and has been allowed to depreciate gradually. The impact of depreciation on FX inflows through non-resource exports and foreign direct investments is yet to be established. Whether or not depreciation has helped, the injection of United State (US) dollars under the IMF program, high commodity prices, and increased production in the mineral and petroleum sectors have improved FX inflows in recent years, and enabled increased supply by BPNG of dollars into the market. The September 2024 biannual monetary policy statement (MPS) states that access to FX has improved and the clearance time for outstanding orders has fallen to 4-5 weeks.
Nevertheless, for all this, the FX shortage still remains a concern to businesses and individuals. Already in 2025, Brian Bell Chief Executive Officer Cameron Mackellar has stated that access to foreign currency is still “an issue for us and everyone else seeking goods, products or services from overseas.”
While the government has committed to ending rationing, BPNG has not announced any deadline. Indeed, it has been sending mixed signals. On the one hand, it has said, for example in the September MPS, that it is against rationing and that it wants “to achieve full convertibility”. On the other hand, in December it issued guidelines to foreign exchange dealers on which FX orders to prioritise, that is, how to ration. But such guidelines are only needed if rationing is to remain in place, and their issuance implies that rationing will not be ended soon.
So what more needs to be done to end FX shortages? First, the non-resource sector, especially agriculture and manufacturing, require strong government support to improve export production. This will be supported by ongoing depreciation of the kina to make exports competitive and generate more foreign reserve inflows for the economy.
Second, socio-economic issues such as law and order, deteriorating utility services, poor infrastructure and political instability discourage foreign firms from investing in the country. Key stakeholders including the government have to create a conducive business environment to attract foreign investment.
Third, the government has allowed the firms in the resource sector to keep their FX earnings in offshore bank accounts through project development agreements. For future project agreements, the government may have to negotiate with resource developers to keep their operational accounts onshore to strengthen foreign reserve inflows. However, this arrangement will increase the demand for US dollars.
Fourth, the government has managed some of its resource revenues through offshore foreign currency accounts. Transferring those funds to domestic currency accounts will improve the inflow of FX reserves.
Fifth, the central bank should announce a deadline for the end of FX rationing. Once a deadline is in place, BPNG would be obliged to manage the exchange rate and the amount of FX it releases to the market to ensure FX demand and supply are matched. No one is arguing that the kina should once again be floated but if BPNG is setting the value of the kina it should do so subject to the constraint of convertibility (non-rationing). The kina was managed without rationing prior to 2014. Without a deadline, the rationing problem that has emerged over the last decade may continue for years to come. A decade of FX shortages is long enough. 2025 should be the year in which the kina becomes convertible again.
Resolving our FX & Fuel Crisis
Dear Editor,
Please allow me space to state a few facts regarding the above, since it seems that our ongoing Forex & fuel crisis have really become an issue, when in reality they are not that difficult to comprehend, understand and or resolve.
These two (2) pertinent issues are intertwined and closely related and should be easily resolved if we understood their complexities and how they work. These issues are not rocket science to figure out and resolve. The following are the two (2) main (key) approaches that we must take immediately to resolve these current outstanding issues;
1. Review, renegotiate and re-sign all our resource (especially oil & gas) project agreements, so that all foreign currency (including USD), are repatriated back to our country (PNG). This is the surest, most sure-fire action to take to relieve our current forex issue. Especially since, revenue from our oil, gas and mineral resources make up the bulk (more than 60%) of our total exports. We are talking about hundreds of millions and even billions of dollars here. This approach will most definitely resolve our current forex crisis in the next 6-9 months if we are serious and embark on it in early 2025.
When most resource projects started and were initially signed into agreements, (during the Somare and then subsequently O’Neil led governments), project developers such as OilSearch, Barrick, Exxon and Santos argued that they needed to trade using their Singapore and other foreign, offshore accounts. Under the pretext, that BPNG did not have the capacity to deal with the substantial volume of forex trade that they would require for their operations. This lame excuse of using offshore accounts has directly led to our current forex shortage and backlog.
Our FX backlog is only circa K1 billion. If we can get all these giant resource project developers to remit all, or a certain percentage of their forex earnings onshore, using BPNG and our domestic banks, I can safely and confidently assure the current Marape-Rosso government that our forex backlog issue will be largely (and mostly) resolved, eased and tamed by September 2025. In time for our 50th Independence anniversary celebrations this year.
2. The second approach to use to resolve the aforementioned issues would be to use Domestic Price Parity (DPP) pricing when setting the price for our oil, gas and mineral resources. This would most definitely and vastly reduce the price of our fuel, oil and gas products in PNG.
Rogue multinationals like Puma have been using International Price Parity (IPP) and import parity pricing when setting the price of all their fuel, oil and gas products being sold domestically. Leading to fuel, oil and gas products being sold in the country, being sold at international market prices, when these goods and services should be bought and sold at low domestically affordable rates.
Puma and our project developers aren’t entirely to blame for this arrangement, however. Our previous incompetent regimes and State negotiation teams (SNTs) must also be held to account for this blunder, since they are the ones who agreed and signed on these agreements and arrangements in their current formats.
No wonder our current PM Marape was blaming the war between Russia and Ukraine for our fuel problems, when that clearly shouldn’t be the case. Any fool knows that we don’t even have any trade with Russia and or Ukraine! Why would a war between them, thousands of mile away, have any bearing on the fuel we own and extract from our own country? Just outright stupid, silly and nonsensical.
Our current oil, gas and other resource project agreements, must be reviewed, re-analyzed and re-negotiated so that we can resort to DPP pricing and other more sensible and beneficial arrangements to monitor to price of fuel produced domestically. So that wars in foreign unknown, unheard of countries such as Iceland or Greenland etc… don’t have any bearing on our domestically owned and operated fuel, oil, gas and other mineral resources!
Charles Malu
Dept of Finance