Monetary and banking

Inflation has generally been moderate in PNG. Average annual CPI growth from 1977 to 2019 is
7 per cent. However, inflation did increase in the 1990s in the context of rapid currency depreciation.

Data notes on monetary and banking data

Disaggregated CPI data is not discussed here, but is available in the database.

In terms of deposits, the banking sector is close to twice the size it was at independence relative to GDP. This is shown in the figure below. At independence, deposits were 15 per cent of GDP. They reached 24 per cent in 1997 but fell back to 15 per cent in 2003. Then, with the resource boom, deposits reached 39 per cent of GDP in 2013, before falling to their current level of 25 per cent of GDP. The main beneficiary of this growth in deposits has been the government. Bank government debt has increased from 2 per cent in 1980 to 10 per cent in 2019. The outstanding stock of debt to the private sector is little changed relative to GDP: 10 per cent in 1980 and 11 per cent in 2019. State-owned enterprises have become significant debtors in recent years with outstanding bank debt (and resultant significant debt distress) of some 4 per cent of GDP, up from zero prior to 2012.

As a result in this shift in lending behaviour, the banks’ average liquid asset ratio has grown above 50 per cent (government securities are counted as liquid assets, even though they are not actually very liquid). In the 1980s, BPNG used the minimum liquid asset ratio as a regulatory instrument to influence bank behaviour, and, as the figure below shows, for much of this period it was binding. However, that is no longer the case, and the ratio is no longer targeted by the authorities. There is still a cash reserve requirement, but that is also not binding. BPNG uses the Kina facility rate as its primary monetary policy lever, but it seems to have limited sway over lending rates, since banks fund their loans from their deposits.

At independence, the banking sector was highly regulated. The main effect of deregulation seems to have been a decline in deposit rates to virtually zero. The spread between deposit and lending rates has risen from well under 5 per cent to close to 10 per cent, meaning that lending rates have not fallen by nearly as much as deposit rates. PNG’s banks have become among the most profitable in the world. That they are able to maintain such a spread is testimony to their monopoly power.

Key monetary aggregates are shown in the figure below. The axis is logarithmic to show movements in early years. The period of strongest money supply growth began just after the boom started, and continued to around 2012 before tapering, and then falling after the boom. The money supply increased again in 2019 and 2020, in line with higher Government spending.

Data notes on monetary and banking data