Current challenges facing PNG in the international economy

Paul FlanaganDevelopment Policy Centre

Australian National University

Structure

• External Accounts– The link between flows and stocks– PNG’s Balance of Payments (flows) and

International Reserves (stocks)• External shock– Oil price drop – implications for flows and stocks

• Policy options– Quantitative (regulations)– Price (exchange rate)

External Accounts

• National accounting conventions• Current account (goods and services exports

and imports) + capital account (flow of capital such as foreign investment and dividend payments) = Balance of Payments (overall flow in External Accounts)– PNG’s Balance of Payments (past and expectations

from Table 3 of IMF Article IV)

PNG’s Balance of Payments

2010 2011 2012 2013 2014 2015 2016 2017

($1,500)

($1,000)

($500)

$0

$500

$1,000

$1,500

Overall BoP balance (before oil price shock)

USD

mill

ions

SurplusSurplus

Deficit

Flows and Stocks

• The overall balance of payments is the flow of external income

• A country’s international reserves is the stock of assets held by the central bank from previous year’s flows

• Broadly, one can think in terms of how your net annual income (an annual flow) affects your bank balance sheet (a stock)

• International reserves from previous year + Balance of Payments flows = International reserves at end of year

PNG’s BoP and International Reserves

2010 2011 2012 2013 2014 2015 2016 2017

($2,000)

($1,000)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

Overall BoP balance (before oil price shock) Net international reserves (IMF)

USD

mill

ions

Surplus Surplus

Deficit

Current PNG challenge – oil price fall

• External trade shock– Large price fall in PNG’s key commodity export LNG– Oil price fall will lead to an LNG price fall– Background reading – estimated a 35% fall– ANZ says a 42% fall by second quarter 2015

• What are the implications for PNG’s balance of payments and international reserves?– Following analysis assumes a 20% fall in price for

PNG’s commodity exports with no change in export quantities

Oil price fall – PNG BoP

2010 2011 2012 2013 2014 2015 2016 2017

($2,500)

($2,000)

($1,500)

($1,000)

($500)

$0

$500

$1,000

$1,500

Overall BoP balance (before oil price shock) Overall BoP balance (after oil price shock)

USD

mill

ions

Deficit Emerging Balance of Payments

Crisis

2010 2011 2012 2013 2014 2015 2016 2017

($3,000)

($2,000)

($1,000)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

Overall BoP balance (before oil price shock) Net international reserves (IMF)Overall BoP balance (after oil price shock) Net international reserves (after oil price shock)

USD

mill

ions

Emerging International

Reserves Crisis

Policy Options

• A country must not run out of international reserves (it would stop trade – can no longer pay for imports or capital obligations)

• Quantitative restrictions– Limiting when importers can be given foreign exchange to

pay suppliers – delays can help bolster international reserves

– Limiting who can deal in foreign currency– Stopping various types of imports– Stopping various types of payments

Policy response - regulatory

2010 2011 2012 2013 2014 2015 2016 2017

($4,000)

($3,000)

($2,000)

($1,000)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

Net international reserves (IMF) Net international reserves (after oil price shock)Net International Reserves less forward book

USD

mill

ions Emerging

International Reserves Crisis

Policy response – market prices

• International market for PNG’s goods, services and capital flows• Traded with the world through foreign exchange markets• Supply and demand – equilibrium levels can bring balance to

balance of payments– And if the flow is balanced, the stock of international currency

reserves will also become balanced• Sudden appreciation of the Kina on 4 June 2014 difficult to

explain – hurts especially poor rural exporters– Might have soon be returning to more a market-based level– But now have had a major external shock– Exchange rate can be a shock absorber in such circumstances– Australia’s exchange rate depreciated by 16% since June 2014

PNG’s exchange rate

12/11/2

013

12/22/2

013

1/2/2

014

1/13/2

014

1/24/2

014

2/4/2

014

2/15/2

014

2/26/2

014

3/9/2

014

3/20/2

014

3/31/2

014

4/11/2

014

4/22/2

014

5/3/2

014

5/14/2

014

5/25/2

014

6/5/2

014

6/16/2

014

6/27/2

014

7/8/2

014

7/19/2

014

7/30/2

014

8/10/2

014

8/21/2

014

9/1/2

014

9/12/2

014

9/23/2

014

10/4/2

014

10/15/2

014

10/26/2

014

11/6/2

014

11/17/2

014

11/28/2

014

12/9/2

014

12/20/2

014

12/31/2

014

1/11/2

015

1/22/2

015

2/2/2

015

2/13/2

015

2/24/2

015

3/7/2

015

3/18/2

0150.3

0.32

0.34

0.36

0.38

0.4

0.42

Kina to USD

PNG and Australian exchange rates

12/11/2

013

12/22/2

013

1/2/2

014

1/13/2

014

1/24/2

014

2/4/2

014

2/15/2

014

2/26/2

014

3/9/2

014

3/20/2

014

3/31/2

014

4/11/2

014

4/22/2

014

5/3/2

014

5/14/2

014

5/25/2

014

6/5/2

014

6/16/2

014

6/27/2

014

7/8/2

014

7/19/2

014

7/30/2

014

8/10/2

014

8/21/2

014

9/1/2

014

9/12/2

014

9/23/2

014

10/4/2

014

10/15/2

014

10/26/2

014

11/6/2

014

11/17/2

014

11/28/2

014

12/9/2

014

12/20/2

014

12/31/2

014

1/11/2

015

1/22/2

015

2/2/2

015

2/13/2

015

2/24/2

015

3/7/2

015

3/18/2

0150.3

2.3

4.3

6.3

8.3

10.3

12.3

0.75

0.85

0.95

1.05

1.15

1.25

Kina to USD AUD to USD

Conclusions

• PNG should have a serious discussion about policy options to deal with a possible crisis– Not too late – actions can still be taken

• Quantitative restrictions will slow the crisis but is doing significant damage to PNG’s economy

• Moving back to a market-based exchange rate appears to be a key option– But this must now be done in an orderly way

Structure

• External Accounts– The link between flows and stocks– PNG’s Balance of Payments (flows) and

International Reserves (stocks)• External shock– Oil price drop – implications for flows and stocks

• Policy options– Quantitative (regulations)– Price (exchange rate)