Loi Bakani, Governor, Bank of Papua New Guinea (BPNG): Interview

Interview: Loi Bakani

To what extent are low oil prices affecting the PNG economy, and what stance is the Central Bank taking to counteract volatility?

LOI BAKANI: GDP growth in 2014 was about 10% and the same is expected in 2015, reflecting a full year of production at the PNG liquefied natural gas (LNG) plant. Although domestically this may appear to fall short of expectations, considering outdated higher oil price predictions, it is a positive outcome, especially considering the sluggish global economy.

The fall in oil prices has taken the market by surprise just about everywhere, including PNG, and the LNG revenue shortfall will have an impact on government expenditures, especially considering that a significant component of the gas sales was placed on the spot market. The main task of the government and the central bank under these conditions will be to control the budget and a deficit of PGK2.3bn ($870m) in 2015.

Tight monetary and fiscal policies are not always popular, but there is no other solution in the short term. Having said that, our goal as an administration is to complete ongoing infrastructure projects, while pushing for diversification into more sustainable sectors like agriculture and light industry.

We will also introduce a new player to the banking sector before the end of 2015, and although it will be based in Moresby, the conditions for the licence involve reaching rural communities via retail business. Thanks to modern technology, it is much easier to set up ATMs outside the main urban centres and rely on agency networking, rather than opening up full branches, which can turn into an expensive exercise.

How do you respond to concerns about the lack of hard currency in the banking system, often associated with the trading band introduced in 2014?

BAKANI: The trading band was introduced to address the imbalance in the foreign exchange market, not to hinder economic growth. It is not a secret that several commercial banks may be hoarding hard currency instead of buying it on the spot market. Many offshore banks were also conducting banking business onshore, while the volume of kina transacted through kina accounts overseas reached as much as 50% of the foreign exchange market’s turnover.

The situation needed tightening, and that is why we introduced exchange control measures in March 2015. We are confident that these measures will re-establish balance in the system, while a string of large projects, including OkTedi mining and PNG LNG, will bring additional hard currency in the medium to long term.

So far, we have used our reserves to supply foreign exchange to the market, and regardless of the trade band, we think that the kina’s movement will continue to reflect the market’s fundamentals. Some banks have adjusted quickly to the new environment by diversifying their trading books.

We have also issued a licence for a new finance company under Bank South Pacific, but generally speaking we feel that there are other available products in the market besides foreign exchange. Commercial banks should tap into those in order to improve their financial results, not only banking on fees and charges on products and services. Making money from margins on lending would be much more beneficial to the economy in this period of consolidation.

How will the government finance another deficit budget, in light of the economic climate?

BAKANI: I have been strongly against soft loans in the past, when they come with strings attached, as it is essential for us that new infrastructure projects should create synergies with the local economy. The government is considering issuing an international bond before the end of 2015, as there seems to be a renewed appetite for emerging economies, for example sovereign bonds issued in Mongolia and Sri Lanka. We should be able to raise approximately $1bn, as our standing on the international market has improved as a result of the completion of the Exxon-led PNG LNG project.