OBG talks to Loi M Bakani, Governor, Bank of Papua New Guinea

Interview: Loi M Bakani

What tools will the central bank use to promote stability and economic growth?

LOI M BAKANI: For price stability the strategy will be to manage excess liquidity through open market operations so that price stability-entailing low inflation, stable interest rates and a stable exchange rate are all maintained. This requires government assistance, through disciplined spending and transferring trust account funds to the central bank. For financial system stability, the strategy is both on-site and off-site supervision of commercial banks and financial institutions for a sound and stable financial system.

For efficient payments system work is under way on a payments system that aims at real time gross settlement of transactions for efficiency of the payments system. Overall, once these changes are accomplished, they will help to produce positive economic growth and increased prosperity.

How will the bank deal with currency appreciation as the economy grows and the Papua New Guinea liquefied natural gas (PNG LNG) project starts up?

BAKANI: The announcement of the PNG LNG project in 2010 coincided with strong commodity prices across the globe. As a result, the level of foreign currency flows into PNG increased. Consequently the kina began to appreciate, especially against the dollar.

The bank adopted a strategy of ensuring exchange rate movements were not too disruptive or volatile. A stable exchange rate is a crucial factor to PNG’s continued economic growth.

Stable interest rates and exchange rates combine to ensure inflation remains at acceptable levels. Price stability is central in PNG to economic development. It increases consumer and investor confidence in both the private and public sectors.

As a result of the high levels of foreign currency inflows, sufficient reserves have been accumulated, which provides us with the comfort that these reserves can help to stabilise any volatility in exchange rates.

The central bank is also able to play an active role as a participant in the domestic foreign exchange market by buying and selling kina to licensed banks to ensure the exchange rate remains stable over the long term. The current assessment is that year-on-year the kina has appreciated by 24% against the dollar.

We are mindful of the impact this will have on the traditional export industries, as well as the effect on the amount of imported consumables entering PNG.

Stimulating competition in the foreign exchange market is also necessary. The large amount of foreign currency flowing into PNG is making foreign exchange a big business. An increased level of competition will result in better service at a lower cost for consumers.

There is massive scope for increasing the number of players in the market. Dialogue has already begun with other financial institutions. Work is being done with both the Tourism Promotion Authority and a number of independent travel agents to this end.

What are the main thrusts and the primary objectives of the bank’s strategic plan for the period between 2012 and 2015?

BAKANI: The main thrusts are underpinned by the core objectives of the central bank, which are to conduct monetary policy with a view to maintaining price stability, building on a stable financial system and to create an efficient payment system.

The payment system in PNG has historically been rudimentary. The time it takes for a cheque to clear is currently far longer than it should be.

Work has already been commissioned on developing a new system able to handle this service in real time. The system was purchased in the US and is being installed. In association with this drive, the Payment System Act, which is outdated, will be modernised and taken to Parliament for approval. The new legislation will cover cash, plastic cards and methods involving modern technology. It will also cover anti-money laundering and reporting of suspicious transactions.