Speech by Mr. David Toua, OBE, Chairman of the Board, Bank of Papua New Guinea, at the 2024 Business Advantage Papua New Guinea Investment Conference and Expo
2024 Business Advantage Papua New Guinea Investment Conference and Expo
Brisbane, Australia
12-13 August 2024
Speech: Mr David Toua, OBE
Chairman of the Board of the Bank of Papua New Guinea
Daba Namona, Morning Tru, and Good Morning Olgeta.
I would like to recognise the traditional owners of the land on which we meet, the Yugambeh people, and pay respect to their elders, past, present and emerging.
I extend this acknowledgement to all indigenous leaders here today, from Australia, Papua New Guinea and beyond.
I also thank Business Advantage for invitation to speak at this event, which brings together partners from the public and private sector to discuss investment in our growing economy.
The Bank of Papua New Guinea, as our central bank, has an important role to play in the development of our country.
The Bank’s operations are governed by the Central Banking Act, which was amended in 2021 to clarify our role and strengthen our governance.
The Act sets out our four key objectives.
The first of these is “to formulate and implement monetary policy with a view to achieving and maintaining price stability and promoting employment and economic growth, especially of the non-mineral and non-petroleum sector.”
As we meet today, much of the focus is naturally on investment in the mining sector. But we know that this leads to a two-speed economy, and results in many of the challenges the Bank is facing today.
Challenges that the Board is taking seriously.
On that note, may I recognise and acknowledge the presence of BPNG Governor Elizabeth Genia, and two of the Banks board members, Richard Kuna, the President of the CPA in PNG, and Mark Baker, former CEO of ANZ PNG.
A personal highlight for me this year was to welcome a fully replete Board in February. Along with Mark and Richard, other directors include, Sir Robin Fleming, the former CEO of BSP, former Treasury Secretary Dairi Vele, KCH boss, David Kavanamur, former RBNZ Executive Michael Reddell, and recently appointed Deputy Governor Jeffrey Yabom.
This board composition puts us in strong position to implement the much-needed reforms that will restore convertibility to our currency, make our monetary policy an effective tool for economic management, and improve services and inclusion to our citizens.
So let me now discuss some of the current challenges, and the actions we are taking to address them.
First let me turn to monetary policy.
The riots in Port Moresby in early 2024 were deeply distressing and created uncertainty, economic losses, and the loss of jobs and services vital to our communities.
We reduced the Kina Facility Rate to 2 percent to help those affected recover.
But now, prices of some of our key agricultural commodities are at record levels. Coffee prices are at their highest points since 2022, and cocoa is at the highest price in a decade with no sign of moderating.
The outlook for agricultural commodities over the next 18 months is very positive and we hope to see volume increase to take advantage of this and to put more kina in the hands of our farmers.
And higher international prices also put inflationary pressure on our economy.
As you know, monetary policy is the tool the Bank uses to fulfil its mandate of price stability. And as many of you will know, that tool has been far too blunt in PNG for far too long.
A key reason for this is excess liquidity in the market.
Simply put, the commercial banks in PNG are self-funded, and unlike in many other countries, do not rely on the wholesale market to fund their balance sheet.
In the past year, we have introduced measures to remove liquidity from the market and make monetary policy a more effective tool for stabilizing prices.
In March the Board said that, over the following six months, we envisaged a significant tightening in monetary policy and conditions to help manage rising inflation.
We acted to tighten liquidity in two steps, namely two increases in what is for now our most effective instrument, the Cash Reserve Requirement.
That has resulted in the return of our Government T-Bill rates to those seen prior to COVID.
And in time, we expect to see term deposit rates increase to more normal levels, with more competition helping to put upward pressure on rates.
Just last week, the Board agreed to raise the Kina Facility Rate to 3%. It is our most important signaling tool and demonstrates that we are comfortable with (and actually want) a higher interest rate structure, which is normal for PNG.
The Board also reaffirmed our intention to begin issuing longer dated auctioned central bank bills.
Over time this instrument will be a key part of a more market oriented monetary policy implementation approach.
Alongside effective monetary policy instruments, we must also consider adjustments in the exchange rate to dampen demand for imports.
Let me now turn to foreign exchange.
I will start by noting that the current challenges we face have been building for over a decade, since the first attempts to peg our currency high were made as the last resource boom came to an end.
These were thought to be temporary measures, but as we all know, they remained firmly in place for far too long.
This board inherited an unenviable position.
We simply cannot continue to keep the currency artificially high.
Foreign currency shortages have been a persistent handbrake on growth, leading to lower investment, reduced competition in key sectors and ultimately higher prices.
The IMF has estimated Papua New Guinea’s economy would be 3.0 billion dollars larger had we not introduced currency rationing in 2014.
Much of that growth would have been in the non-resource sector.
The restrictions have stopped our national companies from growing and has taken jobs and wealth from our citizens.
Thanks to the ongoing restrictions, particularly related to resource projects, much of our export revenue is not repatriated to Papua New Guinea.
Instead, it is held offshore, contributing to the accumulation of unmet foreign exchange orders with our commercial banks and our Authorised Foreign Exchange Dealers.
In 2023, foreign currency inflows amounted to around 5.6 billion dollars in contrast to total export receipts of around 14 billion dollars.
Had even half of those 14 billion dollars been brought onshore, we would be in a far stronger position this year.
In 2023 we began a focused program to return the kina to a convertible trading currency.
This process has been slow and cautious and reflects our deep understanding of the impact currency movements have on both our exporters and our importers.
We must balance the interests of all parties with the resources we have at our disposal.
While in 2023 we more than doubled the amount of foreign exchange in the market, it was still not enough to satisfy unmet demand.
So an important part of our response has been to carefully and slowly adjust our currency, taking measured steps to ensure the least disruption to our businesses and to give them opportunities to adapt to new circumstances.
I will take this opportunity to comment on media coverage we have seen recently.
Contrary to comments made the bank doesn’t premeditate annual devaluation targets.
The Bank is engaged in a careful and managed process to regularly and frequently assess the need for adjustments to our currency to manage the competing needs of all businesses in our economy.
We do this prudently and without making the sorts of alarmist statements to the media.
We know that the economic situation we see today is not reflective of our situation in a few months’ time, let alone years.
As it is, the central bank continues to intervene in the foreign exchange market to alleviate demand pressures.
We will continue to act with caution and with a careful eye on the benefits and costs of our actions.
While outstanding orders remain at a monthly average of around K1.2 billion, the time in meeting these orders has been reduced to 4-6 weeks, and I hope you are seeing these changes in your business engagements with your commercial banks.
Finally, I’ll discuss how government spending is affecting our economy.
The total level of Government debt is currently K57 billion, or 50.5 percent of GDP, of which around K31 billion is domestic and K26 billion is external.
To put this in perspective, coming out of COVID Fiji’s debt to GDP ratio is around 83 percent of GDP.
Indonesia’s is 45.3 percent, while in Malaysia it is 60.3 percent.
So, in and of itself, it is not a remarkable statistic.
The Government has reined in spending and this quarter it was lower than this time in 2023 by around K1 billion.
In the six months to June 2024 the Government recorded a surplus of K246.5 million, compared to a deficit of K2.8 billion in the corresponding period of 2023.
Fiscal policy appears to be working alongside monetary policy and foreign exchange management to help moderate inflation and stabilise our economy.
So – what next for the Bank?
A major priority for us is modernising our national financial backbone to support a diverse and thriving finance sector.
We are pleased to see two new commercial banks entering our market – congratulations to Credit Bank and TISA Bank and we welcome the service and innovation you will bring to our country.
National Banking Corporation, formerly People’s Microbank, is also nearing the completion of their process to receive a commercial banking license.
The launch of three new banks demonstrates confidence in our economy.
Still, there is more we can do to create an environment for greater financial inclusion, and this includes developing the backbone infrastructure that supports the growth of the financial services sector.
We want as many new participants as our market can support, and particularly ones with a focus on inclusion for those in rural and remote locations.
We are looking carefully at our payment’s infrastructure, and the role the Bank plays in supporting the entrance of new participants, products and services.
We need to make sure we are ready for the innovations we can expect over the coming decade.
And this also means it is time to bring some services to an end.
Cheques are no longer used in many countries. They are subject to fraud and there is a high cost on our commercial banks in verifying their authenticity and validity.
The end of private sector cheques, and the coming end of public sector ones, will remove one costly overhead from the system and encourage our people to move to more secure methods of transaction.
I’m pleased to note we’ve had very few problems, and the majority of the population has adapted quickly to this change.
Going forward, we expect more use of biometrics, and our Financial Analysis and Supervision Unit has recently released guidance to help commercial banks use digital identity products.
We can expect virtual cards and cardless transactions to replace physical cards, and smartphones will be used in even our remotest areas.
At the Bank of PNG, we are preparing for this digital future. And our Board is determined to deliver on this promise.
There is no doubt that this is a challenging time for our country. The global economic headwinds are not in our favour.
But you can be assured that the Board, the Executive, Management and Staff of the Bank of Papua New Guinea are working hard to take us forward and meet our objectives for the benefit of the people of Papua New Guinea.
I thank you for your time today and welcome further discussion on these important topics.