Bank of PNG Board Chairman Mr. David Toua speech on the Business Council Forum of PNG and Australia
I’d like to thank the two Business Councils, The Business Council of PNG and the Australia PNG Business Council, for providing me with this opportunity to speak with the business community about the Bank of Papua New Guinea, recent legislative actions, current challenges, and the road ahead.
Before I do that, let me first acknowledge the staff of the Bank of Papua New Guinea – our central bank.
Change is never an easy proposition to negotiate, and the staff of BPNG have had to endure significant upheaval over the past two years with the appointment of an Independent Advisory Group (the IAG) to review the Central Bank Act, the conduct of a phase one IAG review and subsequent Act amendment in December 2021, and commencement of phase two of the IAG review which is currently underway.
A consequence of the change has been a change in leadership roles. The two most senior figures in the Bank at the time the amended Act was introduced, the Governor and Deputy Governor, were retired as the result of Act amendments, and a significant structural change was legislated that altered the composition, and powers and responsibilities of the BPNG board. More on that later…
The situation right now is that we don’t yet have a permanent Governor, nor do we have any Deputy Governors in place, and several board vacancies remain to be filled. Protracted delays with these appointments are not ideal and we, the Board, are working diligently with the appropriate authorities to have these in place as soon as possible.
Despite this the staff continue to manage the financial system and monetary policy, whilst also facing uncertainty as to the final iteration of the Central Bank Act and dealing with the extra responsibilities resulting from the Act amendments so far.
So my thanks to the staff of BPNG for continuing to do their job so well in trying circumstances!
A bit about the changes now, and their impact and consequences.
It serves us best to first go back to the year 2000, the last time there was a change to the Act, to provide some context to the Bank’s journey.
If you were around in the mid 1990’s you may remember the parlous state of the economy at the time. High inflation, a rapidly declining kina, deficit balance of payments, and only a few weeks of foreign exchange left to trade. The Central Bank actually had to go the RBA with cap in hand to seek emergency funding to keep things afloat, amongst other desperate measures.
Something drastic had to happen, and it did. A change in political leadership saw the late Sir Mekere Morauta appointed as PM, and he set about bringing in the much-needed reform needed to rescue PNG. Among the many great things he introduced, and there were a few, Sir Mekere ushered in the Central Bank Act 2000, ring fencing the BPNG and allowing it the autonomy and independence to effect monetary policy reform and manage the economy towards better times.
That Act has stood the country and the institution in good stead. PNG survived that period of economic turbulence, re-established a strong foundation, and has been able to manage its way through a number of challenging periods since, in no small way due to the smart and independent interventions and activities of BPNG as the country’s financial regulator.
The reason for that trip down memory lane is to emphasise that BPNG as a leading national institution is not broken, far from it. It remains robust, provides timely interventions when required, maintains healthy reserves, and manages monetary policy in a manner appropriate to our unique economic circumstances.
You might ask why change the Central Bank Act at all? That’s not for me to answer, but I will say this. BPNG, through the Board of Directors, is making the changes an opportunity to review and reset, to introduce greater transparency and accountability, to become more stakeholder focused, and to strengthen and modernise its functionality as a Central Bank of the future.
Perhaps the most obvious change brought about by the recent Act amendments relates to the decision-making structure and hierarchy of the Bank. Where once the Governor was also the Chairman of the Board, and the final arbiter on all major decisions, that authority, has been transferred to the Board of Directors, chaired by one of the external Directors. The Board now has responsibility for monetary policy, financial regulation, all other BPNG functions, and the overall performance of the Bank. This governance role will be managed through a number of important committees, as described in the amended Act.
This is a significant modernisation of the traditional Central Bank model and brings with it new levels of shared accountability and transparency in decision making. In order to facilitate a transition to the new structure the Board has developed a Board Charter that sets out the various roles and responsibilities of Board and Management, provides the guidelines for required governance and promotes the independent authority of the institution. That Board Charter is a public document that is posted on the BPNG Website.
Arguably the most profound change is the elevated responsibility of promoting employment and economic growth in addition to maintaining price stability, in the process of formulating and implementing monetary policy. The economists in the room will know about the inverse relationship between inflation and employment, so having a binary responsibility to manage and balance both price stability and economic growth presents a very new and significant challenge to the bank.
This on top of managing an already broad range of functions; monetary policy (as stated), financial regulation, foreign exchange and foreign reserves, national payment systems, PNG’s physical currency, and the governments own banking.
In the coming years there will be much to do to ensure that the BPNG is fit for purpose and robust enough to fulfil its new mandate as prescribed by new amendments, and to find lasting solutions to enduring monetary, financial and economic challenges.
Let me speak briefly to the most discussed of these challenges…foreign exchange shortage.
BPNG is well aware of the issues faced by business in accessing foreign exchange. There are many varied and somewhat complex reasons for this but the fundamental issue is that there is not enough supply of foreign exchange to meet the demand for it.
There are a few things that you should be aware of if you aren’t already.
People often speak about the healthy asset base enjoyed by BPNG. Much of that is the money PNG has secured through international financing for specific purposes, and a significant sum that sits on the balance sheet is offshore and therefore cannot be utilised.
We all know about the country’s heavy reliance on imports and our vulnerability to shock from global events. In order to cushion PNG from these shocks it has been necessary for the BPNG to maintain our currency at a certain value and to provide regular currency interventions to ensure necessary flows.
Longer term we need to move to a freely floating currency, but we can’t do that overnight and we do need to find a sensible way forward if that is to happen.
Earlier, I referenced the parlous state of the economy in the nineties. In 1994 we did run out of cash, foreign reserves were depleted and we were forced to devalue our currency overnight.
We simply don’t want to be faced with that situation again!
Things will be different in future if we have more competition in the financial markets, there is significantly more foreign direct investment, and more project revenue is domiciled. That is something for a broad range of stakeholders to consider and facilitate. The central bank certainly has a role to play in ensuring market conditions can support those developments but BPNG cannot do it alone.
Perhaps there is a way forward in the planned IMF programme signed by GOPNG.
The basic premise of the programme is that PNG will make a gradual move to greater exchange rate flexibility and introduce appropriate mechanisms to enhance monetary policy transmission. The central bank supports such a move, but it will have to be done carefully and advisedly. I really can’t say too much about the programme at this time as things are in the very early planning stages.
Needless to say there will be challenges for all of us along the way, but ultimately, the belief is that it if we manage things appropriately, if all stakeholders buy into the changes, then we will be closer to the trading conditions we all want and deserve.
By way of conclusion let me assure you of Bank of Papua New Guinea’s commitment..
• A commitment to reform
• A commitment to transparency
• A commitment to good governance
• A commitment to sound and sensible economic management
A commitment to PNG!