Papua New Guinea has a high demand to import goods and services for consumers, business and governments.
UPNG Economic Lecturer, Kelly Samof says to facilitate these purchases the country needs foreign currency on a daily basis continuously.
He explains that on the supply side, the main sources of foreign currency are receipts from exports and payments from resource companies such as royalties.
Speaking at the media briefing on Foreign Exchange (forex) today, Mr Samof said given the country’s small and relatively underdeveloped manufacturing sector, there is a high demand to import a variety manufactured goods for households and business use.
However, the supply of foreign currency into PNG has not been sufficient, leading to a chronic forex shortage.
He explained that to deal with this, BPNG began to ration forex, however this has led to a large backlog of unmet orders and delays in access to forex.
In terms of the supply and demand of foreign currency, there has been a chronic shortage of forex since 2014.
Since 2015, BPNG has been rationing the markets access to forex to deal with the shortage, instead of allowing the exchange rate to depreciate.
This has led to a large backlog of unmet orders and also delays in the processing of forex orders.
He added that BPNG must smoothen the supply of forex to match the daily demand, otherwise, there would be longer periods excess demand of forex leading to exchange rate appreciation when there is a large inflow of forex and exchange rate depreciation when there are short periods of excess supply.
Mr Samof further clarified that it is important that BPNG stabilizes the exchange rate to limit exposure to exchange rate risk.
He also stated that there are different policies being discussed to address the forex shortage; for example, requiring SOEs and businesses to remit all revenues to PNG.
Mr Samof warned that whichever, policy is implemented will need to deal with the structural mismatch between demand and supply, and deal with it quickly.