Kina ‘peg’, FX shortage slowing growth

The decision to peg the Kina against the US Dollar in 2014 and the current foreign exchange shortage has contributed to slow economic growth in the country.

Westpac director and senior economist, Justin Smirk, said while there were positives to the introduction of the trading ban on the Kina, there were also implications.

Smirk said the current situation constrains local business expansion and creates a tightening in the Kina market.

Smirk said the decision to peg the kina in July 2014 ensured currency stability, prevented mass depreciation and created certainty in the Kina.

However, because the Kina is dependent on how much volume is traded, the shortage of foreign exchange will affect local businesses who import, and potential investors.

“So there’s two breaks right now through this controlled Kina. One is that it’s constraining local businesses’ ability to expand and grow, (and) it’s creating tightening in the Kina market which means there’s not enough Kina in the system and so everyone starts borrowing from each other.”

Smirk stated during his visit that the Kina will weaken further over the next couple of years due to the weakening of commodity currencies in Australia, New Zealand and Canada.

He said it is now for the bank of PNG to manage the effects.

“The skills now is how does the Central Bank manage that, whether it’s depreciating the currency or how they liberise the exchange rate to allow some relief to come through in the system.”

(Westpac director and senior economist, Justin Smirk)

Cedric Patjole