NRI analysis on FOREX shortage

Papua New Guinea (PNG) is a small open economy that relies heavily on the mineral, petroleum and agriculture sectors.

These sectors contribute meaningfully to gross domestic product, export earnings, and formal employment. Export earnings directly influence the balance of payments (BOP) position. PNG has recorded both BOP surplus and deficit since political independence.

The National Research Institute (NRI) Spotlight Vol. 17, Issue 9, titled "Does Foreign Exchange shortage affect balance of payments in Papua New Guinea?" by Dr Thomas Wangi, Senior Research Fellow at PNG NRI looks at how foreign exchange shortage issues affect BOP, and suggests policy recommendations to address it.

The paper argues that foreign exchange shortage has occurred because the local economy is experiencing a low supply of United States Dollars and other foreign currencies such as Australian and New Zealand Dollars in its reserves to effectively conduct international trade.

The shortage in foreign exchange restricts the ability of importers to buy foreign goods and services, to repatriate profits and dividends to offshore bank accounts, and government to service its external debt repayments. This implies that businesses are importing fewer goods and services than their normal volumes, and foreign investors are transferring less profits and dividends than anticipated. 

This article established that the shortage has impacted the current account in favour of exports, and capital and financial accounts in favour of inflows, which has partly painted positive impressions on BOP positions in recent years.

Policy interventions:

The government may have to undertake following policy suggestions to improve foreign exchange shortage:

  1. Support private sector to expand domestic production and export volumes;
  2. Negotiate with project developers in the mineral and petroleum sectors to keep their operational bank accounts onshore, and 
  3. Improve earnings from resource projects through increased shareholdings and tax incentive reviews.

The Publication can be accessed on the PNG NRI website.

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