Current challenges facing PNG in the international economy Paul Flanagan Development Policy Centre...
Transcript of Current challenges facing PNG in the international economy Paul Flanagan Development Policy Centre...
Current challenges facing PNG in the international economy
Paul FlanaganDevelopment Policy Centre
Australian National University
Structure
• External Accounts– The link between flows and stocks– PNG’s Balance of Payments (flows) and
International Reserves (stocks)• External shock– Oil price drop – implications for flows and stocks
• Policy options– Quantitative (regulations)– Price (exchange rate)
External Accounts
• National accounting conventions• Current account (goods and services exports
and imports) + capital account (flow of capital such as foreign investment and dividend payments) = Balance of Payments (overall flow in External Accounts)– PNG’s Balance of Payments (past and expectations
from Table 3 of IMF Article IV)
PNG’s Balance of Payments
2010 2011 2012 2013 2014 2015 2016 2017
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500
Overall BoP balance (before oil price shock)
USD
mill
ions
SurplusSurplus
Deficit
Flows and Stocks
• The overall balance of payments is the flow of external income
• A country’s international reserves is the stock of assets held by the central bank from previous year’s flows
• Broadly, one can think in terms of how your net annual income (an annual flow) affects your bank balance sheet (a stock)
• International reserves from previous year + Balance of Payments flows = International reserves at end of year
PNG’s BoP and International Reserves
2010 2011 2012 2013 2014 2015 2016 2017
($2,000)
($1,000)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Overall BoP balance (before oil price shock) Net international reserves (IMF)
USD
mill
ions
Surplus Surplus
Deficit
Current PNG challenge – oil price fall
• External trade shock– Large price fall in PNG’s key commodity export LNG– Oil price fall will lead to an LNG price fall– Background reading – estimated a 35% fall– ANZ says a 42% fall by second quarter 2015
• What are the implications for PNG’s balance of payments and international reserves?– Following analysis assumes a 20% fall in price for
PNG’s commodity exports with no change in export quantities
Oil price fall – PNG BoP
2010 2011 2012 2013 2014 2015 2016 2017
($2,500)
($2,000)
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500
Overall BoP balance (before oil price shock) Overall BoP balance (after oil price shock)
USD
mill
ions
Deficit Emerging Balance of Payments
Crisis
2010 2011 2012 2013 2014 2015 2016 2017
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Overall BoP balance (before oil price shock) Net international reserves (IMF)Overall BoP balance (after oil price shock) Net international reserves (after oil price shock)
USD
mill
ions
Emerging International
Reserves Crisis
Policy Options
• A country must not run out of international reserves (it would stop trade – can no longer pay for imports or capital obligations)
• Quantitative restrictions– Limiting when importers can be given foreign exchange to
pay suppliers – delays can help bolster international reserves
– Limiting who can deal in foreign currency– Stopping various types of imports– Stopping various types of payments
Policy response - regulatory
2010 2011 2012 2013 2014 2015 2016 2017
($4,000)
($3,000)
($2,000)
($1,000)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Net international reserves (IMF) Net international reserves (after oil price shock)Net International Reserves less forward book
USD
mill
ions Emerging
International Reserves Crisis
Policy response – market prices
• International market for PNG’s goods, services and capital flows• Traded with the world through foreign exchange markets• Supply and demand – equilibrium levels can bring balance to
balance of payments– And if the flow is balanced, the stock of international currency
reserves will also become balanced• Sudden appreciation of the Kina on 4 June 2014 difficult to
explain – hurts especially poor rural exporters– Might have soon be returning to more a market-based level– But now have had a major external shock– Exchange rate can be a shock absorber in such circumstances– Australia’s exchange rate depreciated by 16% since June 2014
PNG’s exchange rate
12/11/2
013
12/22/2
013
1/2/2
014
1/13/2
014
1/24/2
014
2/4/2
014
2/15/2
014
2/26/2
014
3/9/2
014
3/20/2
014
3/31/2
014
4/11/2
014
4/22/2
014
5/3/2
014
5/14/2
014
5/25/2
014
6/5/2
014
6/16/2
014
6/27/2
014
7/8/2
014
7/19/2
014
7/30/2
014
8/10/2
014
8/21/2
014
9/1/2
014
9/12/2
014
9/23/2
014
10/4/2
014
10/15/2
014
10/26/2
014
11/6/2
014
11/17/2
014
11/28/2
014
12/9/2
014
12/20/2
014
12/31/2
014
1/11/2
015
1/22/2
015
2/2/2
015
2/13/2
015
2/24/2
015
3/7/2
015
3/18/2
0150.3
0.32
0.34
0.36
0.38
0.4
0.42
Kina to USD
PNG and Australian exchange rates
12/11/2
013
12/22/2
013
1/2/2
014
1/13/2
014
1/24/2
014
2/4/2
014
2/15/2
014
2/26/2
014
3/9/2
014
3/20/2
014
3/31/2
014
4/11/2
014
4/22/2
014
5/3/2
014
5/14/2
014
5/25/2
014
6/5/2
014
6/16/2
014
6/27/2
014
7/8/2
014
7/19/2
014
7/30/2
014
8/10/2
014
8/21/2
014
9/1/2
014
9/12/2
014
9/23/2
014
10/4/2
014
10/15/2
014
10/26/2
014
11/6/2
014
11/17/2
014
11/28/2
014
12/9/2
014
12/20/2
014
12/31/2
014
1/11/2
015
1/22/2
015
2/2/2
015
2/13/2
015
2/24/2
015
3/7/2
015
3/18/2
0150.3
2.3
4.3
6.3
8.3
10.3
12.3
0.75
0.85
0.95
1.05
1.15
1.25
Kina to USD AUD to USD
Conclusions
• PNG should have a serious discussion about policy options to deal with a possible crisis– Not too late – actions can still be taken
• Quantitative restrictions will slow the crisis but is doing significant damage to PNG’s economy
• Moving back to a market-based exchange rate appears to be a key option– But this must now be done in an orderly way