By Charles Lee, Candidate for WHP Regional, 31 March 2022
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Papua New Guinea never had foreign currency problems since Independence up until around the year 2000. From 1975 to 2000 our needs were simple and basic and there was not much economic activity. Whatever we produced locally was sufficient to cater for our needs and wants at that time.

It was from 2000 onwards that we started to see a number of significant oil and gas discoveries especially in Hela, Southern Highlands and Gulf apart from other natural resource discoveries. Porgera also started to discover more gold. This saw the influx of new foreign mining officials, consultants, investors and contractors during feasibility studies right up to FEED and construction stages.

The spin-off businesses and new economic activity which emanated from these new projects brought about NEW NEEDS and NEW WANTS both in terms of Goods and Services that we then realized that we did not produce locally and that we had to source from outside of the country. This caused major trade deficits to start to appear in our balance of trade books held at the Central Bank. We were starting to use alot of our foreign currency surpluses at the Central Bank to purchase goods and services oversees that we did not produce locally. Our foreign exchange cash held at the Central Bank was insufficient to meet this new heightened demand.

As a measure to mitigate the rapid depletion of our foreign currency reserves, the Central Bank allowed our commercial banks to open up domestic foreign currency accounts held onshore for businesses and institutions to use to make their own purchases overseas. History tells us that this also proved insufficient.

At that particular time, the government should have passed mandatory regulations and enact into law legislations that direct investors especially miners to repatriate a certain percentage of their exports including dividends earned back onshore and vigorously police it in order to cushion the effects of this downward spiral of our foreign currency account. If I recall correctly this was done but to a much lesser extent and certain concessions were given to investors which defeated the purpose of this regulatory directive.

Foreign businesses operating in PNG started to see this problem becoming worse which would then lock up their capital so they found loopholes and moved their funds which was in PNG Kina to stronger currencies such as the US Dollar and held them off-shore. This then brought about serious immediate repercussions on the strength of our Kina which then caused the value of our Kina to fall to record lows. Word got around throughout the globe and new investors were scared to bring their foreign currency into PNG to invest because we do not have sufficient foreign currency to support their businesses. That’s why new investors have dried up.

Successive PNG Governments then became excited and ambitious and started to borrow aggressively internally against future revenues from these new mines through the issue of treasury bills and government inscribed stock. This saw an immediate surge in domestic interest rates. I’ve seen government bonds paying up to 15% interest, totally unheard of anywhere else in the world. It has borrowed to a point where it can borrow no more which then saw the government start to negotiate concessional loans overseas at 1-3% interest rates. It does not matter. Debt is debt. That’s how we ended up in huge debts. The monetary policy system that our Central Bank is using by design will further increase national debt sadly.

To fix these issues we have to start by cutting back government expenditures on unnecessary and uneconomical four-lane roads including other wish-list expenditures and redirect funding towards creating industries that will produce goods and services that we do not produce locally. This will solve 50% of our foreign currency imbalances. We must start to produce onshore if not all then most of the goods and services that we consume domestically. This will immediately plug foreign currency leakage.

On the regulatory front, the government must introduce MANDATORY legislation targeting the miners and their owners especially to repatriate back to PNG’s foreign currency account a fixed percentage of their earnings. There should not be any concessions, it must be mandatory otherwise it will not work but be in vain. All PNG export revenues (less foreign debt servicing obligations) must be apportioned between foreign currency account held at the Central Bank and domestic government expenditure. It should not all go to government expenditures.

To complement this, we need serious fiscal discipline through the budget and expenditure process to see this through. There will be issues in terms of lack of new roads and bridges as funding is redirected to address this issue as explained above, but these are minor as we chart a new course to fix our economy for the long term.

Once there stability in the economy, the government should then set up a sovereign wealth fund with strong governance mechanisms which our children will need when all our mining activities dry up.