May 4, 2016

Foreign exchange issue affecting business houses in PNG : Barker

ECONOMIST and executive director of the Institute of National Affairs (INA) Paul Barker says the foreign exchange (Forex) issue is a big one often referred to as the elephant in the room during business meetings with government. 
According to Barker, it affected pretty well all businesses, as well as many households. 
“Initially, it affected smaller, medium-sized, and particularly PNG-owned businesses and especially those such as retailers and others with a high input of foreign supplies or services and personnel provided from overseas,” he said.
“Larger and well-established firms with long and trusting trading suppliers and especially those that are subsidiaries of larger international firms have had less difficulties. But now all firms, whether importing staple foods like rice, equipment, fuel or spare parts are having difficulties. “There is a multi-hundred million kina backlog in payments owing to overseas suppliers and the overseas suppliers also simply cannot afford to offer sustained credit to PNG firms. 
“The banks are having to restrict foreign exchange into very small parcels (generally K25,0000 which is a very small amount for a major trading firm). 
“The level of imports was high during the period of high commodity prices and during the construction phase for the PNGLNG facilities. Since then, after some lag, the level of imports have tailed off, notably  in the later months of 2015 as domestic economic activity has declined along with the value of the kina, reducing the large trading imbalance. 
“Nevertheless, PNG is a trading nation, which is highly dependent on a wide range of imports, both as industries inputs as well as consumer products. Even most locally manufactured goods require some imported inputs, which must be paid for and there’s a very large backlog in payments for imported fuel, required by most industries.
“The recently agreed financing arrangement for the banks, with IFC, both to provide foreign exchange and for the banks to continue to fund government’s budget deficit and for its operations, will help ease the pressure and support government operations for a short while, but it’s clearly far below the US$1 billion (K3 billion) sought by government from the earlier announced sovereign bond, and it’s clearly only a stop-gap. 
“Enhancing exports is critical to be able to restore the foreign exchange requirements of this economy. There’s little cheer on the horizon at the moment from oil and LNG prices, although some reconciliation and rolling back of the global energy surplus could develop later in the year. The gold price has been rising in the face of global economic and financial uncertainty, and gold has long been PNG’s major export earner, until the commencement of LNG exports; that should also start lifting revenue from the extractive industry if sustained; the restoration of some production from Ok Tedi should also provide forex earnings in due course, even though it’s restoration along with other government expenditure remains heavily dependent upon the domestic financial institutions. A good coffee crop this year and some recovery of cocoa, despite cocoa pod borer, and the continued strong cocoa price, provides at least local economic stimulation.
“This is a time when the Government should be really encouraging the development and diversification of its economy, to generate broad-based growth and employment generation as in the government’s own Responsible Sustainable Development Strategy (STaRS). Unfortunately, this is also the time when Government has also chosen to initiate several new policies which potentially severely undermine the prospects of investment and job creation, particularly by foreign investors. These include the heavy restrictions on foreign investment and ownership in a wide range of industries in the new SME policy, various interventions in agriculture (again related to investment and trading restrictions, and provision of prospective trading monopolies) and aspects of the proposed amendments to the Land Act. 
“Each of these initiatives appears like wolves in sheeps’ clothing, notably inoffensive and in the case of the SME policy, attractive, in apparently promoting extensive PNG-owned SMEs. But the proposed removal of foreign investment in a wide range of business activities, from agriculture to transport and much manufacturing and trading, would effectively cause major disinvestment, loss of jobs, loss of business confidence and capacity to secure capital. These policy initiatives really need to be reconsidered promptly before too much damage is done, removing the damaging components while retaining those related to support local business development, for example.”

THe Natioinal/ ONE PNG