Interview: Loi Bakani
How can the banking system minimise vulnerability to shocks related to Covid-19?
LOI BAKANI: Macroprudential policy remains the first line of defence for the banking system. There needs to be greater focus on systemic risks and a shift away from traditional, idiosyncratic policies. Countercyclical capital buffers, as well as other cyclical and structural macroprudential policies, are becoming increasingly necessary. Narrowing the coordination gap between macroprudential and macroeconomic policies – including monetary policies – is an important step. Countercyclical monetary policies provide another layer of defence. The recent lowering of the cash reserve ratio (CRR) for commercial banks from 10% to 7% is one example of this. Pursuing stringent countercyclical monetary policies will help to minimise vulnerability to liquidity and credit shocks. The major contrast between pandemics and other macroeconomic headwinds is that the former are accompanied by restrictions on physical movement and disruptions to the supply chain, which slow economic activity like the provision of financial services. Broadening the coverage of digital banking and financial technologies in Papua New Guinea could potentially lessen the adverse effects of external shocks, particularly the risk of disruptions to the provision of financial services. Liquidity remains a key concern for financial institutions during periods of economic shock. Due to the lack of an active secondary financial market, holders of government securities find it difficult to sell off when liquidity is required. The development of a secondary market will help minimise vulnerability to the global pandemic by enabling key economic players access to liquidity when needed.
What are your priority monetary policy initiatives for maintaining economic stability?
BAKANI: Price stability is the main objective of monetary policy and supports long-term economic growth. In recent years prices have remained relatively stable, with annual inflation of 3-4%. Given the stability of inflation and other macroeconomic indicators, in 2019 the central bank, BPNG, eased its monetary policy stance. It was eased once more in March 2020 in response to the economic impact of Covid-19. In light of external headwinds, growing public debt and the foreign exchange (forex) shortage, BPNG initiated policies to ensure macroeconomic stability and CRR reduction. These included measures to provide forex to the market while diffusing liquidity: commercial banks were directed to secure BPNG approval before issuing a forex loan, ensuring that the limited forex available was given to priority sectors. BPNG has also taken steps to stabilise the exchange rate – supported by intervention policy – to minimise the threat of inflation and risk on external debt. Meanwhile, the policy signalling rate – the kina facility rate – was gradually reduced from 6.3% in June 2019 to 3% in March 2020. The reductions were made to support lending and spur economic activity during the period of economic downturn. BPNG also implemented a quantitative easing programme wherein it will buy back government securities before maturity.
To what extent will the IMF loan application impact business sentiment in PNG?
BAKANI: The successful IMF loan application should have a positive impact on business sentiment, depending on where the funds are spent. An extensive share of private sector businesses is dependent on public spending, particularly capital expenditure and the government’s small to medium-sized enterprise policy. The IMF loan will enable the government to expend its capital budget – on which a large portion of private sector businesses rely. This would fuel demand and drive economic activity, as well as impact business sentiment. However, the additional funding will have a limited impact on recurrent expenditures, such as personal emoluments and debt repayments, which have been reduced as a result of the Covid-19 crisis.
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