Interview: Mark Baker
In what way do you see the shortage of foreign exchange in Papua New Guinea developing?
MARK BAKER: The kina has never been a widely traded currency; the only buying and selling of the currency is for customer orders, and from this perspective it has always been thinly traded. This has created some volatility as the economy absorbed the $20bn PNG LNG project. The regulators have tried maintain financial stability and are doing the best they can with the relatively limited mechanisms they can bring to bear. At the end of the day, the economy is still not diversified enough to easily absorb projects of this size and the short-term imbalances that are created.
The growth in the economy from 2009 to 2013 was driven by elevated import demand, as contractors on the PNG LNG project brought in large amounts of foreign currency and converted this to kina. Now in 2017 – with less foreign currency coming in – we can see that while import demand is still in an elevated state, there is an inherent mismatch between supply of foreign currency and demand for it. Other external shocks, such as the dramatic fall in commodity prices in early 2016 and the temporary closure of the Ok Tedi Mine, have exacerbated the situation. However, in late 2017 there was some respite after a fruitful year in the coffee market and the reopening of the Ok Tedi Mine.
In my own view, even if the value of the kina falls significantly, this does not mean that PNG’s exports will increase under the assumption that they will become more competitive. This is because the country’s existing export commodities are already being fully sold at international market prices. The issue is more one of increasing PNG’s capacity to export, particularly agricultural products, which will broaden the economic base of the country. On the import side, a significant reduction in the value of the kina would drive imported inflation, which would itself have social implications.
Some possible solutions include external borrowing, such as a sovereign bond, which would provide some relief. Timing and price are important factors, and although there have been discussions around this option, it is unlikely that would progress until 2018.
How can banks encourage more of the unbanked population to open accounts?
BAKER: In terms of returns, branch banking is relatively difficult compared to other markets. For example, due to security concerns cash needs to be flown into branches outside of Port Moresby, which immediately introduces a significant cost. This makes the standalone returns on a branch network quite marginal. Digital channels are a better option for expansion. Digicel did a good job establishing the infrastructure and mobile network to allow access to people who did not have mobile services before. That being said, we have still not seen penetration of financial services rise to expected levels when compared to regions in Africa, for example.
It is difficult in PNG because of the low level of financial literacy, which is something all of the banks are working to address. However, convincing people to open a bank account can be a hurdle in itself, and then adding the element of moving directly to mobile banking is another additional challenge. However, there is a large amount of cash circulating in PNG outside of the formal banking system that the central bank is keen to absorb, although the remoteness of many villages is a challenge as it is difficult to reach people. Fortunately, even though they are very remote, in many cases they can still get a signal on their mobile phone.
It is an interesting situation in PNG, as the best way to encourage more people to join the banking system is through digital means. I believe that the role of banks in this country is to think more deeply about partnering with other companies that already have good distribution networks in place. No sector in particular will be able to provide the solution; there will need to be cooperation and synergies established to attract the unbanked population to the formal banking system.
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