Monday, 30 March 2015


by Mr Loi Bakani Governor of the Bank of Papua New Guinea

This statement supports our report on this blog entitled Introduction to International Economics. In our report, we wrote to explain the role of the Reserve Banks of the world in setting monetary policy to maintain price stability. In this country, we have the Bank of Papua New Guinea. Please click:

introduction to international economics - family positive ...
Mar 11, 2015 - INTRODUCTION TO INTERNATIONAL ECONOMICS .... That means that 
families have to budget more tightly and not spend so much on luxuries. ..... But it is the 
degree of support that the aid can give to improving life in the .

We explained the role of Reserve Banks as a coach being pulled by a team of horses and driven by the coachman. If the horses were galloping too fast, he would rein in and slow the coach down. If the horses were too slow, he would let the reins go loose and crack the whip to speed up the coach.

The Monetary Policy Statement sets out the key factors that are involved according to coachman Mr Bakani. There is price stability, kina exchange rate, production and export of Liquefied Natural Gas (LNG), high economic growth, expansionary fiscal policy, high import demand, net inflows and unauthorised banking business of foreign banks.

Other key factors include Gross Domestic Product (GDP), non-mineral sector, depreciation of the kina, balance of payments, annual inflation outcome, international oil prices, global inflation, balance of payments, gross foreign exchange reserves, depreciation of the kina against the US dollar, supply of foreign currency,  investment in the non-mineral export sector especially agriculture, fisheries and forestry, Sovereign Wealth Fund (SWF).

Can you see the big picture? Let us start from the world picture. The key to economic stability is the international economic scene. The PNG kina has to stand strong against the major world currencies mainly the US dollar. There has to be inflow of international currency to PNG. This is achieved mainly through sales of LNG.

This country also requires foreign exchange reserves that currently stand at K5 billion kina. Mr Bakani expresses concern at unauthorised banking business of foreign banks taking foreign and domestic currencies out. We all read that there have been reports of a certain ethnic group illegally exporting PNG currency. The Bank of PNG needs to control the outflow of currency.

Mr Bakani points out that expansionary fiscal policy accompanying high economic growth increases the spending of the community and produces high import demand. More people want a car imported from Japan. Out goes the PNG currency to an overseas source.

There are international factors that reduce the economic stability of PNG. There is the reduced price for world oil. There is a drop in industrial production in major countries which will reduce the mineral market. This will affect the strength of the kina and the inflow of foreign capital. There will be depreciation of the kina.

The Bank of PNG has to take steps. High import demand can be reduced with a rise in interest rates. Funds can be released from the gross foreign exchange reserves which last year stood at K5 billion though this should be a last resort. Deficit budgets can be strengthened as a last resort after spending has been trimmed.

Mr Bakani refers to the Sovereign Wealth Fund before parliament to prudently manage revenue inflows from LNG and other mineral projects. The PNG coachman points out that all revenue inflows should go through the Bank of PNG.

The most important site of investment has to be in maintaining the coach. Mr Bakani refers to Open Market Operations (OMOs) that involve the auction of Central Bank Bills (CBBs), Treasury Bills, and inscribed stocks to Other Depository Corporations and general public with Repo transactions with Central Banks.

The nation invests in itself. In Australia, banks have to invest in Statutory Reserve Deposits (SRDs)

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