Commercial bankers

Bankers sceptical of PNG reform package

By Sam Vulum

in PNG have cast doubt on the success of the government’s economic reform package. They said after a meet ing on August 10 that they supported the government’s overall objective of stabilis ing the Kina but were unsure whether the measures would be successful.

The bankers said while they were not criticising the quality of economic advice being offered to the government, they were not convinced that the changes to monetary policy would provide the neces sary benefits. The measures announced by prime minister Bill Skate also included a requirement for commercial banks to hold 10 per cent interest-free deposits with the Central Bank, widening the foreign exchange market by issuing licences to non-bankers as well, and shortening the period for exporters to keep their foreign currencies off-shore.

“There is some doubt as to the veracity of the assessed impacts on reserves and the value of the currency... The states foreign exchange inflows associated with logging, mining and petroleum may be overstated,” the bankers’joint statement said. They said mining and petroleum companies had con tractual agreements that permitted them to hold export earnings off-shore for three months. “Unless they agree to modify their contracts, export earnings will, most like ly, continue to remain off-shore”. The Bankers and the Central Bank had wanted a number of other measures to support the Kina including a proposal to raise the Minimum Liquid Assets Ration (MLAR) from 20 per cent to 30 per cent to dampen lending, and also for the Central Bank to set a maximum lending limit. However, these were not included in Skate’s eco nomic reform package. Instead they intro duced the CRR and reduced the MLAR to zero, with the government having the option to vary and further tighten mone

tary policy. "The Banks believe MLAR to be an effective monetary policy tool and the banks’ preference was to raise MLAR to 30 per cent in order to dampen lending.

We believe this was also the preferred option of the BPNG before the govern ment’s announcement,” the bankers’ said.

Meanwhile, interest rates are expected to rise sharply - by as much as five per cent when the economic measures become effective. The rise in rates is being fuelled by the demand that commercial banks deposit 10 per cent of their funds, interest free, with the Central Bank.

The introduction of the CRR represents a significant change to the structure of the banking system’s balance sheet, and is an extra tool for tightening monetary policy.

As a result of this, commercial banks will now be required to move about K 250 mil lion to K3OO million in treasury bills, earn ing high interest rates, to the CRR. To recover the loss of earnings, commercial banks said they would have to raise lend ing rates. “In effect, the CRR is, potential ly, a significant additional tax on the bank ing industry of around K5O million and means that 10 per cent of each bank’s deposits are unable to be invested to achieve a return,” the bankers said. “The cost of this change to deposit investment options available to the banks in their overall balance sheet management will ini tially be passed on to borrowers, and over time, shared between depositors and bor rowers,” the association said. The bankers said they expected the interest rate hikes to be “temporary”, possibly for three months, but the time would depend on the Central Bank’s future policy on making treasury bills available and the rate they pay on deposits.

“If the government, through the BPNG, do not make treasury bill investments available in which banks can invest, banks will have surplus liquidity un-invested and will quickly reduce the interest rates they are paying on deposits,” the bankers’ state ment said. ■