PNG looks to securing

financial assistance

By Brian Tobia

The Papua New Guinea government is desperate for foreign exchange capital to build up its foreign reserves and will grab at any options available else it will never recover from operating in deficit.

Its very vital SUS2SO million bond issue has been delayed until the market condi

tions improve.

Adequate foreign reserves are needed to bring the country into the Year 2000 and the bond issue is an important facility that can help raise capital necessary to fund the country deficit budget for this financial year, says Central Bank Governor Morea Vele.

A budget support loan from the World Bank will still be negotiated although the bond issues looks promising because PNG

needs to boost its foreign reserve position.

He said the bond issue will be pursued as well as other options which are open to PNG like the World Bank/Intemational Monetary Fund loan.

In January, the World Bank had done an economic survey and is in the process of finalising a draft report fater which dis cussions with PNG will commence again.

“Even if we were to reach some agree ment with these two institutions, we are looking at the end of the year for any drawdown of the financial assistance,” said Mr Vele.

“So all options are open and it is a question of which one can be drawn down.

“If one becomes successful, it does not mean the government will not go back to others.

“We are at the stage where we need to

build up our reserves ... so if one comes earlier and some come late, we will take care of all of them,” he added.

With the decline in the value of the kina, drop in gold, silver, copper, oil and agricul ture commodity prices on the world market which make it difficult for PNG to be com petitive internationally, the bond issue is really vital.

PNG with the rest of the Asia/Pacific region has gone through some difficult financial crisis together with drought affecting commodity exports. Other coun tries have quite large IMF assistance but PNG has yet to get some assistance and has managed quite well in 1997/98 fiscal years.

But things are very tough and “I think our efforts have to go into securing some form of financial assistance.”

Mr Vele said PNG needed more than “adequate foreign reserves” to take the country into Year 2000 - there is sufficient reserves though.

The roadshow for the SUS2SO million bond issue has been a tremendous success but its launch has been delayed until mar ket conditions improve,” says Mr Vele.

The roadshow was very successful and “we now have investors who know about PNG as far as the bond issue goes because it is the first ever by the government to sell bonds on international financial markets”.

“But what has happened quite unfortu nately was that the timing was completely out of our control ... at the last day of our roadshow (May 14) the United States rates came out and it was higher than what the market had.

“So the market has been a bit nervous in the last expected two weeks and in fact the US Treasury Board rates have gone up by about a percentage point,” he added.

This is why the timing of the launch of the bond issue is on hold until the market settles down.

An assessment will then be made of the market conditions and the government will make a decision on when to launch the bonds and prices at which they will be sold.

“Unfortunately it is outside anyone’s control in PNG that the market has turned nervous ... he added.

The kina does not have to return to the values achieved during the “hard kina poli cy” era, but it must be restored to levels

which made it a strong and respected curren cy. Any improvement in the export prices for crops is offsetted by higher costs for fuel, fertiliser, transport, food and the burden of high interest rates and high inflation. There is need for a commitment to restore credibil ity to the management of the economy and value to the national currency.

However, PNG must reject completely any suggestions that a collapsing currency is good for the nation and work together to rebuild the currency’s value and its interna tional credibility. Bank of South Pacific managing director Noel Smith believes there is real hope for improved economic condi tions in the second half of 1999. “Despite concerns about the devaluation of the kina and the high domestic interest rate regime, there are real prospects for the turn-around in the second half of the year ... my view is that the exchange rate will strengthen but by how much, I do not know,” said Mr Smith.

He said the public have to come to term with the fact that PNG is an import depen dent economy and the days of a strong kina against major currencies are gone.

It is important to understand that a lower currency value has improved the competi tiveness of the PNG economy - the rural sec tor for example has benefited significantly from increased commodity revenue. A lower kina would encourage foreign investment and in the long term would be of benefit to the PNG economy. The challenge for PNG now is to achieve private sector growth, development of the manufacturing industry, creation of non-mining sector employment, maximisation of rural sector productivity and reduction to PNG’s dependence on

imported goods. With sentiment now posi

tive regarding the budget funding support which was made available in late June, (after this issue went to press) the country may see a relaxation of the current tight monetary policy and a reduction in real domestic inter est rates. However, it is absolutely crucial to finalise the offshore funding at the cheapest possible rate as soon as possible. Mr Smith added that there is ample liquidity in the banking system to comfortably meet demands on the kina and with bolstered for

eign currency reserves, the positive impact

of the stock exchange establishment and sea sonal coffee revenue flows, improved eco nomic prospects are realistic. ■