The Papua New Guinea National Research Institute (PNG NRI) is pleased to release it’s latest publication as PNG NRI Spotlight Volume 13, Issue 6 authored by Dr. Francis Odhuno, Senior Research Fellow and Program Leader of the Institute’s Economic Policy Program.
Keeping the novel coronavirus (COVID-19) at bay is currently PNG’s nightmare; a much as it is a public health scare. The threat of widespread COVID-19 infections is forcing the country’s open export-dependent economy into spin. PNG’s economic trouble is worsened by the the extent to which COVID-19 is continuing to spread across the globe. As trading partner countries close their borders in an attempt to control the virus, less foreign exchange is being earned in PNG, while the risk that foreigners may suddenly expropriate their investments is also high. With no vaccine for the virus in the near future adding to the uncertainty, investors prefer holding financial assets, and the turbulence of foreign exchange rates caused by the pandemic becomes a serious policy concern for the Government.
Indeed, history suggests that major disease outbreaks often have adverse effects on financial asset prices, including the foreign exchange rates. So, as a component of its Economic Stimulus Package in response to the COVID-19 threat, the government is implementing key monetary and fiscal policies aimed at maintaining low and stable inflation, and to smooth fluctuations in the exchange rate. Can the daily fluctuations in the number of new COVID-19 infections worldwide be blamed for daily fluctuations in exchange rates in PNG?
Using daily data compiled by the European Centre for Disease Prevention and Control (ECDPC) during the first three months of the pandemic, the author found that the US dollar value of PNG Kina does not respond to news of new COVID-19 infections worldwide. In. contrast, there is a near synchrony between the bad news about COVID-19 infections worldwide and the Australian dollar (AUD) value of the PNG Kina, especially towards the second half of March 2020 when the number of new infections was skyrocketing. The author concludes that the difference is probably because unlike the price of the AUD, the price of the US dollar (USD) in PNG is managed by the Central Bank, hence its non-response to world-wide COVID-19 shocks.
The author argues that since PNG’s contribution to the world market is small, it cannot influence international prices of global currencies; so policy options that can help mitigate exchange rate fluctuations in PNG are limited. Strict foreign exchange controls over currency (mainly USD) trading may help in the interim. But the more important fact is that the COVID-19 scare provides the opportunity for the government to rethink how it manages the benefits from mineral, petroleum and gas exports by a Soverign Wealth Fund (SWF). Instead of debt and foreign aid, the SWF, where it is already established and adequately funded, would have been used to finance the stimulus package to support PNG businesses and individuals to recover from the ravages of the COVID-19 pandemic.