1. Current challenges facing PNG in the international economy Paul Flanagan Development Policy Centre Australian National University

2. Structure External Accounts – The link between flows and stocks – PNG’s Balance of Payments (flows) and International Reserves (stocks) External shock – Oil price drop – implications for flows and stocks Policy options – Quantitative (regulations) – Price (exchange rate)

3. External Accounts National accounting conventions Current account (goods and services exports and imports) + capital account (flow of capital such as foreign investment and dividend payments) = Balance of Payments (overall flow in External Accounts) – PNG’s Balance of Payments (past and expectations from Table 3 of IMF Article IV)

4. PNG’s Balance of Payments

5. Flows and Stocks The overall balance of payments is the flow of external income A country’s international reserves is the stock of assets held by the central bank from previous year’s flows Broadly, one can think in terms of how your net annual income (an annual flow) affects your bank balance sheet (a stock) International reserves from previous year + Balance of Payments flows = International reserves at end of year

6. PNG’s BoP and International Reserves

7. Current PNG challenge – oil price fall External trade shock – Large price fall in PNG’s key commodity export LNG – Oil price fall will lead to an LNG price fall – Background reading – estimated a 35% fall – ANZ says a 42% fall by second quarter 2015 What are the implications for PNG’s balance of payments and international reserves? – Following analysis assumes a 20% fall in price for PNG’s commodity exports with no change in export quantities

8. Oil price fall – PNG BoP

10. Policy Options A country must not run out of international reserves (it would stop trade – can no longer pay for imports or capital obligations) Quantitative restrictions – Limiting when importers can be given foreign exchange to pay suppliers – delays can help bolster international reserves – Limiting who can deal in foreign currency – Stopping various types of imports – Stopping various types of payments

11. Policy response - regulatory

12. Policy response – market prices International market for PNG’s goods, services and capital flows Traded with the world through foreign exchange markets Supply and demand – equilibrium levels can bring balance to balance of payments – And if the flow is balanced, the stock of international currency reserves will also become balanced Sudden appreciation of the Kina on 4 June 2014 difficult to explain – hurts especially poor rural exporters – Might have soon be returning to more a market-based level – But now have had a major external shock – Exchange rate can be a shock absorber in such circumstances – Australia’s exchange rate depreciated by 16% since June 2014

13. PNG’s exchange rate

14. PNG and Australian exchange rates

15. Conclusions PNG should have a serious discussion about policy options to deal with a possible crisis – Not too late – actions can still be taken Quantitative restrictions will slow the crisis but is doing significant damage to PNG’s economy Moving back to a market-based exchange rate appears to be a key option – But this must now be done in an orderly way

16. Structure External Accounts – The link between flows and stocks – PNG’s Balance of Payments (flows) and International Reserves (stocks) External shock – Oil price drop – implications for flows and stocks Policy options – Quantitative (regulations) – Price (exchange rate)