PNG went into independence with a ‘hard Kina’ policy, which was essentially a commitment not to engage in nominal depreciation. The Kina was originally pegged to the Australian dollar, but, after a couple of years, the peg was changed to a basket of currencies. As the Australian dollar weakened over this period, the Kina appreciated against it. The hard Kina policy was softened over the course of the 1980s (Goodman et al., 1987), but the peg remained. With the closure of the Panguna mine in 1989, the government depreciated the Kina by 10 per cent in response to the loss of foreign exchange. There was then a period of expansionary fiscal policy, leading to the depletion of foreign exchange reserves and a balance of payments crisis in 1994. In response, the Kina was again depreciated, and then floated, and it began a period of rapid depreciation. The Kina fell against the USD every year to 2002, with major falls in 1994 (17 per cent), 1998 (30 per cent), 1999 (19 per cent), 2001 (18 per cent) and 2002 (14 per cent), at which stage the Kina was only one-quarter of its pre-float 1993 value.
Then, in 2003, with the start of the resource boom, the Kina began to appreciate again, reaching a high of USD0.48 in 2012. The end of the resource boom and LNG construction in 2013 saw the resumption of depreciation, but after a couple of years, the government introduced exchange rate rationing and brought the Kina back under a de facto crawling peg to limit further depreciation. The shift from a floating to a pegged exchange rate sounds like a return to the hard Kina policy of independence; however, the crucial difference is that now with queueing to obtain foreign exchange to purchase imports, the Kina is no longer convertible. There is little support for depreciation; at the same time, the shortage of foreign exchange is the primary complaint of business.
Data notes on foreign exchange
The figure below shows the value of the Kina in real terms, using data from the World Bank on PNG’s real effective exchange rate. The figure shows that the Kina is almost back at its pre-float hard Kina level, once inflation is taken into account in both PNG and its trading partners. The fact that commodity prices are significantly above their value at independence, and that the resource sector as a whole is much bigger than at independence might support this as a reasonable outcome. However, the PNG Kina was widely regarded as overvalued in the early years of independence (see, for example, Goodman et al, 1987, p.65). Extensive import rationing implies that currently the currency is certainly overvalued. This is linked to the fact that, as is discussed below, a declining share of resource sector revenue (and thus foreign exchange) is finding its way into the rest of the economy.
The figure below shows foreign exchange reserves. A prerequisite of the hard Kina policy was to have sufficient reserves to meet demand for the Kina at the exchange rate set. In fact, however, foreign exchange reserves fell over time as a ratio of months of imports most years starting in the late 1970s. In this sense, the balance of payments crisis of 1994 was a long time coming. Despite the macroeconomic reform program mounted in response to that crisis, there was a second balance of payments crisis in 1998–99, also evident from the figure. Click the legend titles to compare reserves in US dollars versus reserves as months of imports.
Data notes on foreign exchange
Next series: Fiscal data