Comments

Hello Richard, Thanks very much for the detailed and well thought through response. I appreciate the reply. I will try to address your points, see what you think. You are right in saying that no matter what the exchange rate is there will be winners and losers. (However I do think you are underestimating the costs to exporters like coffee and oil palm, exchange rates definitely matter to them!). We know that if the exchange rate were 100 times lower, or 100 times larger there would be winners and losers. So then, if every exchange rate has winners and losers, what should the exchange rate be? How do we compare the benefits of any particular exchange rate for some, with the costs of that same exchange rate for others? The two alternatives are for the government to control the rate, or for the market to set the rate. There are benefits and costs to these kinds of regimes. Though over time, the evidence suggests that the best way to maximise the benefits, and minimise the costs is to use a market rate. In this case, the government set rules around the rate, but not long afterwards, commodity prices fell massively. While PNG’s competitors’ exchange rates fell (sometimes dramatically), the Kina did not. If you compared the kina market rate at 1 June 2014 to 1 June 2015, it had actually increased over the course of the year. This is not good for competitiveness. The recent Article IV put out by the IMF (page 15) shows that even if you don’t include the large appreciation of 17% in June 2014, the Kina has still depreciated slower than other regional currencies, this is despite the fact that PNG relies far more on commodities for foreign exchange. http://www.imf.org/external/pubs/ft/scr/2015/cr15318.pdf In this case, it is possible that the government had a good reason to introduce the trading rate bands. However, what is not clear, is that, when coming to the decision to introduce the bands, that the costs of overvaluation were as clear as whatever benefits to overvaluation there were. These costs were then exacerbated by the commodity price falls. Perhaps I am an optimist, but I do feel that most in the government want to do what is best for PNG and it’s people. This article (and the previous two) aims to provide evidence to suggest that, when you use tools to try and take in to account all the winners and the losers, we find that overall PNG would be better off with a faster reduction in the exchange rate, rather than a slower one. In a future article, I will be looking at whether the rate of depreciation has indeed actually sped up. This is not a doomsday scenario, but at the same time it is not a positive one either. Many are not affected in their day-to-day life by the exchange rate. Many are, both directly and indirectly. (Though those who are not affected would also not be affected by depreciation). Opponents of the government and others will gladly sensationalise articles such as this. People will always try to use research to achieve political ends. However, it would be inaccurate to say that the article is suggesting that the economy is at a stand still. Many of those using informal markets will be unaffected, however this does not invalidate the evidence that suggests that the economy is growing slower than if the rate of depreciation of the exchange rate was increased. This is something I thought through very much before writing. It is a fine line to balance trying to get people’s attention to risks associated with various policies, to providing a tone that can be misinterpreted (wilfully or not). Around the most recent MYEFO, the boss of ANZ put out a statement that deftly avoided talking about some of these issues, and instead focussed on the long-term future. Many thought that this meant he rejected the negative analysis, which was not true; the ANZ actually favours further depreciation. Most articles I have seen are positive on PNG’s long-term future and this is a sentiment I share. What I hope the article is suggest that the benefits of a market rate are greater for PNG than the benefits of an overvalued rate. And as such, if the government sped up the depreciation that this would be positive for the people of PNG. Ultimately, this is what I feel we are all working towards, the best future for PNG.

This is all very well in terms of analyzing the figures, but what do people think they are supporting? 'Aid' is taken as a given, but very often when people are asked to define overseas aid they come up with a diversity of responses. It is often equated with charity hand-outs. The information from the survey is not much help unless you also know what people understand by 'aid'.

Hey Rohan, Great research on a critical issue for the PNG economy. It's very interesting to see what's happening in PNG from an international perspective and to have a more comprehensive understanding of what the literature says about the impact of exchange rate manipulation in developing countries. Another factor that must be weighing against any further devaluation is the elephant in the room of interest repayments to government debt held in foreign currency, notably USD. With on-budget interest repayments, which don't include the controversial [http://www.smh.com.au/business/energy/ubs-papua-new-guinea-deal-respected-figures-question-pm-peter-oneills-role-20151012-gk78zo.html] UBS loan, already swallowing up 10% of the 2016 budget any further depreciation would likely push that number up even further. Who knows what would happen to off-budget debt but there's clearly a lot of political interest aligned with keeping it propped up. It will be interesting to see how the Government addresses questions on the exchange rate from potential investors when going after their proposed Sovereign Bond. Cheers, Jonthan

Great analysis Terence. Thank you for undertaking this deeper analysis and explanation. This data helps those of us who try to engage in deeper conversations using deeper information within our networks, colleagues and families. Look forward to seeing more short articles using data and analysis of our current economic state and options and what that means for assertions about why we need to cut aid when it is such a tiny portion of our expenditure as a nation. Makes one wonder what would happen if we used a well informed study approach similar to that done by EPAC on attitudes to tax in the early 90s. You may be familiar with the study - I think Glen Withers led that work.

An interesting article Grant. Taking a broader view though, it's a shame that corruption has ended up subsumed into a mishmash of topics under SDG-16. Both the World Bank as well as the UN have for a number of years now, has rated corruption as the single greatest obstacle to reducing world poverty. According to the World Economic Forum and the World Bank recent data suggests that corruption now costs around 5% of global GDP – or US$2.3 Trillion per annum – and increases the costs of doing business by up to 10% (globally)! Now the third largest industry globally, it's also on the rise. For those of us who have worked at the coal face, this comes as no surprise, as the direct daily impact (and damage) that corruption has on all sectors of society - in particular the poorest of the poor - can be seen everyday. Unfortunately, corruption and the SDG's is yet another case of a lost opportunity, as rather then reducing corruption to the flow of illicit funds (which in itself shifts the focus to transnational financial flows), corruption should have been an SDG in its own rights. By doing this, it would have enabled the selection of a multiple set of indicators / quasi-indicators and measurements that in turn, would have enabled a more contextualised and nuanced approach to the problem. My fear at the moment, is that in its current form the SDGs - when it comes to corruption - will end up a failure, as not only with the topic not get the political focus so desperately needed, but will end up buried behind a host of competing topics.

Thank you for raising an issue of great concern, not only among Pacific Island employees in Aust and NZ but also students who also have the added responsibility of supporting families back home with their limited scholarship allowances.

There are other financial inequalities that conspire against a level playing field for Pacific Islanders. The Internet always promised to reduce the "tyranny of distance", providing the remote scattered island communities with new opportunities arising from globalisation. However in Solomon Islands where I live, and probably other regional countries, would be online businesses, eco-tourism operators and artisanal traders still lack access to online payment systems that support local bank accounts. Telegraphic transfers are not suitable as a general payment system for many reasons, they are expensive and thus prohibit small transactions, and customers expect one-click purchasing. The only real contender owing to it's ubiquity is Paypal. However, it does not support local bank accounts here. This means that Solomon Islanders cannot offer it to their customers as payment system. As far as I know there are no other online payment systems that are as accessible as Paypal that would be available to local people here. For those expatriates and elites who have access to offshore accounts this is no problem. But why is this service - a normal aspect of commercial life in most of the world - not available here? Some time ago I asked Paypal online help about this and received the rather generic reply: “I understand that you want to know why adding a Solomon Islands commercial bank account can’t be added to a Solomon Islander PayPal account. Due to the challenges and complexities associated with the worldwide financial network, we cannot offer the option to add a Solomon Islands commercial bank account to a Solomon Islander PayPal account. We also cannot offer a firm date or timetable for expansion of specific services.” One possibility is that commercial banks here are resisting the introduction of such services. It is certainly true that banking services here are generally second rate compared to what the same banks offer in Australia and New Zealand. If we want true financial inclusion it has to be on equal terms with dominant economic powers. Over several years I have brought this question up in online forums such as the Pacific Chapter of the Internet Society, and with contacts in our Central Bank for instance, but there is no change in the situation.

Do you know if any (and how many) remittances might possibly use bitcoin or cryptocurrencies? Or is this not really feasible for the pacific? See <a href="https://theconversation.com/bankers-are-about-to-ensure-money-transfers-go-underground-34487" rel="nofollow">this article</a> from last year. And <a href="http://cointelegraph.com/news/113171/moneygram-bitcoin-really-is-not-being-used-for-remittance" rel="nofollow">this</a>. There was a lot about this option in 2014 but I have not seen so much this year.

Thanks Nic for an interesting comment. Like Garth you've convinced me I was being too conservative in what I've asked for. Is the Green Climate Fund something that would normally be expected to be funded from aid? (Sorry, these funds are not something I know as much about as I should). If it is, then given the commitment you mention, not only should the govt not cut aid but it should, at the very least, add $50M/yr if it wants its pledges to be anything more than an exercise in robbing Peter to pay Paul. Terence

I just read a tweet stating “Exchange rate brings the economy to a stand-still” and a link to this article. Some comments if I may … Which economy are we talking about? The markets seem to be thriving and of course the other parts of the informal sector that most live in. One resilient thing about PNG is that the bomb could drop and life would go on as normal for many. And it hasn’t (yet) to pay for huge social security entitlements and suchlike that other economies are chained to. Do you mean the Mining sector – well, commodity prices might have something to do with that? And I believe the LNG boast that PNG is already one of their lowest costs producers. Hence a competitive advantage. Do you mean the Agricultural sector – well, oil palm producers say low or high – the exchange rate is a double edged sword. If low – the price of importing fertilizer/spare parts etc. is a killer, if high – the PNG costs of production are greater. Or are we talking coffee? With the ongoing drought, not to mention ongoing structural factors like roads, it’s hard to see a lower exchange rate making much of a difference. Anyway, consistent “quality” to my mind would ensure high demand for this commodity. It’s already a good price. Are we talking the Transport sector? The low price of fuel currently must be a real profitable boon for all transport providers, not to mention others who have fuel as a major cost i.e. PNG Power. Will a lower exchange rate make a difference? Is it Tourism? Again personal security, fear of malaria and suchlike as well as structural & visa issues – seem to be the root cause of slowness in this sector. One bright light does seem to be the recent endeavours in this area though and invest in the sector. Australian tourists I speak to already seem to think that the rate is pretty good i.e. K2 fo $1. How low is low?? I remember when K1=$1. Or perhaps Construction? Imagine the prices of hardware and building materials (most imported) if we have a large devaluation. Will that be good for the economy? Certainly not for anyone thinking of buying a house. I haven’t mentioned Manufacturing as I’m not sure what we manufacture that has a significant impact on the economy. Tinned fish? Forestry? Surely you’re not implying a lower exchange rate would help the loggers become more competitive and that would be a good thing. I’m pretty sure they can sell their product. Likewise with Fisheries. Anyway, every graph I look at has shown a steep decline in the PNG rate against US since BPNG’s actions 18 months or so ago. It is devaluing in a seemingly controlled way and the ridiculous profiteering and exploitation by currency traders has also been managed - as has any wild swings in exchange rates that could happen if hedge funds and that like cast their eye on PNG. If the fact that the rate against the AUD$ and others has held its own is the issue – is that such a big deal? Haven’t those currencies been largely overvalued for some time and they too are depreciating as the US gains strength. If there is capital flight – perhaps it might have something to do with alarming analysis! As for large multi-nationals finding it difficult to send funds out for purchases or other reasons – I’m pretty sure they have repatriated their profits for some years and can’t believe they don’t have ways and means of paying the bills if they really want to during the hard times. These companies move funds around all the time. If they have to keep a larger amount in the country for a period, sobeit. The economy is, after all, growing (faster than Australia's I believe) - with perhaps some big projects around the corner. All our jobs are to keep it growing and steer through these stormy seas. Sorry, you seem to be wearing De Bono’s black hat and I thought I’d put on some other colours for the sake of advocating another point of view and to challenge some assumptions. Not based on international experience but from more micro observations within the PNG context and from living and doing business “on the ground” here. Happy to be wrong – just thought I’d comment in case there is any group think going on.

With the Prime Minister travelling soon to Paris, its also important to look at how the ODA program will be integrated into Australia's commitment to climate financing. In Lima last year, Australia committed A$200 million over four years to the Green Climate Fund (GCF) and recently resumed its role as co-Chair of the Fund. These welcome steps follow a lengthy hiatus where the Abbott government refused to support or contribute to the Fund. A key problem is that neither major political party in Australia has explained how they will contribute our fair share of international climate financing. The current global objective of US$100 billion of public and private funds each year means Australia should contribute more than A$2 billion annually. Recent cuts to the aid budget and the lack of other mechanisms to raise revenue (through carbon taxes, Tobin taxes or the like) means Canberra will struggle to match recent pledges from other OECD countries (Labor relied on the ODA budget for our Fast Start Finance in 2010-12, and refused to use any revenues from the carbon tax for our international obligations). A central pillar of any deal in Paris will be adequate, predictable and sustained climate financing. With most climate funds currently flowing to major energy and infrastructure projects in larger developing nations, our Pacific island neighbours want to ensure that more revenues are focused on adaptation as well as mitigation, and that funding mechanisms are adapted to the capacities of small island states. Minister for International Development and the Pacific Steven Ciobo has pledged that Australia will advocate for the interests of our Pacific neighbours at the GCF. But islanders want to speak in their own voice and have created mechanisms - such as the Pacific Small Island Developing States (PSIDS) group at the United Nations - to advance their own agenda on environment and development.

Thanks Richard. Can you draw out the causal pathway between aid, aid dependence and poorly functioning economies? The title of the post implies that aid dependence has effects, but beyond an assertion that aid dependence exists, and it is bad for economies, the post doesn't clearly spell out the relationship. Keen to get your reflections on this.