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The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market

Author

Listed:
  • Davies, Martin

    (Washington and Lee University)

  • Schröder, Marcel

    (Asian Development Bank)

Abstract

Papua New Guinea (PNG) has faced a foreign exchange (forex) shortage since 2015. To protect reserves, the Bank of PNG has resorted to forex rationing that led to a large backlog of orders and import compression. This paper surveys the structure of PNG’s forex market and analyzes recent market conditions. We argue that the various policy proposals being discussed currently in PNG are inadequate to restore currency convertibility. For this, a real exchange rate depreciation is required instead. We develop a forex market model that features a backlog of unmet orders, which suggests that a frontloaded depreciation is preferred to an often-favored gradual adjustment. Empirical results indicate that the government’s large budget deficits have contributed to the forex shortage, which highlight the need for greater fiscal restraint. In the longer term, we argue for more exchange rate flexibility and forex allocation through competitive auction.

Suggested Citation

  • Davies, Martin & Schröder, Marcel, 2022. "The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market," ADB Economics Working Paper Series 663, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0663
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    foreign exchange shortage; foreign exchange rationing; currency convertibility; Papua New Guinea;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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