Friday, May 04, 2012

Increasing liquidity levels worry Central Bank

The increasing level of liquidity is the main cause of concern to the Bank of PNG, according to its quarterly economic bulletin released yesterday (Thursday), The National reports.
Governor Loi Bakani said the main issue that the Central Bank was confronted with was the increasing level of liquidity in the banking system in recent years, caused by the foreign exchange reserve build-up related largely to dollar-denominated mineral tax earnings, high export earnings and inflows related to the PNG liquefied natural gas (LNG) project and other private foreign direct investments.

Bakani…concerned at increasing levels of liquidity.

“This is compounded by the fast drawdown of trust accounts held at the Central Bank,” he said. “Whilst the high liquidity levels do not appear to influence inflation via the credit channel despite strong economic growth, it is still a threat to price stability and soundness of the financial system.
Bakani was concerned that the Central Bank was incurring an increase in the cost of monetary policy management by issuing Central Bank Bills (CBBs) to sterilise some of the excess liquidity.
“Efforts made to transfer some of the trust account funds to the Central Bank and opening of all new trust accounts with the Bank of PNG have not been really successful as the government continues to hold high trust account balances with commercial banks,” he said.
“The kina continued to appreciate against most of the major currencies on the back of the strength of the US dollar as investors look to it as a safe asset in light of the Euro debt crisis and weak global economic conditions.
“The kina’s appreciation was supported by high foreign exchange inflows associated with the LNG project, mineral tax receipts, and high commodity export earnings.”
Bakani said up to April 20, 2012, the kina appreciated against the US dollar by 3.6% to 0.4836, and against the Australian dollar by 1.7% to 0.4670.
He said that while the kina appreciation was a positive development to curb inflation, it had the potential to adversely affect the export sector.
“In this regard, the Central Bank has been actively involved in the foreign exchange market to ensure stability in the movement of the kina exchange rate,” he said
Bakani said the level of gross foreign exchange reserves as at April 30, 2012 was K9,074.9(US$4,442.2) million, compared to K9,226.4 (US$4,340.1) million as at end of December 2011.
“The increase in the US dollar value is due to the latest payment of mineral tax for the government while the decline in the kina value reflects the appreciation of the kina against the US dollar,” he said.
Meanwhile, Bakani said inflationary pressures in the domestic economy would come mainly from domestic demand pressures associated with high inflows and spin-off activities relating to the construction of the LNG project and increased government spending.
“The upside risks to domestic inflation will stem from: the volatility in import prices; a fall in prices of export commodities; depreciation of the kina exchange rate; and higher than budgeted government expenditure,” he said.
Bakani cautioned the Government to be disciplined in its spending, particularly during the national election period, to keep within the 2012 budget.

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