Tuesday, October 02, 2012

Bakani: Central bank must manage high liquidity in PNG


The main issue for the Central Bank is managing the continued high level of liquidity in the banking system, according to Governor Loi Bakani.

Bakanai..."surplus in overall balance of payments"
He said in the bank’s September monetary policy statement released at the weekend that Papua New Guinea continued to experience high levels of liquidity as a result of the build-up in foreign reserves, largely from mineral tax receipts, as well as foreign exchange inflows related to the PNG LNG project and other private foreign direct investment.
The bank maintained a tight monetary policy stance between March and August 2012, while last month (September), monetary policy was eased by the reduction in the Kina Facility Rate (KFR) from 7.75% to 6.75%, following release of the June quarter 2012 inflation income of 1.4%.
“The overall balance of payments is expected to be in surplus by K1. 134 billion,” Bakani said.
“This outcome reflects investment outflows associated with the PNG LNG project and direct foreign investments by the private sector.
“By the end of 2012, the gross foreign exchange reserves are projected to be around US$4. 349 billion (K9.049 billion), sufficient for 6.6 months of total and 19.4 months of non-mineral import cover.”
Bakani said in 2012, broad money supply was expected to increase by 13.3%, driven mainly by an increase in net foreign assets (NFA) of the banking system.
“Monetary base and private sector credit are expected to grow by 32.6% and 10.1%, respectively,” he said.
“The government projects a deficit of K513.1 million for 2012 in its mid-year economic and fiscal outlook (MYEFO), compared to a balanced budget projected in the 2012 national budget approved by parliament.
“This deficit is mainly due to lower than expected revenue reflecting a fall in international commodity prices.
“The government should prudently manage its budget now that revenues are declining.
“Past experience shows that financing the budget deficit through domestic debt issuance has no inflationary impact.”
Bakani said the bank was mindful of the projected strong economic growth in 2012 and its potential impact on inflation.
“It is therefore important that the close coordination and cooperation fiscal and monetary policies continue to ensure macroeconomic stability is maintained,” he said.
“The bank will maintain its monetary policy stance for the next six months, but may adjust it if economic and/or financial market developments warrant it.”
Bakani said upside risks to the bank’s projection of 32.6% growth in monetary base would come from:

• Continued high inflows of foreign exchange;

• Higher than budgeted overall government expenditure; and

• Fast drawdowns of trust accounts from the Central Bank.

He said in addition, the upside risks to the bank’s inflation projection of around 3% for 2012 included:

• Depreciation of the kina exchange rate;

• Any substantial increase in international food and fuel prices;

• Higher than expected inflation in PNG’s major trading partners; and

• Any supply-side shocks.

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