Papua New Guinea

Papua New Guinea is classified as loosely structured discretion throughout, but this covers changes from something like a managed (but variable) exchange rate fix augmented by some direct monetary policy to a managed float with some central bank autonomy and the pursuit of price stability via indirect monetary instruments, albeit without the financial markets infrastructure that would ensure an effective monetary transmission mechanism.

Years

Targets and attainment

Classification

1976-2017

self-government 1973 and independence (from Australia, which continues to be main trading partner and important supplier of grant aid) 1975, with creation of new currency (which was only legal tender from end-1975) and local branch of Australian central bank converted into Papua New Guinea (PNG) central bank, with instruments including reserve and liquid assets ratios, lending guidelines (later ceilings), moral suasion, administered interest rates and rediscount facilities; currency fixed to Australian dollar but with frequent adjustments on basis of undisclosed basket and (up to 1978) other indicators, typically in response to fluctuations of Australian dollar vs USD; 1980 USD becomes intervention currency; monetary policy (and commodity stabilisation funds) geared to stabilisation of external effects from movements in prices of commodity exports, and promotion of growth; regular Treasury bill auctions from 1980, negotiable government bond tap issues from 1981; short-term money market remains inactive and thin and does not provide effective mechanism for monetary policy; interest rates moved more actively from 1981, liberalised 1983-4; discrete devaluation (in step with Australian dollar) 1983, restoring eroded competitiveness; attempts at monetary targeting early 1980s, abandoned 1984, with emphasis shifted to ceiling on ‘nonseasonal’ private credit; as of late 1980s major monetary instruments remain liquid assets ratio and discount facility with occasional use of bank lending controls; 1989 closure of Bougainville copper mine under political and armed attack requires major adjustment measures including depreciation; early 1990s some shift towards indirect monetary instruments in form of open market operations; 1994 balance of payments crisis leads to devaluation and then to a (managed) float, with sharp fiscal and monetary tightening and introduction of interbank foreign exchange auctions, conducted initially by open-outcry and later via a screen-based system; 1995 weekly auction of short-term credits/deposits in place of discount facility; domestic difficulties plus fallout from Asian crisis lead to rising inflation and weakening exchange rate 1997-8, with weak monetary response including breaching of limit on central bank financing of government and renewed reliance on cash reserve requirement, which largely replaces minimum liquid assets ratio; mid-1999 return to stabilisation, with law increasing central bank autonomy and return to indirect monetary instruments, including basic standing facilities and from 2001 OMOs in repos; 2000s growth of financial sector, improvements in supervision; by mid-2000s coherent reserve money approach aimed primarily at price stability with policy rate as signal (but no corridor) and OMOs in repos as main instrument, but excess liquidity and thin markets mean policy rate transmission is poor, while forex intervention is partly smoothing and partly reserve-building, in economy with high exchange rate-prices pass-through; 2008-12 LNG-related inflows lead to volatility and appreciation, with central bank unable to stabilise and sterilise, but then diminish; 2014 trading band imposed on disorderly forex market, leading to sharp real and nominal appreciation and queues for forex, with real appreciation and queues still present at the end of the period; statistical data poor, but slow and erratic improvements from 1990s 

loosely structured discretion LSD

Selected IMF references: Report on the Economy, March 1976, pp12-20, 30, 39; RED 1977 pp25-8, 41-2; SR 1977 pp3-5; RED 1978 p30; SR 1978 p8; RED 1979 p19; RED 1981 pp21, 26-7, 34; RED 1983 pp34-5, 37, 41, 44, 52; RED 1984 pp35, 37-9, 40, 43, 99-100; RED 1985 pp16-17; SR 1986 p19; SR 1988 pp10-11; SR 1990 pp2-3, 12; RED 1991 pp20-1; RED 1993 pp14-15; SR 1995 pp8-10, 17, 22-3, 58-60; RED 1998 pp23, 25, 28-9; SR 1999 pp4-10 13-15; RED 2000 pp16-19, 21-2; SR 2000 pp9-10; SISA q2002 pp19-32; SR 2002 p14; SISA 2008 pp13-16, 25-6; SR 2008 pp24-5; SR 2012 pp10-12; SR 2014 pp8-10, 15-16; SI 2015 pp13-16, 20-1; SR 2015 pp10-11; SR 2016 pp11-14; SR 2018 pp5-6, 11-12.

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