Papua New Guinea

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 inflows 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