L Wilson Kamit: Tackling extreme poverty in Papua New Guinea
Address by Mr L Wilson Kamit, CBE, Governor of the Bank of Papua New Guinea, to the
Lowy Institute for International Policy Conference on "Tackling Extreme Poverty in Papua
New Guinea", Sydney, 14 May 2009.
* * *
Distinguished guests,
Ladies and gentlemen
May I firstly thank the organizers of this conference, namely the Lowy Institute for
International Policy, Care Australia and the Australian National University for the invitation to
address this conference on tackling extreme poverty in PNG.
It is not very often that Governors of central banks are asked to comment on social issues or
microeconomic matters. We tend to look at the macroeconomic level. Given the global
financial crisis and its adverse effects that are being felt right across the globe, I am
pleasantly surprised at the invitation to this conference. Recently, I have been asked to
address different audiences on this subject at home and abroad.
I was asked to comment on the impact of the current global financial crisis on the PNG
economy and its impact on poverty. I have some comments to make on the first part, which
is the likely impact of the global financial crisis on PNG. I must however confess that there
are others gathered here today who are better placed to comment on the second part of our
discussions on the impact on poverty. I will therefore restrict myself to making some general
remarks.
Ladies and gentlemen, much has been said and written about the causes of the current
global financial crisis and its effects around the globe. I will therefore not dwell on them.
The maxim that "no nation is an island" is never more so true than now, where all countries,
developed and developing, if they have not been so far, will be affected in one way or
another by this crisis. Development through globalisation, international trade and global
finance has meant that we, in PNG, will also be affected by activities and events taking place
far away in the major financial centres and industrialized countries. As a small, open
economy, PNG is a price taker for our exports and is vulnerable to the global economic and
financial conditions.
Given this, the question for us, therefore, is in what ways is PNG likely to be affected by this
financial crisis.
We are, to an extent, fortunate in PNG in that our banking system is shielded from the
immediate effects of the crisis. Our banks and financial institutions are engaged in the
traditional financial activities of raising funds from depositors and making loans to borrowers.
Almost all the funds raised by our commercial banks are done so through deposit takings
domestically. Deposits comprise over 80 percent of our commercial banks' liabilities, much of
it in kina. Foreign currency deposits are only a small component of the banks' deposit base.
As at the end of December 2008, foreign currency deposit was around 9 percent of total
deposits.
The commercial banks are generally sound with high capital adequacy ratios. In 2008, their
capital adequacy ratio was 25 percent, higher than our limit of 12 percent (see chart 1). The
banks have no exposure to sophisticated financial products such as mortgage-backed
securities that are linked to the demise of the sub-prime mortgage market. The high level of
liquidity in the banking system also provided sufficient funds for commercial banks to operate
without resorting to borrowing from the international financial system.
Despite the high level of liquidity, the commercial banks' lending is prudent with low levels of
non-performing loans. In 2008, non-performing loans totaled K70 million, down from K277
million in 2001 (see chart 2). Lending also comprises a small share of the banks' assets,
about 35 percent. The banks are well managed and closely regulated by the Bank of PNG. In
addition, the two subsidiaries of Australian banks have in place guarantees from their parent
banks (letters of comfort) for any lending in excess of prudential exposure limits set by the
Bank of PNG, giving confidence to the stability of the financial system. Both these banks'
parents have double "A" credit ratings by Standard and Poor's.
However, the financial institutions and companies most likely to be affected by the crisis are
the superannuation funds and PNG dual-listed companies in overseas stock markets. The
two major superannuation funds, the Nambawan Super Ltd and Nasfund Ltd, have some of
their assets invested in offshore equities, while the rest are invested in commodity-based
stocks that are dual-listed in PNG and overseas markets. They have reported positive
returns in 2008 and remain positive and confident, though with lower returns projected for
2009.
Indeed, much credit must be given to the financial sector reforms introduced by the
Government in 2000, which created an independent central bank and introduced improved
supervision of the financial system. The reforms saw much needed changes done to
strengthening our financial sector after the excesses and mismanagement of the 1990s (see
chart 3). The reforms also meant we were in a better position to face the current financial
crisis.
While PNG may not be directly affected by the global financial crisis, we will be if and when
the financial crisis turns into a recession. Already, the major industrialized countries are
experiencing negative growth in economic activity. These countries include the United States
(US), United Kingdom (UK), Germany, and Japan. There is lower growth here in Australia.
Besides China, these are the major markets for many of our exports. A slowdown in these
countries would mean less demand for our export commodities, resulting in lower export
revenue, and a reduction in Government tax revenue. A lower reserve level means less
funds available for the Central Bank to invest in and loss of income to the Government (see
chart 10).
In the private sector, lower export demand would mean companies would hold back on any
expansion plans, save costs by reducing employment and may have difficulties servicing
their loans. Furthermore, foreign investors would delay any new investments in the country
given the uncertainties. Generally speaking, economic activity in the country would be lower
(see chart 4). For 2009, the Government forecasted a growth in economic activity (GDP) of 6
percent.
All this does not augur well for poverty reduction in PNG. Less Government revenue would
mean the Government has to reduce its expenditure (see chart 5). This is the prudent fiscal
response to a reduction in revenue. The alternative would be to borrow, domestically or
externally, to make up for the revenue shortfall. This would however mean increasing the
Government's indebtedness. So far, the Government has succeeded in reducing its debt.
The Government's debt to GDP ratio declined from 71 percent in 2001 to around 30 percent
in 2008 (see chart 6). A return to borrowing (deficit financing) would reverse this
achievement, as well as passing on the burden of servicing the debt to future generations of
Papua New Guineans. Tying down financial resources for debt servicing means there is less
money available to fund the provision of much-needed goods and services to the populace.
If the Government decides to reduce expenditure, this may mean cutting back on essential
social services of health and education, and important infrastructure projects that would
improve the livelihood of our people. The Government has set aside the windfall gains from
high commodity prices in 2007 and the first half of 2008 in various trust accounts for
spending in the key priority areas of infrastructure, health, education, agriculture and law and
order. However, with revenue forecasted to be lower than expected, this would put pressure
on the Government to access these funds to maintain recurrent expenditure levels. This
concern was raised at the recent PNG Economic Update forum series in Port Moresby.
The majority of our people still live in their villages, relying on subsistence farming and fishing
and using the cash economy whenever the need arises. They also benefit from their
extended family ties through the "wantok" (care for extended family) system. Fortunately,
they are least affected by the workings of the Government and its agencies, much less by the
global financial crisis.
Our own challenges in the Central Bank in relation to poverty alleviation involve the issues of
financial inclusions and financial literacy. How do we get the vast majority of our people
outside our financial system to participate fully within the system and benefit from the
economic growth? Over the years, we have revitalized the savings and loan society
movement, closing down dormant societies, improving on training for their staff and
increasing supervision on their activities. We have also licensed two microfinance institutions
to complement the activities of the commercial banks and other financial institutions. The
savings and loan societies and microfinance companies are aimed at assisting low income
earners and entrepreneurs to do businesses, improve their lifestyles and should assist in
alleviating poverty. How can we ensure our people are financially literate so that they can
make informed financial decisions as well as notice unscrupulous deals when they see one?
Financial education and literacy programmes by the Government sector, private sector and
non-government organizations are important. Financial literacy programmes lead to financial
inclusion which improves the lifestyles or economic conditions of those engaged in it and
help reduce poverty. However, to work effectively, both these two activities would have to be
undertaken together, that is, microfinance development together with financial literacy. The
on-going financial global crisis shows the importance of dealing with these issues, even in
the industrialized countries.
The current global financial crisis is a concern. Some say it is the worse economic crisis
since the Great Depression of the 1930s. If so, it presents a challenge to all of us here today.
To those of us involved in the economic management of the country, as well as the
technocrats, the politicians, the business community and civil society. We all have a part to
play in ensuring that any adverse impact of the crisis is eliminated or minimize, especially on
the most vulnerable members of our community.
In the 1990s, what some call the "lost decade", when in spite of high earnings from our
mineral wealth and steady economic growth, gross fiscal mismanagement, the closure of a
major mining project and other external factors, we were deprived of the opportunity to set
the stage for progress and growth. We hope we have learnt from this experience and not
repeat the same mistakes.
Thank you again for the invitation and I look forward to the rest of the discussions at this
important and timely conference.
Thank you.
Chart 1: Capital Adequacy Ratios
60
Banks LFIs Regulatory Requirements
50
40
%
30
20
10
0
2003 2004 2005 2006 2007 2008
Chart 2: Non Performing Loans
300
250
200
150
K'mn
100
50
0
Chart 3: Assets of the Financial System
19000
Banks & Finance Companies
17000
Savings and loans Societies
15000
Life Insurance Companies
13000
Superannuation Funds
11000
Total
9000
K'mn
7000
5000
3000
1000
-1000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Chart 4: Real GDP
12000
10000
8000
6000
K'mn
Non-mineral Mineral Total
4000
2000
0
(est)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(proj)
2007
2008
Years
Chart 5: Fiscal Operations
8000
Revenue
7000
Expenditure
6000 Fiscal Surplus / Deficit
5000
4000
K'mn
3000
2000
1000
0
-1000
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
1975/76
(Jul-Dec)
1977
Chart 6: Government Debt
10000
Domestic debt Foreign Debt Total
9000
8000
7000
6000
5000
K'mn
4000
3000
2000
1000
0
Chart 7: Inflation
25
Headline CPI
20
Exclusion-based underlying
CPI
15
10
%
5
0
-5
04 05 06 06 07
'99 '99 '00 '00 '01 '01 '02 '02 '03 '03 '04 '05 '07 '08 '08 '09
S S S S S S' S' S' S' S
M M M M M M M M' M M M
Qtr
Chart 8: Quarterly Kina exchange rate against AUD,
USD, TWI and REER
0.7 130
USD AUD REER TWI
0.6 110
0.5 90
USD
0.4 70 REER
&
&
0.3 50
AUD
TWI
0.2 30
0.1 10
0.0 -10
Dec-0
Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
Dec-99 Dec-00 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08
Chart 9: Interest rates
25
Interest rate on deposits Interest rate on loans
KFR 28 days T'bill / CBBs
20
15
%
10
5
0
'99 '99 '00 '00 '01 '01 '02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08
Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct
Month
Chart 10: Foreign Reserves
2500
2000
1500
US$'mn
1000
500
0
Reserve money
10000
Broad money
Credit to Private Sector
8000
Credit to Gov't
6000
K'mn
4000
2000
0
-2000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
BIS Review 84/2009