Leonard Wilson Kamit: Sustaining macroeconomic stability
Presentation by Mr Leonard Wilson Kamit, Governor of the Bank of Papua New Guinea, to the Rural
Industries Council, Port Moresby, 22 February 2006.
* * *
Introduction
Thank you Chairman Mr Brown Bai for the invitation to this meeting of the Rural Industries Council
(RIC). I want to share my thoughts on financial sector reforms, which commenced in 2000, and how
this development changed economic management of the country. I am convinced that sustained
macroeconomic stability will lay the necessary foundation for growth in the medium to long run. I
present a snap shot of necessary institutional reforms that create an enabling environment to promote
sustained macroeconomic stability and growth.
Financial Sector Reforms
I am of the view that most significant reform process in Papua New Guinea was the financial sector in
2000. It involved the Government introducing the new Central Banking Act (CBA) 2000, the Banks and
Financial Institutions Act (BFIA) 2000, and the Superannuation and Life Insurance Acts.
Under the Central Banking Act 2000, the Central Bank has three important objectives and functions,
which are the responsibility for monetary policy formulation and implementation, financial system
supervision and oversight of the payments system. The Act also made significant changes to the
relationship between the Central Bank and Government, eliminating political influence, introducing
price stability as the objective of monetary policy, and provided greater independence to the Central
Bank in the management and conduct of it's affairs.
The Central Banking Act 2000 made price stability as the main objective of monetary policy.
Consistent with the Act, the Monetary Policy Statement (MPS) is released semi-annually in January
and July. In order to respond quickly to monetary shocks, the Kina Facility Rate (KFR) is announced
on the first Monday of each month, which provides a clear direction or signal to the market on the
Bank's monetary policy stance. The announcement is strengthened through operational instruments,
which are market orientated and used commonly by many central banks around the world. These
instruments include Treasury bills, short term Inscribed stocks, Repurchase Agreements, and Central
Bank Bills.
A sound and healthy financial and efficient payments system is a necessary conduit for monetary
policy implementation for facilitating business activity. The Bank has also introduced stringent
supervision of banks, finance companies and other financial institutions such as savings and loan
societies, superannuation funds and life insurance companies. This is to ensure prudent management
of depositor's funds, members' contributions, and premiums on life insurance policies held with these
financial institutions. In this regard, the Bank employs best international practices on prudential
supervision methods to ensure financial system stability. A greater part of the standards introduced
was focused on good governance practices and the assessment of Fit & Proper persons for Directors
and Management of these financial institutions.
To date, the reforms have vastly improved the conditions and outlook of the financial sector landscape
of the country. In the banking sector, there is marked improvements in asset quality with
nonperformining loans as a percent of total assets declining from 2.3 percent in 2000 to 1.4 percent in
September 2005. Return on assets of the banking system, which was negative 1.1 percent reversed
sharply to over 6.0 percent at the end of September 2005. In addition, the banking system remains
liquid at 15.5 percent of total deposits, compared to 4.0 percent in 2002. These indicators reflect that
the banking system is financially sound and provides a strong foundation for sustained
macroeconomic conditions.
In the Superannuation industry, the positive results over the last few years speak for themselves
compared to the bad experiences some 6-7 years ago where contributors lost a lot of their savings.
The tale is different today. Prudent and good management are enabling contributors to benefit from
their funds. The declaration of huge profits by POSF and Nasfund are clear testimony of these
reforms. Similarly, improvements are continuing to be instilled in the Life Insurance industry.
The Bank recognizes the importance of the Savings and Loans movements in ensuring the economic
and social well being of the members who participate in it. This can only be realized in a sustainable
way if the operators of the societies continue to ensure that these institutions are managed in a
prudent manner and supported by strong governance. Improved management of the societies
combined with stringent level of supervision by the Bank of PNG has enabled the industry to record
improvement in its overall performance. Between June 2004 and September 2005 total assets
increased by over 50 percent to K312 million.
The rugged geographical terrain of the country makes access to financial service difficult for the
semiformal, informal and the rural population. Financial institutions themselves face these difficulties in
reaching out. In our endeavours to bring out financial services to these sectors the Bank of Papua
New Guinea in collaboration with the Asian Development Bank, the National Government and AusAid
established the "Wau Microbank" under the micro finance project. The pilot project is slowly growing
into a viable complementary player in the development of the financial system. In addition, the PNG
Sustainable Development Program Company obtained a banking licence from the Central Bank to
operate the PNG Micro Finance Limited in 2004, and has operations in NCD and Western Province.
The micro-finance industry development is a meaningful way of mobilizing savings and servicing a
large section of the community that do not enjoy financial facilities. The Government has also
introduced the District Treasury Roll-out Program, which will further complement the provision of
financial services in the rural parts of PNG. This entails the provision of treasury, banking and post
office services from one outlet mainly at local and district levels.
I am still very concerned about fast money scams. Hard working Papua New Guineans have lost funds
to con-artists who operate these scams. The Bank of PNG continues to warn the public about these
scams and individuals must avoid risking their savings. I also call on your rural industries members to
support the Bank in warning people about these illegal scams.
The Bank of PNG is also supportive of the Government's initiatives to promote export driven economic
growth strategy through removal of impediments to trade and investment. In recognition of this
initiative, the Bank liberalized the foreign exchange control regime by freeing up controls in all but (4)
areas which are:-
•
Opening of foreign currency or kina accounts offshore by residents;
•
Approval for capital transaction contracts;
•
Gold export licenses; and
• Approval for dealing in foreign exchange.
To date, consistent with the Banks expectation, the liberalization has had limited impact on the
balance of payment position of the country. This is the result of an close and on-going dialogue and
communication between the stakeholders and the Bank of Papua New Guinea.
Macroeconomic Review
What has been the end result of this massive financial sector reform? The end result is that it has
helped to achieve macroeconomic stability that is necessary for inducing sustainable economic
growth. The stability in macroeconomic environment is reflected by the following:
•
Decline in inflation from double digit levels to an annual headline inflation of 4.6 percent in
December 2005;
•
Stable exchange rate;
•
Historically high levels of international reserves of over US$760 million that is sufficient for
around 8 months of non mineral and 6 months of total import cover;
• Sound fiscal management by the Government was fully supported by high mineral tax receipts
and saving from the reduction in interest expenditure. This led to a fiscal surplus of 0.3 percent
of GDP in 2005;
•
Efficiency gains from Financial Sector Reforms leading to high profitability and improved asset
quality of the financial institutions; and
• Confidence in the Government's management of the economy by the public.
Consistent with the macroeconomic stability, the Bank of PNG progressively eased monetary policy,
reducing the Kina Facility Rate (KFR) from around 16.0 percent in 2002 to 6.0 percent in February
2006. As a result of the lower interest rate environment private sector credit grew significant in 2005 by
over 20 percent. Unlike in the past, where private sector borrowing stagnated because of continued
increased funding of the fiscal deficit of the National Government, the increase in private sector
borrowing is also the result of improved fiscal management and new loan products offered by the
commercial banks.
I released the Semi-Annual Monetary Policy Statement (MPS) on 31 January 2006. The MPS sets the
broad parameters for monetary policy for the six months of 2006 and the medium term. The monetary
policy for 2006 and the medium term were framed against a background of sound macroeconomic
fundamentals, which we expect will be sustained into the medium term.
Going Forward
Going forward, much still needs to be done. The financial sector reforms have not only led to the
development of a sound and healthy financial system but also created a stable macroeconomic
environment. However, Papua New Guinea should not be complacent with these outcomes but
continue to work towards building a more efficient and competitive financial system that
accommodates domestic and global challenges. The reforms of the financial sector is still on-going
and the following reforms are currently being undertaken by the Bank:
•
A Taskforce has reviewed the Superannuation and Life Insurance industries to determine
areas where parts of these new legislations could be more stakeholder/member friendly. The
Report has been finalized and is waiting to be formally presented to the Treasurer and myself;
•
Undertaking a review on the legal framework for Micro-Finance Institutions and a review to the
Savings & Loan Societies Act 1995 with the view of separating registry functions from
prudential supervision.
•
In June 2006 the Bank will undertake a review of the liberalization with the aim of fully
liberalizing the remaining exchange controls. I intend to immediately allow holders of onshore
foreign currency accounts to settle obligations in foreign currency. This arrangement is
intended to minimize foreign exchange transaction costs.
•
The Bank decided to licence financial institutions as authorised foreign exchange dealers
under the Banks and Financial Institutions Act to promote competition.
• The Bank has commenced a major review of the payments system in Papua New Guinea.
Review of the payments system is necessary for a sound and efficient system that will reduce
costs to businesses and improve monetary policy transmission. The review will cover different
forms of payments, clearing-house, and currency banknotes and coin distribution and
withdrawal methods. Papua New Guinea is a predominantly cash economy and I want to see
our people use clean banknotes and bright coins. I want to devise more efficient methods of
withdrawing dirty and torn banknotes.
In conclusion, these reforms are intended to sustain macroeconomic and price stability over the
medium to longer term. With the stable macroeconomic environment, the private sector and members
of the Rural Industries Council should use this opportunity to enhance their activities and contribute
towards generating economic growth.
Thank you for listening.