It is widely accepted that finance is sine qua non for start-up, establishment and expansion of a private sector enterprise; capital is indeed critical for operational as well non-operational activities. Generally, the capital structure encompasses a mix of internal and external sources, with the latter financed primarily and commonly by financial sector institutions like commercial banks. Growth and expansion of the private sector then becomes almost invariably dependent on credit available and accessible from the financial sector, begging the question—what might the determinants of such credit to the private sector be? This question is important because a well-functioning private sector is in turn sine qua non for economic growth and development and thereby poverty and income inequality alleviation, enhanced employment and well-being of a country and its citizens. Hence the purpose of the study—what indeed are the determinants of private sector credit in the case of Papua New Guinea (PNG), a Pacific island Country, located in the North-East of Australia.
PNG is a small, open, developing economy endowed with natural resources, and is an exporter of primary commodities (example: palm oil, coffee, cocoa, fish, gold, copper, oil and gas) and importer of manufactured items (example: fuel, rice, vehicle, machinery and equipment). Among the Pacific Island Countries (PICs), PNG is relatively larger, in terms of both the population and economy. The latter is dominated by two broad sectors—agriculture, fisheries and forestry—the biggest sectoral employer; and the mineral and extractive energy sector which accounts for majority of export earnings and gross domestic product. The mineral sector is made up mainly of foreign-owned mining and quarrying companies funded predominantly by external sources. The other sectors are largely locally-owned and dependent on the local financial sector for investment and expansion.
Since the early 2000’s PNG has experienced sustained economic growth which peaked between 2009 and 2013 as a result of the construction phase of the multi-billion-kina PNG Liquefied Natural Gas (LNG) project. Economic growth has slowed since 2014 after the completion of the project’s construction phase at the end of 2013 and the fall in international commodity prices in the second quarter of 2014. The financial sector comprises of commercial banks, finance companies, merchant banks, savings and loans societies, superannuation funds, life insurance companies, and other licensed institutions. Four commercial banks make up the largest part of the financial sector—Bank South Pacific (BSP); Australia and New Zealand Banking Group (ANZ) PNG Limited; Westpac Bank (PNG) Limited; and Kina Bank Limited. The largest of these is BSP, with over 40 branches across the country. Westpac and ANZ are subsidiaries of Australian Banks and operate around 15 and 9 branches, respectively in PNG, while Kina Bank has only one branch in the country. According to the World Bank’s Development Indicator database, domestic credit to the private sector as percentage of GDP by commercial banks in PNG has been hovering between 13 and 20 percent since 1994. This ratio reached 20 percent in 2013 but declined to 15 percent in 2017, far lower than the ratios in other PICs. For instance, the ratio for Fiji was 40 percent in 1994 but had reached 60 percent in 2006 and since then has been maintained around that level. Vanuatu’s ratio has also improved from 35 percent in 1994 to 68 percent in 2017. Thus, the greater relevance of the study’s question—what might the determinants of private sector credit be in the case of PNG?
Using quarterly data from for the period 2000 to 2017, an autoregressive distributed lag model and, various demand and supply-side factors our study finds that deposits at the commercial banks, real gross domestic product, real effective exchange rate, and net foreign assets have significant positive influence on credit to the private sector in both the short and the long-run. Interestingly, lending rates have no significant influence on credit to the private sector.
Mr Solomon Kasingu, Ms Gail Sabok, Ms Diana Tuam and Mr Jeconiah Hamua, Bank of Papua New Guinea, Dr Jen-Je Su and Dr Parmendra Sharma, Griffith Asia Institute.
This paper was presented at the December 2018 South Pacific Central Banks—Griffith University Research Conference and Regional Policy Dialogue in Suva. The views and opinions expressed in this study are those of the authors and do not reflect those of the Bank of Papua New Guinea or its Board.
Please click here to read the full working paper, “Determinants of private sector credit in Papua New Guinea“.