The unprecedented scale and magnitude of the COVID-19 damage across the globe has caused loss of human life and massive disruption to economic activity. The negative impact of the pandemic is expected to induce the worst economic crisis since the Great Depression of 1929 with countries across the world being faced with the dilemma of containing its spread whilst minimising the negative economic impact of lockdowns and travel restrictions. The latest growth forecast by the International Monetary Fund (IMF) World Economic Outlook (WEO) in June 2020, indicated that the COVID-19 pandemic had a more negative impact than initially anticipated. The IMF therefore projects a contraction of 4.9 percent in 2020, compared to its April WEO forecast of negative 3.0 percent. In 2020, economic growth in the advanced economies is projected to contract and developing economies to decline by 3.0 percent. Growth in most of the emerging markets and developing economies are projected to decline except China.
The contraction in global growth in 2020 and its downward impact on global inflation has prompted many major central banks to ease monetary policy and support their Government’s fiscal stimulus measures. The contraction in global growth is adversely affecting Papua New Guinea (PNG) economy with growth expected to be lower in 2020. Given this environment and the future low growth scenario, the Bank of PNG (BPNG) announced policy and regulatory measures on 30 March 2020 aimed at providing liquidity payment and monetary system amid the potential negative repercussions of COVID-19. The measures comprised of:
- reduction of the monetary policy signalling rate, the Kina Facility Rate (KFR) from 5.0 percent to 3.0 percent to lower the cost of borrowing;
- reduction of the Cash Reserve Requirement (CRR) from 10.0 percent to 7.0 percent, injecting additional liquidity of over K600.0 million into the banking system;
- increase in the Repo margin by 100 basis points from 75 basis points on both sides;
- introduction of the Quantitative Easing (QE) program that allowed BPNG to buy-back Government securities (Treasury bills and Inscribed Stocks) from existing holders to provide them with liquidity; and
- early redemption of Government securities under the Tap Facility was allowed for small investors to have access to their funds.
BPNG continued to support the foreign exchange market by providing dollars to priority import orders related to COVID-19 as well as other health related imports of medical drugs and pharmaceutical products.
On 2 April 2019 the Government announced its COVID-19 economic stimulus package of K5.6 billion, which consisted of K2.5 billion in Treasury Bond issuance (COVID-19 Bond) to be raised domestically and K1.5 billion from external financing. Mainly from the IMF. In order to raise the K2.5 billion COVID-19 Bond funding, the Government issued K1.0 billion on 1 May 2020 and K750 million on 15 May 2020. Both auctions were oversubscribed. In June, the IMF approved a Rapid Credit Facility of K1.6 billion for PNG to help address balance of payments (BOP) needs created by the COVID-19 pandemic.
Following the announcement of the policy measures, the licensed financial institutions responded with their own relief packages to assist their clients who had cash flow needs. The commercial banks reduced their interest rates relief on the principle and interest payments on a case-by-case basis for borrowers affected by COVID-19. This relief also applied to fees and charges.
Prudential measures introduced by BPNG included: a 3-month repayment moratorium (until June 2020) on borrowers impacted by COVID-19, to be assessed on a case-by-case basis; customers allowed to restructure and reschedule loans without attracting administrative charges or fees; maintaining exposure provisions on current (including pre-COVID-19) asset classification and to be reviewed after 3 months; and relaxation of prudential reporting deadlines by a month and reducing prudential activities until the third quarter of 2020.
In consultation with BPNG relating to the Government’s economic stimulus measures, the Authorised Superannuation Funds (ASFs) introduced measures to support their members who are directly affected by the impact of COVID-19. These measures include a tax-free one-off payment of up to 20 percent or maximum of K10,000 of the member’s own contribution for those that have lost their jobs; work with the employers on a case-by-case basis to determine suitable payment options for the employee contribution payments, including deferment, if necessary; a waiver on penalty interest for late payments for employers who may be affected; and provide concession on rental payments for their clients renting their commercial properties.
The impact of the COVID-19 pandemic is negatively affecting PNG through the decline in global trade and growth, and causing international commodity prices to fall sharply. The latest international commodity price data published by the World Bank in April 2020 indicate a general fall in the prices of PNG’s main export commodities. Prices for Liquefied Natural Gas (LNG), copper and nickel declined, while that of gold picked up reflecting investors’ preference for a safe haven investment. Non-mineral commodity prices for cocoa, coffee and palm oil also increased providing some relief to PNG exporters. The significant drop in some of the commodity prices has already affected PNG’s export tax revenue and foreign exchange inflows, and will continue to put pressure on the foreign exchange market. The Government’s support to increase local production and ensure its food security requirements are at a satisfactory level is critical to sustain domestic consumption, while reducing the country’s dependency on imports.
Developments of key economic indicators
BPNG’s Employment Index shows that the level of employment in the formal private sector declined by 1.1 percent in the March quarter of 2020, compared to a decline of 1.6 percent in the December quarter of 2019. Excluding the mineral sector, the level of employment fell by 1.4 percent. By sector, the level of employment decreased in the construction, financial/business and other services, retail and wholesale sectors, while it increased in the agriculture/forestry/fishing, mineral and transportation sectors. In the manufacturing sector, the level of employment remained unchanged. Over the year to March 2020, the total level of employment decreased by 4.5 percent, compared to an increase of 4.0 percent in the corresponding period of 2019. Excluding the mineral sector, the level of employment fell by 5.4 percent over the year to March 2020, compared to an increase of 1.7 percent in the corresponding period of 2019. The decline in employment was mainly due to the measures to counter the spread of COVID-19.
Domestic interest rates
The monetary policy measures provided additional liquidity to the banking system to help stimulate economic activity. Demand for loans however remained low given the disruption to economic activity and uncertainties going forward. The decline in some lending rates were also not sufficient to trigger the expected increase in lending to the private sector.
Private sector credit
The private sector credit increased by 1.6 percent in the first quarter of 2020. This mainly reflected the slowdown in the economy and the uncertainty in the business environment due to COVID-19 as many companies and business houses scaled down their operations.
As at 30 June 2020 the average daily kina exchange rate depreciated against all major currencies except the British pound. It depreciated against the euro by 2.9 percent to €0.2577, the Japanese yen by 2.5 percent to ¥31.1500, the Australian dollar by 1.9 percent to A$0.4216 and the US dollar by 1.7 percent to US$0.2890. The kina appreciated against the pound sterling by 3.1 percent to £0.2354. These currency movements resulted in the Trade Weighted Index (TWI) depreciating by 1.8 percent to 29.14.
As at 30 June 2020 the level of foreign exchange reserves fell to K7854.2 (US$2309.1) million, mainly reflecting the outflow from government debt repayments and intervention in the foreign exchange market.
The value of merchandise exports in the March quarter of 2020 was K8,531 million, compared to K8,987 million in the corresponding quarter of 2019. The decline was due to lower export values of all export commodities, except crude oil, condensate, tea and other agricultural products.
The value of merchandise imports was K1,966 million in the March quarter of 2020, compared to K3,595 million in the corresponding quarter of 2019. General imports decreased by 57.1 percent to K970.6 million in the March quarter of 2020, compared to the corresponding quarter of 2019. The impact of the COVID-19 pandemic, combined with lower payment of import invoices due to a shortage of foreign currency inflows contributed to the decline. Petroleum sector imports decreased by 42.8 percent to K177.7 million in the March quarter of 2020, compared to the corresponding quarter of 2019. The outcome was mainly due to lower capital expenditure by a resident petroleum company reflecting limitation of exploration activities pending improvements to market conditions and completion of the Government’s proposed review of the oil and gas fiscal regime. Mining sector imports decreased by 19.2 percent to K817.4 million in the March quarter of 2020, compared to the corresponding quarter of 2019. The decline reflected lower capital expenditure undertaken by the Ok Tedi, Hidden Valley, Kainantu, Simberi, and Ramu Nickel mines combined with lower alluvial production.
Mr Loi M Bakani, CMG, Governor of the Bank of Papua New Guinea.