MARCH 2015 MONETARY POLICY STATEMENT & FOREIGN EXCHANGE CONTROL DIRECTIVES

Transcription

1 MARCH 2015 MONETARY POLICY STATEMENT & FOREIGN EXCHANGE CONTROL DIRECTIVES Mr. LOI M. BAKANI GOVERNOR BANK OF PAPUA NEW GUINEA Lae Chamber of Commerce and Industry Thursday 9 th April 2015

2 Presentation Outline Part I: March 2015 Monetary Policy Statement 1. Global Economy 2. Monetary Policy Considerations & Issues 3. Macroeconomic Indicators: BOP, Fiscal, Public Debt, Exchange Rate & Inflation 4. Monetary Policy Stance Part II: Foreign Exchange Control Directives 1. Domestic Foreign Exchange Market 2. Analysis of movements and transactions in Kina Vostro accounts 3. International reserves 4. Foreign currency deposits 5. Balances in onshore and offshore Foreign Currency Accounts 6. Aim of directives 7. Way Forward 8. Conclusion

3 Part I: March 2015 Monetary policy Statement

4 1. The Global Economy Global growth is expected to pick up slowly in Global inflation is also expected to pick-up slightly in Most Central Banks policy rates for Advanced Economies are expected to remain low, while US and UK are expected to increase. Source: Bloomberg

5 2. Monetary Policy Considerations & Issues GDP in 2014 is estimated to have grown by higher than the 8.4% reported in the 2015 Budget. In 2015, projected GDP growth reflects full year of LNG production and full capacity production for nickel & cobalt, as well as activity in the non-mineral sector. High economic growth & expansionary fiscal policy contributed to high import demand and depreciation of the Kina. Inflation is trending upwards. Financing of the Budget deficit will be a challenge. Declining oil and other commodity export prices have implications for Gov t Budget and foreign exchange reserves.

6 Balance of Payments (K mn) Source: Source: Bank of PNG Note: 2014 to 2017 includes flows related to the PNG LNG project, compared to the actuals, which do not include LNG figures. Overall BOP projected to be in surplus in 2015 mainly due to LNG export inflows and higher holdings of foreign exchange by the Bank of PNG.

7 16,500 Fiscal Operations of the Gov t (K'm) ,500 Source: 300 Revenue & Expenditure 12,500 10,500 8,500 6,500 4, ,200-1,700 Deficit / Surplus 2,500-2, ,700-1, Prel 2015 Proj 2016 Proj 2017 Proj -3,200 Revenue Expenditure Deficit/Surplus Source: 2015 National Budget outcome is preliminary. Third expansionary fiscal budget with a deficit of K2.3 bn in 2015 or 4.4% of nominal GDP Expenditure to priority areas; transport infrastructure, agriculture, law and order, education and health services and increased funding to provincial, district and local level Governments (LLGs).

8 45,000 40,000 35,000 30,000 Public Debt to GDP K'million 25,000 20, % 15, , , Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Public Debt (K'm) GDP nominal (K'm) Debt to GDP ratio (%) Source: 2015 National Budget & Bank of PNG Shortfall in revenue in 2014 resulted in high debt financing. Public debt is expected to decrease to 27.8% of GDP in 2015 from 35.5% in 2014.

9 Source: Source: Bank of PNG The exchange rate has depreciated by 9.3% since the banding, from US$ to US$ as at 27 th March The continued depreciation was due to high economic growth that led to increased import demand, while foreign exchange inflows were lower.

10 Source: Annual Headline Inflation (percentage change) 8 Projections Source: BPNG and NSO. Inflation is expected to be around 6.0% in Inflationary pressures are expected mainly due to continued economic growth that led to high import demand.

11 3. Summary Economic growth was boosted during the construction phase of the LNG project but inflation remained low Growth continued, supported by the expansionary fiscal policy of the Gov t with spending in priority areas High growth contributed to increased import demand which led to the depreciation of the Kina BPNG intervened to support the foreign exchange market Despite the growth and depreciation, inflation has been manageable

12 Summary (cont d) Monetary policy management was aimed at finding a balance between high liquidity levels, rising interest rates from budget financing, and high import demand resulting in the depreciation of the Kina Advised caution in the 2014 September MPS on the high expectation of LNG revenue In March 2015, LNG revenue were much lower, further aggravated by low oil and other commodity export prices

13 4. Monetary Policy Stance Given the projected revenue shortfalls, the Gov t will have to make adjustments to its 2015 Budget Ongoing close coordination between Fiscal and Monetary Policies is important Coordination is enhanced by operation of new payments system-kina Automated Transfers System (KATS) Also further progress on establishment of SWF BPNG will maintain its stance of Monetary Policy

14 Part II: Foreign Exchange Control Directives

15 5. Observations in Forex Market Over the last 2 years, undesirable activities in the foreign exchange market were observed, which led to the introduction of the trading band in June 2014 In 2014, BPNG observed: Increased volume of activities conducted through Vostro accounts of foreign banks Increased transactions in onshore and offshore Foreign Currency Accounts (FCAs) Led to reduced foreign currency liquidity in market Affected businesses and kina depreciated.

16 Domestic Foreign Exchange Market

17 Domestic Foreign Exchange Market High intervention by BPNG in February 2015 of around K300 mn

18 PGK/USD Exchange rate depreciated by 9.3% since the banding

19 5.1 Kina Vostro Accounts Kina Vostro accounts of foreign banks were used for unauthorised banking business by: Not using authorised foreign exchange dealers to convert kina for foreign currency, in breach of Regulation 6 of the Central Banking (Foreign Exchange and Gold) Regulation Taking deposits from PNG resident entities In 2014 the volume of kina transacted via the Vostro accounts was approximately 50 percent of the turnover in the domestic foreign exchange market The large kina payments and receipts are not reported to BPNG because the foreign currency leg is done by foreign banks The transactions that involved the use of Vostro accounts were not subject to the exchange rate trading band Exchange rate spreads offered by foreign banks to PNG residents were much wider than 150 point spread in the domestic market

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21 5.2 International Reserves (BPNG)

22 Commercial Banks Net Foreign Currency Deposits (K mn) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

23 4, Approved Offshore Foreign Currency Accounts (FCAs) of Residents (end of month balance) 3,500 3,000 K' mn 2,500 2,000 1,500 1, Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Nov-11 Sep-12 Jul-13 May-14

24 Distribution of Foreign Currency Holdings 14, , , , , , , Jan-11 1-Mar-11 1-May-11 1-Jul-11 1-Sep-11 1-Nov-11 1-Jan-12 1-Mar-12 1-May-12 1-Jul-12 1-Sep-12 1-Nov-12 1-Jan-13 1-Mar-13 1-May-13 1-Jul-13 1-Sep-13 1-Nov-13 1-Jan-14 1-Mar-14 1-May-14 1-Jul-14 1-Sep-14 1-Nov-14 1-Jan-15 Offshore FCA Balance Onshore FCA Balance Net FC Deposits BPNG Reserve In aggregate, around K8bn forex reserves for PNG. Likely import cover of 11.8 months for total and 16.6 months for non-mineral, as at January 2015

25 6. Exchange Control Directives On the 5 th of March 2015, the following Foreign Exchange Control Directives were issued on: Use of Vostro accounts by foreign banks Unauthorised banking business conducted by foreign banks Onshore foreign currency accounts Cease the opening up of new accounts until an audit is complete Offshore foreign currency accounts Cease the opening up of new accounts until an audit is complete Export proceeds 3 months retention period to repatriate export proceeds onshore

26 Aim of the Directives The Exchange Control Directives were issued under the Foreign Exchange Manual They are not a re-introduction of foreign exchange controls or removal of exemption notices Not meant to frighten or scare anyone but restore order in the foreign exchange market Help address the imbalance in the foreign exchange market

27 Planned Implementation Authorised Foreign exchange dealers to enforce directives with their customers External audit conducted on onshore and offshore foreign currency accounts (FCAs) Pending the findings of the audit, a ban is imposed on opening of new onshore and offshore FCAs Offshore Kina or foreign currency accounts for trade purposes are opened with the prior approval of BPNG

28 Implementation BPNG approves 2 types of offshore FCAs opened for trade-related purposes Those under Project Development Agreements Those not under Project Development Agreements Holders of offshore FCAs are to use them for the sole purpose of meeting their offshore liabilities and repatriate surplus funds to PNG Introduce 3 months repatriation requirement from date of shipment of export

29 Implementation Holders of offshore FCA opened for trade purposes without BPNG s prior approval have 2 months (until 6 th May) to close them down and convert the funds into Kina They can then apply to BPNG should they want an offshore FCA Breaches of the Directives will be dealt with in accordance with the Central Banking (Foreign Exchange & Gold) Regulation. Revised Foreign Exchange Manual will be issued with the new Directives

30 8. Conclusion These Directives are aimed at stopping the use of Vostro accounts for unauthorised banking business Restore order and help to address imbalance in the foreign exchange market It is not a crisis situation Vostro accounts to be used only for authorised purposes and resident entities (importers/exporters) should deal only with authorised dealers Authorised dealers or banks have to report transactions through Vostro accounts on the BOP forms

31 Conclusion (cont d) Offshore FCAs should be used only to pay for foreign liabilities of the holders Offshore FCAs for trade purposes are not exempted and requires BPNGs prior approval to open All offshore FCAs that are not for trade related purposes will be addressed by BPNG later Onshore FCAs should not be held for speculative purposes and any demand for foreign currency should be brought to the spot market

32 Conclusion (cont d) BPNG will make further decisions based on the findings of the audits on FCAs Any breaches of these Directives will be dealt with by the Central Banking (Foreign Exchange & Gold) Regulation

33 Penalties: Conclusion (cont d) Fine of K100,000; or Amount equal 25% of the total value of funds or property involved, whichever is greater; or Imprisonment for a term not exceeding five years. In addition, a court may order forfeiture of an asset or order its sale to BPNG

34 Thank You Thank You