Too much ‘unusual’ power vested in BPNG governor – The National
The Independent Advisory Group was commissioned by the government to review PNG’s 2000 Central Bank Act. It is chaired by Robert Igara, who is Chancellor of the University of Papua New Guinea and former Chief Secretary, when
the Central Bank Act was introduced in 2000. Its two other members are Sir Wilson Kamit, who was
Governor of the Bank from 1999 to 2009 and Dr Stephen Howes, Professor of Economics at the Australian
Director of the National Center for University Policy and Development. The first phase of the examination report has been completed
on October 25, 2021, and it was tabled and passed during the last session of Parliament, limiting the Central Bank
Duration of the governor’s mandate to four years and reduction in the number of members of the board of directors.
According to a report by the Independent Advisory Group (IAC), the power given to the governor of the Papua New Guinea (PNG) central bank by PNG’s Central Bank Act 2000 (CBA) is unusual.
âAt last count, there are only three other central banks in the world that have given one person as much power as the ABC of PNG.
Sir Wilson Kamit
Dr Steven Howes
âWhereas collegial decision-making is a feature of the modern central bank which both increases the independence of decision-making and improves the quality of decisions.
âThe majority of central banks, boards of directors or committees are responsible for making policy decisions,â the IAG said in its review of phase 1 of the CBA.
The Bank of Papua New Guinea (BPNG / Central Bank) already has a Monetary Policy Committee (MPC) but this is entirely internal to the management of the bank.
The AGI proposed that the MPC be strengthened by giving it a legislative mandate to formulate monetary policy and oversee its implementation, and that it be open to external members, including international ones, to allow contestability.
“The governor would chair the MPC and therefore retain his leadership role in monetary policy, but the collaborative review that an MPC would provide would greatly improve accountability,” the IAG added.
The IAC found that BPNG had isolated itself too much, both from other parts of government and private sector stakeholders.
âIndependence prevents abuse, but isolation undermines responsibility. If no one knows what BPNG is doing, how can they be held responsible? While BPNG should continue to be independent from government, it needed to do more to collaborate with other branches of government, especially the Treasury, and especially in times of crisis, such as the current pandemic, the IAG reported.
âThere has been too little communication between the government and BPNG, and we are proposing several measures to improve the two-way flow of information to resolve disputes and promote teamwork – all without in any way affecting undermining the independence of BPNG “, he added.
The IAG also found that the private sector wanted BPNG to be accessible for discussion, to explain itself and to consider alternative viewpoints.
“The seemingly endless disagreement between the private sector and BPNG over the extent – if not the existence – of foreign exchange shortages is the kind of problem that could easily be resolved through dialogue,” added the IAG.
Although BPNG performed well in some ways – inflation remained relatively low and stable and the payments system improved – but there had been some significant issues and negatives that needed to be changed for the future. :
- The controversial “wiggle room arrangement” exposed a loophole in the all-important CBA Article 55, a loophole that allowed virtually unlimited deficit financing, a result that was certainly never achieved. foreseen. This loophole must be closed;
- THE protracted foreign exchange rationing that emerged in 2014 following BPNG’s sudden 17 percent exchange rate appreciation and which has plagued the economy since then has undermined economic growth and encouraged fiscal lavishness. PNG should revert to its traditional policy of currency convertibility as soon as possible.
- THE illegal dividend payments during the period 2011 to 2015 raised serious governance issues, both for the Government and for BPNG. This episode underlines the need for a strong board of directors capable of defending the rights of the bank granted by the CBA;
- BPNG waited too long to switch to an accommodative policy, which it only did in the second half of 2019, even though it had been clear for several years that the economy was struggling, with employment nearly declining. every year since 2013;
- THE financial sector has remained stable but has become more concentrated over time. PNG is badly in need of more competition in the financial sector and new entrants to lower interest rates and extend credit to the financial sector and access to those who need it and can put it to good use.
The IAG also described the CBA as a “masterstroke” that ended years of political interference in the management of BPNG by securing the tenure of the governor and the board of directors. âThe days when the governor’s job was a revolving door were immediately over,â said IAG.
One of our objectives is to preserve and strengthen this independence.
âWe propose to preserve it by keeping in place key elements of the existing law, such as the requirement that the tenure of the governor and members of the board of directors be protected.
“This is what sets BPNG apart from other state-owned enterprises, some of which indeed suffer from the curse of instability and political interference.”
The IAG said the board should be chosen on merit, not on the basis of representation, and that strict limits should be placed on ministerial discretion.
âAnd we should cast the net further, aiming for not only national but international representation. A stronger, more merit-based board of directors will be in a better position to protect BPNG’s independence, âadded the IAG.
BPNG was made independent by the CBA in order to reduce the discretionary room for maneuver arising from political interference.
âBut an unintended consequence of the legislation has been to create new discretionary leeway or arbitrary behavior on BPNG’s part. During our consultations, we heard testimony from companies needing to text or reach the governor through an intermediary to request the release of foreign exchange to finance vital imports.
âThis is not the kind of economy that will serve PNG well – an economy in which business leaders must focus on lobbying rather than innovation; and where the success of the business depends on relationships rather than performance.
âWe are proposing two new rules that are simple, transparent and desirable to reduce room for maneuver and increase predictability:
- FIRST, we want to close the loophole currently present in section 55 on government funding. We take a conservative and pragmatic approach. Given PNG’s shallow capital markets and single borrower limits, all purchases of government securities by BPNG potentially have a fiscal impact, making it easier for the government to finance its deficit. Completely prohibiting State financing would therefore amount to prohibiting any BPNG operation on State securities. It is an option, but it would be extreme. Given the lack of competition in PNG’s financial markets, the bank can play a useful, albeit limited, role in deficit financing by combating the market power of major private sector financiers. The key word here is ‘limited’ and we are proposing a prudent, quantitative and easily measurable legal limit on deficit financing, which could be temporarily increased in times of national crisis like the coronavirus (Covid-19). Such an approach is in accordance with relevant international practice and would prevent the excesses of the âslack arrangementâ from ever happening again; and
- SECOND, we want to end currency shortages and currency rationing. The bank’s task of managing the Kina is not easy, especially given the volatility of the PNG economy and the undiversified nature of the forex market. We believe that the exchange management can certainly be improved, but, according to the existing ACB (Article 58), it should be left to the bank to deal with this problem, and not attempted by government decree or compromised by the government interference. The practice of rationing foreign currency, introduced by BPNG in 2014 and allowed to continue since, is not only a violation of PNG’s international agreements. More importantly, this practice has caused immense damage to PNG’s economy and its international reputation, and has encouraged budget lavishness by assuring politicians that no matter how low their budget deficit is, they will not risk not a balance of payments crisis.
IAG found BPNG’s goals to be too narrowly defined for an organization with so many roles and so much power.
âCurrently, the only objective of monetary policy is price stability. This was understandable when setting up the ABC, given the high inflation the country was struggling with at the time.
âBut also at that time, the central role of the bank in matters of exchange rate and fiscal policy was little understood.
âIn particular, a price stability-only mandate is inappropriate for BPNG, given its responsibility for exchange rate policy, as it introduces a bias against depreciation given the latter’s inflationary impact.
“We contend that the Bank’s goals should extend beyond price stability to include large-scale growth,” urged the IAG.
The IAG said its review report was based on international experience and a detailed analysis of the development of monetary policy and governance in PNG over the past decade.