IDEAS home Printed from https://ideas.repec.org/p/ris/adbewp/0663.html

The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market

Author

Listed:
  • Martin Davies

    (Washington and Lee University)

  • Marcel Schröder

    (Asian Development Bank)

Abstract

Papua New Guinea (PNG) has faced a foreign exchange (forex) shortage since 2015. To protect reserves, the Bank of PNG has resorted to forex rationing that led to a large backlog of orders and import compression. This paper surveys the structure of PNG’s forex market and analyzes recent market conditions. We argue that the various policy proposals being discussed currently in PNG are inadequate to restore currency convertibility. For this, a real exchange rate depreciation is required instead. We develop a forex market model that features a backlog of unmet orders, which suggests that a frontloaded depreciation is preferred to an often-favored gradual adjustment. Empirical results indicate that the government’s large budget deficits have contributed to the forex shortage, which highlight the need for greater fiscal restraint. In the longer term, we argue for more exchange rate flexibility and forex allocation through competitive auction.

Suggested Citation

  • Martin Davies & Marcel Schröder, 2022. "The Path to Kina Convertibility: An Analysis of Papua New Guinea’s Foreign Exchange Market," ADB Economics Working Paper Series 663, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0663
    as

    Download full text from publisher

    File URL: https://www.adb.org/publications/analysis-png-foreign-exchange-market
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, March.
    2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2021. "Reviving the Salter-Swan small open economy model," Journal of International Economics, Elsevier, vol. 130(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dorosh, Paul A. & Fang, Peixun & Pradesha, Angga, 2025. "Regional implications of public investments and external shocks in Papua New Guinea: An economywide analysis," Other briefs 8, International Food Policy Research Institute (IFPRI).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Davies & Marcel Schröder, 2022. "The path to kina convertibility: An analysis of Papua New Guineaʼs foreign exchange market," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 9(3), pages 465-482, September.
    2. M. H. Davies & M. Schröder, 2025. "A simple model of internal and external balance for resource‐rich developing countries," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 69(1), pages 178-199, January.
    3. Schiff, Maurice & Valdes, Alberto, 1998. "Agriculture and the macroeconomy," Policy Research Working Paper Series 1967, The World Bank.
    4. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
    5. Soriano, M a. Cecilia G. Author_Email:, 1990. "Classifying the Economy into Traded or Nontraded Sectors," Philippine Journal of Development, Philippine Institute for Development Studies.
    6. Boris Petkov, 2018. "Natural Resource Abundance: Is it a Blessing or is it a Curse," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 43(3), pages 25-56, September.
    7. Astorga, Pablo, 2012. "Mean reversion in long-horizon real exchange rates: Evidence from Latin America," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1529-1550.
    8. Mutambatsere, Emelly, 2006. "Trade Policy Reforms in the Cereals Sector of the SADC Region: Implications on Food Security," Working Papers 127055, Cornell University, Department of Applied Economics and Management.
    9. Soledad Arellano & Felipe Larraín, 1996. "Tipo de Cambio Real y Gasto Público: Un Modelo Econométrico para Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(98), pages 47-76.
    10. Rodrigo Suesc�n M., 1997. "Commodity booms,dutch disease,and real business cycles in a small open economy: The case of coffee in Colombia," Borradores de Economia 2164, Banco de la Republica.
    11. Michael L. Mussa, 1986. "The Effects of Commercial, Fiscal, Monetary, and Exchange Rate Policies on the Real Exchange Rate," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 43-88, National Bureau of Economic Research, Inc.
    12. Ricardo Hausmann, 1995. "Manejo de sacudidas petroleras negativas: la experiencia venezolana en los años 80," Research Department Publications 4011, Inter-American Development Bank, Research Department.
    13. Bo??tjan Jazbec, 2002. "Balassa-Samuelson Effect in Transition Economies: The Case of Slovenia," William Davidson Institute Working Papers Series 507, William Davidson Institute at the University of Michigan.
    14. Kirsi Zongo & Mahamadou Diarra & M. Idrissa Ouedraogo, 2024. "Effect of exchange rate misalignments on foreign direct investment in Sub-saharan Africa," SN Business & Economics, Springer, vol. 4(6), pages 1-21, June.
    15. Corbo, Vittorio & Fischer, Stanley, 1995. "Structural adjustment, stabilization and policy reform: Domestic and international finance," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 44, pages 2845-2924, Elsevier.
    16. Ricardo Hausmann, 1995. "Dealing with Negative Oil Shocks: The Venezuelan Experience in the Eighties," Research Department Publications 4010, Inter-American Development Bank, Research Department.
    17. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: An Overview," UCLA Economics Working Papers 710, UCLA Department of Economics.
    18. Masters, William A. & Ianchovichina, Elena, 1998. "Measuring exchange rate misalignment: Inflation differentials and domestic relative prices," World Development, Elsevier, vol. 26(3), pages 465-477, March.
    19. Polackova, Hana, 1997. "Inflation in nontradables and the macroeconomic policy mix : a model with policy application to transition economies," Policy Research Working Paper Series 1702, The World Bank.
    20. A. H. Ahmad & Eric J. Pentecost, 2010. "Terms of Trade Shocks and Economic Performance Under Different Exchange Rate Regimes," Discussion Paper Series 2010_08, Department of Economics, Loughborough University, revised Mar 2010.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:adbewp:0663. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Orlee Velarde (email available below). General contact details of provider: https://edirc.repec.org/data/eradbph.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.