Rise in kina value will have conflicting impacts

In the recent parliament sitting, treasury Patric Pruaitch said the value of the sliding kina will stabilize once the proceeds from the Liquefied Natural Gas (LNG) project starts to flow in. That is true according to the latest 2014 Bank of PNG annual report.

What the good treasury forgot to mention was the downside risks of sharp appreciation in Kina. And I can show you some evidence here.

When PNG starts exporting LNG, the country will be faced with a dilemma; on one end, sharp appreciation of kina as PNG starts to export LNG will help to reduce imported inflation and overheating pressures. The urban poor may benefit from the slowdown in inflation as prices of goods decline.

On the other end, the situation has damaging impact to rural citizens relying on export cash crops, such as coffee, cocoa and copra. Eighty percent of the population live in the rural areas of PNG and has limited alternatives sources of income. The rural mass depends on the income from the export commodities noted in earlier on. Reduction in the prices of the export commodities will severely affect the rural mass.

Moreover, kina appreciation will worsen the challenges of developing the non-minerals sector in order to diversify the economy.

There are two sides to the coin call the PNG LNG. Sharp rise in kina value will reduce inflation. But the same rise will have damaging impact on the rural mass who depend on export commodities.