IFC reaching out to SMEs

The international Finance Corporation (IFC) is assisting small to medium term enterprises (SMEs) in Papua New Guinea (PNG) by way of convincing the commercial banks to lend to SMEs as well as lending its own money.

“We try to encourage the commercial banks to lend money to the SMES because one major constraint to SMEs in PNG  is for the SMEs to get loans from the commercial banks to expand their businesses.

“Historically, banks normally refuse to lend to the SMEs” says Laura Baily, the country manager of the World Bank group in Papua New Guinea.

IFC has therefore stepped into providing the SMES with training and money.

“We train the SMEs to build their credit worthiness.

“Then we lend them some money as safety net to expand their business.

“The money comes from the world bank” Baily says.

IFC is also in dialogue with the ministry of commerce trade and industry as well as relevant stakeholders to improve access to credit facilities to the SMES in PNG. 

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. 

BPNG's intervention on foreign exchange crucial

We fear that the much talked about LNG Windfall will not be realized. 

A world Banks report states that fourth fifths of the LNG is foreign own. Two thirds of the cost project cost is financed through International debt. LNG windfall will first be used to service the loans before being put into SWF. 

We don’t know the reason behind BPNG's delay in foreign exchange intervention as someone stated in Facebook somewhere but we are sure for the fact that intervention now is crucial.

Intervention in foreign exchange will smooth the exchange rates and help manage inflation.

On the other hand, the intervention can undermine the protection, a floating exchange rate provides from economic shocks. That could be a possible reason why BPNG is not acting fast.

Kina has been gradually declining against major foreign currencies since 2012. See the graph above from MoniPlus. 

LNG windfall to massively benefit foreigners

The much anticipated PNG LNG windfall will benefit foreigners more than Papua New Guineans.

The truth which has been kept obscured under the much publicized uninterrupted economic growth by the incumbent government has been revealed by a World Bank report, the team of experts led by country economist Tim Bulman.

“PNG LNG project is four-fifths owned by non-residents. Three quarters of the construction costs were funded through international debt, which needs to be serviced” the report says.

It is now clear that the PNG LNG windfall will be used to service all the international loans first and whatever that remains will then be put back to the sovereign wealth fund and not the other way around as the government keeps preaching about.