Papua New Guinea’s Central Bank Governor too powerful
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Papua New Guinea’s Central Bank Governor too powerful
PORT MORESBY: The amount of power vested on Papua New Guinea (PNG)’s
Central Bank Governor by PNG’s Central Banking Act (CBA) 200 is unusual,
according to an Independent Advisory Group (IAG) report.
“At last count, there are only three other central
banks in the world that vested that much power in one person as PNG’s CBA does,”
the reported added.
The IAG reported that the Bank of Papua New Guinea (or
Central Bank) needed to review its monetary policies and financial regulations
to meet changing international practices, recommending 31 changes.
The details of the IAG report were published by The National:
Too much
‘unusual’ power vested on BPNG governor
December 17, 2021The
NationalBusiness
The Independent Advisory Group was
commissioned by the Government to review PNG’s Central Banking Act 2000. It is
chaired by Robert Igara, who is University of Papua New Guinea chancellor and
former chief secretary, when
the Central Banking Act was introduced in 2000. His two other members are
Sir Wilson Kamit, who was Central
Bank governor from 1999 to 2009 and Dr Stephen Howes who is professor of
economics at the Australian
National University and Development Policy Centre director. Phase one of the
review report was completed
on Oct 25, 2021, and it was tabled and passed in the last session of
Parliament, limiting the Central Bank
Governor’s tenure in office to four years and reducing the number of board
members.
THE amount of power
vested on Papua New Guinea (PNG)’s Central Bank Governor by PNG’s Central
Banking Act (CBA) 2000 is unusual, according to an Independent Advisory Group
(IAC) report.
“At last count, there are only three other central banks in the world that
vested that much power in one person as PNG’s CBA does.
“Whereas collegial
decision-making is a hallmark of modern central banking that both augments the
independence of the decision-making process and enhances the quality of
decisions.
“The majority of central banks, board or committees are responsible for making
policy decisions,” the IAG said in its Phase 1 review of the CBA.
The Bank of Papua New Guinea (BPNG/Central Bank) already has a Monetary Policy
Committee (MPC) but it is entirely internal to the bank’s management.
The IAG proposed that the MPC be strengthened by giving it a legislative
mandate to formulate monetary policy and oversee its implementation, and that
it be opened to external, including international, members to allow for
contestability.
“The Governor would chair the MPC, and so would retain his or her leadership
role on monetary policy, but the collaborative scrutiny that an MPC would
provide would greatly enhance accountability,” the IAG added.
The IAC found that BPNG had isolated itself too much, both from other parts of
Government, and from private-sector stakeholders.
“Independence prevents abuse, but isolation undermines accountability. If no
one knows what BPNG is doing, how can it be held to account?” While BPNG should
continue to be independent from the Government, it needed to do more to
collaborate with other arms of Government, especially Treasury, and especially
in times of crisis, such as the current pandemic, the IAG reported.
“There has been too little communication between the Government and BPNG, and
we propose several measures to improve the two-way flow of information to
resolve disputes, and to promote teamwork – all without in any way undermining
BPNG’s independence,” it added.
The IAG also found that the private sector wanted BPNG to be accessible for
discussion, to explain itself, and to consider alternative views.
“The seemingly never-ending disagreement between the private sector and BPNG on
the extent – or even the existence – of foreign exchange shortages is the sort
of issue that could easily be resolved through dialogues,” the IAG added.
Though BPNG has done well in some regards – inflation has been kept relatively
low and stable and the payments system has improved – but there had been
significant problems and negatives that needed change for the future:
- THE controversial “slack
arrangement” exposed a loophole with regard to the very important Section
55 of the CBA, a loophole that has allowed virtually unlimited deficit
financing, an outcome that was certainly never intended. This loophole
needs to be closed;
- THE prolonged rationing of
foreign currency that emerged in 2014 following BPNG’s sudden 17 per cent
appreciation of the exchange rate and which has plagued the economy ever
since has undermined economic growth and encouraged fiscal profligacy. PNG
needs to return to its traditional policy of currency convertibility as
soon as possible.
- THE illegal payments of
dividends in the period 2011 to 2015 raised serious questions of
governance, both for the Government and for BPNG. This episode points to
the need for a strong board able to uphold the bank’s rights granted by
the CBA;
- BPNG waited too long before
shifting to an accommodative policy stance, which it did only in the
second half of 2019, even though it had been clear for several years that
the economy was struggling, with employment falling nearly every year
since 2013;
- THE financial sector has
been stable but has become more concentrated over time. PNG badly needs
more competition in the financial sector, and new entrants to push down
interest rates, and expand financial sector credit and access to the many
who need it and can make good use of it.
The IAG also described the CBA as a “masterstroke” that ended years of political interference in the running of BPNG by securing the tenure of the Governor and the board. “Gone immediately were the days when the job of the Governor was a revolving door,” the IAG stressed.
One of our aims is to preserve and strengthen that independence.
“We propose preserving it by keeping in place key features of the existing Act, such as the requirement that the tenure of the Governor and of Board members be protected.
“This is what distinguishes BPNG from other state-owned enterprises, some of which do indeed suffer from the curse of instability and political interference.”
The IAG reported that the Board should be chosen on merit, not on the basis of representation, and tight limits should be placed on ministerial discretion.
“And we should cast the net further, aiming for not only domestic but international representation. A more merit-based, stronger board will be in a better position to protect BPNG’s independence,” the IAG added.
BPNG was made independent by the CBA to reduce the scope for discretion arising from political interference.
“But an unintended consequence of the legislation has been to create new scope for discretion or arbitrary behaviour by BPNG. In the course of our consultations, we heard stories from businesses having to text the Governor or reach him through an intermediary in order to request the release of foreign exchange to finance vital imports.
“This is not the sort of economy that will serve PNG well – one where business leaders have to focus on lobbying rather than innovation; and where business success depends on relationships rather than performance.
“We propose two new simple, transparent and desirable rules to reduce the scope for discretion, and increase predictability: - FIRSTLY, we want to close
the loophole currently present in Section 55 on government financing. We
take a conservative, pragmatic approach. Given PNG’s shallow capital
markets and single-borrower limits, all BPNG purchases of Government
securities potentially have a fiscal impact, making it easier for the
Government to finance its deficit. To completely prohibit government
financing would therefore mean banning all BPNG dealing in Government
securities. This is one option, but it would be extreme. Given the lack of
competition in PNG’s financial markets, the bank can play a useful, if
limited, role in deficit financing by combatting the market power of key
private sector financiers. The key word here is ‘limited’ and we propose a
prudent, quantitative and easily measurable legal limit on deficit
financing, one that could be temporarily increased in times of national
crisis such as Coronavirus (Covid-19). Such an approach is in line with
relevant international practice and would prevent the excesses of the
“slack arrangement” from ever being seen again; and
- SECONDLY, we want to bring
an end to foreign exchange shortages and to foreign currency rationing.
The bank’s job of managing the Kina is not an easy one, especially given
the volatility of the PNG economy, and the undiversified nature of the
foreign exchange market. We think foreign exchange management can
certainly be improved, but, as per the existing CBA (Section 58), that
should be left to the bank to fix, not attempted by Government fiat or
undermined by government interference. The practice of rationing foreign
exchange, which BPNG introduced in 2014 and has been allowed to continue
ever since, is not only in violation of PNG’s international agreements.
More importantly, this practice has done immense damage to PNG’s economy,
and to its international reputation, and has encouraged fiscal profligacy
by guaranteeing to politicians that no matter how high a fiscal deficit
they run, they will not risk a balance of payments crisis.
The IAG found BPNG’s objectives were too narrowly defined for an organisation with so many roles and so much power.
“Currently, the sole objective of monetary policy is price stability. This was understandable when the CBA was put in place, given the high inflation that the country was then battling.
“But also at that time the bank’s central role in relation to the exchange rate and fiscal policy was little understood.
“In 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 objectives of the Bank should extend beyond price stability to include broad-based growth,” the IAG urged.
The IAG said its review report was based on international experience and detailed analysis of monetary policy-making and governance in PNG over the last decade.
December 16, 2021The NationalBusiness
THE Bank of Papua New Guinea needs to review its monetary policies and
financial regulations to meet changing international practices, the Independent
Advisory Group (IAG) reports.
It said Papua New Guinea’s unique circumstances and economic structure needed
to be taken into account with Government fiscal policies. The IAG in its phase
one review of the Central Banking Act 2000 report to Treasurer Ian Ling-Stuckey
in October found that international best practices had changed.
Ling-Stuckey had issued terms of reference to the IAG on May 13 covering the
issues of:
- GOVERNANCE;
- ACCOUNTABILITY
and transparency;
- GOVERNMENT
financing;
- CRISIS
management; and,
- THE
Bank’s objectives, and issues for the second phase of the review.
In response, the IAG made 31
recommendations covering the issues.
The IAG said: “Our vision is a Central Bank that is both independent and accountable,
whose discretion is limited by law, and whose objectives are aligned to its
functions.
“Our recommendations draw on detailed analysis – both what has worked and what
has not, both in Papua New Guinea and internationally – to transform that vision
to reality.
“The Central Banking Act 2000 transformed Bank of PNG’s performance with
positive results for the economy and Papua New Guineans. A second round of
reforms is now needed, and could have the same transformational impact again.”
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