This is an edited version of the keynote the author gave during the PNG 2022 update on October 21.
When our former Prime Minister, Sir Mekere Morauta, died at the end of 2020, there was an outpouring of national grief and widespread recognition that his government had achieved more than any other through its reform program to put the country on the road to prosperity. . Among others, the late Koiari Tarata, then Secretary of the Treasury, Sir Wilson Kamit, then Governor of the Bank of PNG, and myself, as Chief Secretary to the Government and then, with Mr. Tarata’s ill health, as as Acting Secretary for Treasury, were part of those reforms from the late 1990s to 2002. It was indeed a heady and deliberate time, during which we worked long hours and with great intensity to push the ambitious program of reforms spearheaded by our Prime Minister.
We have also received a lot of support and worked closely with the business and financial sector community in PNG, and we have also benefited from the support of our international partners – the “Friends of PNG” Australia, New Zealand, Japan and United States; and a group of eminent personalities – Professor Ross Garnaut, Professor Dwight Perkins of Harvard and Mr. Sakakibara (“Mr. Yen”) of Japan. I would also like to acknowledge the critical commitment and support in implementing the reforms from PNG’s business and financial sector leaders.
Among Morauta’s reforms, one of the most significant was the enactment of the Central Banking Act 2000, which established the independence of the Bank of Papua New Guinea. Last year, when the Treasurer, the Hon. Ian Ling-Stuckey, invited us to undertake a review of this law, we immediately accepted. While we recognize the importance of the Central Bank Act and the other reform achievements of the Morauta government, we also recognize that no reform is perfect. The world is changing and we should always learn from our experience. Twenty years later, it seemed only fitting that the law be revised.
The size of PNG’s financial system exceeds K40 billion, or more than 42% of PNG’s GDP. It is a very important contributor to the country’s economy and, may I add, essential to stability, employment and income in all sectors, as well as to the growth of the economy.
The review is being undertaken by what we call the Independent Advisory Panel, comprising myself, the highly respected former Governor of the Bank of PNG, Sir Wilson Kamit, and ANU Professor of Economics and PNG expert Stephen Howes. We are also supported by a secretariat with staff from the Treasury and the BPNG. We have also been well served by the UNA-UPNG partnership and the substantive work undertaken by academics from both institutions.
Our work takes place in two phases. We have completed the first phase and produced our first phase report. And we are now working on the second phase. The first phase focused on central bank governance and monetary policy. The second phase concerns financial sector regulation and competition.
For those of you who are not economists, let me reassure you that I am not either. But a good economy is the product of good governance, and that’s something I know a little about.
The main purpose of the Central Banks Act 2000 was to protect the Bank of Papua New Guinea and protect it from political interference. Remember the context in which the new law came. There had been a circular governors gate. BPNG’s first Governor, Henry ToRobert, served with distinction for 20 years. But then we had four governors in four years. Moreover, the primary function of the central bank had become to finance the government deficit, contributing to the high inflation and rapid depreciation of the time.
How did we protect the central bank? The 2000 Act removed politicians’ discretion over the council. Most board members were now chosen as representatives – representing the church, unions or business. The act also gave a fixed term to the governor: a maximum of two seven-year terms. The law also made it virtually impossible for the government to remove this governor. The new law then gave the governor responsibility for all policy matters submitted to the bank, whether they relate to monetary policy or the regulation of the financial sector. The new law also prohibits central bank financing of the deficit. Finally, the new law gives BPNG a single, clear objective: controlling inflation.
Looking back over the past 20 years, the stability brought by the new law is obvious to all. Since the law was passed, there have only been two governors. One is my IAG colleague, Sir Wilson Kamit, who served from 1999-2009. The second is Governor Loi Bakani, who served from 2009-2021. is obviously a question that this government needs. Address. But two governors in 20 years is much better than four governors in four years. It is important to note that Mr. Bakani and Mr. Popoitai also served as Deputy Governors for a considerable period. And their appointment as governors is proof of the stability dividends of the Morauta reforms in the country’s most critical regulatory, policy-making and implementing institution.
When it comes to inflation, to the bank’s credit, we’ve seen much lower inflation over the past 20 years than in the 1990s.
In the financial sector, the scams that were a common feature of the 1990s have been cracked down and the financial sector is much more stable.
So there were some positives, but there were also negatives, and things we can learn from.
The performance of central banks over the past two decades has certainly not been flawless. Despite the ban on government deficit financing in the 2000 law, the central bank started to engage in this practice again between around 2013 and 2016 under what has been called the “slack arrangement”.
More recently, I’m sure you’ve heard of complaints from business leaders about the difficulty in obtaining foreign exchange and the slowing economy. One thing that many people do not realize about the Central Bank Act 2000 is that it took the management of kina and foreign exchange matters out of the hands of the government and into the central bank. These difficulties are therefore squarely the responsibility of the central bank. What economists call currency convertibility was once a cornerstone of economic policy in PNG. This meant that if you imported goods into PNG and needed foreign currency, you could get it. Not anymore. Now we don’t have convertibility but rationing. This has been very bad for business and is one of the reasons why growth has been so slow in recent years and employment has fallen.
There have also been problems over the past 20 years in the financial sector for which BPNG is also responsible. BSP [Bank of South Pacific]The success of was born out of the Morauta era, when the government’s decision to privatize the PNG Banking Corporation led to its takeover by BSP. BSP has certainly done a great job in straightening out the corrupt and loss-making bank, but it can’t be good for our country to have such a dominant bank and have so little competition among banks.
So a mixture of successes and failures. Our job was to look at the Central Banks Act 2000 and figure out how to build on the successes and address the failures.
What did we recommend? Well, as I mentioned, we’re only halfway there. We submitted our first phase report late last year and are currently working on the second phase. I am happy to report that the government has acted on our report and has already amended the law on central banks. They haven’t acted on all of our recommendations, and of course that’s their prerogative, but I’m happy to say that they’ve acted on a lot of them. So many reports produced in PNG and for PNG sit on the shelves gathering dust and not much else. I’m glad it wasn’t one of them.
So what were our recommendations? In part two of this blog, I will highlight five of the most important.
This is the first part of a two-part blog based on the author’s keynote speech at PNG Update 2022, “Revisiting the Morauta reforms: modernizing PNG’s Central Banking Act”.
Learn more about the Independent Advisory Group on Central Banking Law and its ongoing work.