A COUNTRY REPORT OF

PAPUA NEW GUINEA

Sir Roy C. Gacus

(Course coordinator/Subject teacher)

Angellie Amor R. Palconite

3/BSMA/A

(Student)
 A foreign exchange market is an inter-financial market in which one commodity is exchanged for
another. The trading of currency spreads for investment purpose, also known as forex trading. It is a
connection to making money. The foreign exchange market allows individuals, private sectors,
corporations, and/or organizations to turn one currency into another. The prospect of hitting another
nation in this manner is unimaginable.

The economy, such as inflation and interest rates, is heavily influenced by a country's economic
situation. Safe interest parity revealed interest parity, and purchasing power parity is an example of this,
referring to a theory I was able to understand. We all realize that the rate of exchange should increase
during a contraction, which is terrible for export markets, and that the exchange rate should fall during a
recession, which is bad for importers. On the other hand, the following example demonstrates that when
the exchange rate depreciates, there are repercussions.

Papua New Guinea’s Currency

Papua New Guinea introduced its notes and coins currency on the 19th of April 1975. The name
of the dollar equivalent is Kina and the name of the cent equivalent is Toea. The Kina is the major unit
and one single kina is equivalent to one hundred toeas.

Papua New Guineans have traditionally lived as agricultural farmers in rural areas, where a
household or community is self-sufficient in generating what they require for their intake. They traded
products they couldn't manufacture or create for goods they already had in excess. During colonial times,
PNG transitioned from a subsistence to a capitalistic society. The shift from a subsistence economy to a
modern exchange economy was part of the general evolution of humanity's culture and social structure
throughout the time.

PNG was industrialized and monetized as a result of these changes in economic processes. This
was the period when people learned to use money in its various traditional forms before it eventually
evolved into the Kina and Toea we know today.

Papua New Guinea’s Financial Market

The Government of Papua New Guinea is in control of a) foreign exchange market operations b)
foreign reserve management c) domestic money market operations and growth; the implementation of
monetary policy through open market operations serves as an agent for the government where they are
responsible for providing Registry and Custody services to the government of Papua New Guinea.

Foreign Exchange Market Operations in PNG are controlled by the Bank of the said country which
also entails that it manages the country's foreign reserves. To that end, the Bank keeps a close eye on
global economic trends, capital market indicators, and foreign exchange markets both at home and
abroad. It acts as a broker in the domestic foreign exchange market, making trading easier.

It develops and executes the Bank's Intervention Strategies focused on innovations in the
monetary and forex markets. The institution is still in charge of managing the country's foreign exchange
reserves and investing them in conjunction with the bank's Reserve Management Policy, as well as risk
management for foreign reserve operations.
Exchange Control

The Exchange Control Reporting Framework offers instructions for filling out multiple kinds of
Balance of Payment (BOP) forms and, including the applicable, lists the required additional
documentation. It is a complement to the Foreign Exchange Notices and should be utilized by Licensed
Dealers in conjunction with the Foreign Exchange Manual (June 2005).

One of the controls done by the state is their accounting policy on foreign exchange. The
candidate must provide adequate detailed descriptions of trading, settlement, and accounting systems
that will be used, such as security and backup capabilities, as well as the ability to generate timely reports
as needed by the Central Bank.

Data on Exchange Rate by Showing a Graph from Jan 2020 Up To Present in a Daily Basis

Graph 1. Exchange Rate January 01,2020- December 31, 2020

Table 1. Worst and Best Exchange Rate every month of 2020

Month Worst Best Average

January 0.2904, 0.2959, 0.2939

February 0.2897 0.3001 0.2939

March 0.287 0.294, 0.2917

April 0.2871 0.2928 0.2902

May 0.2848 0.2915 0.2886

June 0.2869 0.2903 0.2892

July 0.2841 0.2922 0.2882

August 0.2831 0.2889 0.2849

September 0.2822 0.2912 0.2864

October 0.2813 0.2861 0.2852

November 0.2816 0.2853 0.2843

December 0.2825 0.285 0.2844

The table shows the exchange rate of currency between PGK and USD in the year 2020; wherein
the results appear that the month of October was the worst exchange rate of the year with K1 PGK =
0.2813. On the other hand, the best exchange rate was on February 2020 with the rate of K1 PGK=
0.3001 USD.
Graph 2. Exchange Rate January 01,2021 up to present
Table 2. Worst and Best Exchange Rate every month from January 2021 up to present

Month Worst Best Average

January 0.2798 0.2845 0.283

February 0.2807 0.2842 0.2827

March 0.2812 0.2843 0.2832

April 0.281 0.2842 0.2826

May* 0.2805 0.2842 0.284

*As of May 8, 2021

The table shows the exchange rate of currency between PGK and USD as of May 2021; wherein
the results appear that the month of May was the worst exchange rate of the year with K1 PGK = 0.2813.
On the other hand, the best exchange rate was in February 2020 with the rate of K1 PGK= 0.3001 USD.

Factors that can affect exchange rates

Countries use exchange rates for various reasons. Interest rates, trust, the current account on the
balance of payments, economic expansion, and global inflation rates all influence exchange rates.
Different countries keep an eye on the movement of the rates in order to determine a factor in their
current standing in the global community.

The rising and falling of rates are classified as the movement of currency. Therefore, when a
nation is in a recession, interest rates are likely to decline, reducing the country's capacity to boost foreign
capital. As a response, the currency depreciates against the currencies of other nations, reducing the
exchange rate. However, there are certain reasons why rates increase. When speculators expect the
value of the currency it began to increase in the future, they will urge to demand a higher cost now in
order to benefit from the current situation. The probable result will be the increase in demand and
correspondingly, the price will grow. Thus, changes in the exchange rate are often influenced by stock
market sentiments rather than economic fundamentals.

Another factor, if the inflation rate is lower compared to other countries, it is highly observable that
PNG exports will become more efficient, and investor demand for PNG products will improve.
Furthermore, since foreign exports would be less expensive, PNG people will purchase fewer imports. As
a result, countries with much lower inflation rates enable their currencies to appreciate in value.
 The value of government debt can greatly affect the exchange rate in certain cases. If investors
believe a country will pay its debts, they will issue their bonds, causing the exchange rate to fall in value.
Due to the COVID-19 pandemic, the economy was affected in different areas – especially economically.
Establishments, businesses, and other entities were forced to close to ensure the safeness of the
citizens. However, as Papua New Guinea is known as still a developing country, this pandemic is surely a
huge wave for them. The country is still coping to increase its competitiveness and to provide stability in
its country.

When we say competitiveness, if the PNG, for example, has long-term improvements in labor
market relations and higher productivity, products or goods will become more globally competitive and in
the long run, can result in an appreciation in their currency. This is a similar factor to low inflation. These
are some of the factors that affect the movement of exchange rates of the country.

Explanation of Foreign exchange rate in a Grade 1 pupil

The concept of foreign exchange can be in a simpler form for a grade 1 pupil to understand. As a
student, we opt to analyze the certain concept in a possible less technical way for us to remember it. I can
be able to explain the concept of foreign exchange by citing a situation. If Errol from Papua New Guinea
purchased a shirt from you a Filipino citizen, using their own currency Kina, you have to politely tell him
“I’m sorry, but you have to pay me using our currency”. Why? because the value of Errol’s 1 Kina is not
equal to 1 Philippine peso. Therefore, you have to make sure that both of you, are of the same worth or
value.

Importance of Foreign Exchange in Papua New Guinea

The ability to evaluate forex offers a world of possibilities. Since we strive for interconnectedness
and inclusivity, once mastered, this can be a big step forward for the company. However, we cannot deny
that external factors can obstruct our progress toward our objective. Many countries, such as Papua New
Guinea, in reality, were confronted with a slew of problems and downturns. The good news is that they
will be able to adapt and deal with the changes in order to remain afloat.