GoPNG's Counter Inflationary Policy Initiatives And On Whose Advise?

Inflation is an economic situation in which price rises. Price is in a tri-factor relationship with demand and supply. The state of demand and supply determines the rise and fall of price.

Price is a key performance measure in the management of the economy. In managing the economy there are variables to control on the Supply Side and the Demand Side to determine the price fluctuations. In this narrative I will briefly focus only on the Demand Side and its two economy management policies of Fiscal Policy and Monetary Policy.

Fiscal Policy and Monetary Policy aim to change aggregate demand (AD) in the economy. AD is the total spend into the economy. AD is made up of Consumer Spending + Government Spending + Investment by Firms + Net Exports (exports minus imports). Anything that effect these will affect AD. Demand Side Policies are used for short term changes and may be expansionary or contractionary in relation to the state of the economy and circular cash flow in the economy. The fiscal policies are used to stimulate spending in a recessionary economy while the monetary policies are intended to reduce spending in an inflationary economy.

In an Inflationary economic situation where prices are rising and economy is at or near the peak of the business cycle, GoPNG is expected to apply Monetary Policy initiatives and adopt fiscal discipline by planning the avoidance of unnecessary spending by cutting back on some areas as well as applying some macro economic interventions such as not to increase tax.

This is how the Monetary Policy initiatives and the macroeconomic interventions would work to manage (and reduce or slow down) price rise or inflation.

Applying fiscal discipline and reducing tax would mean injections (government spending) into the circular flow of income will drop and withdrawal (tax) from the economy will continue. The cash flowing in the circular flow of income will shrink so its policy will be 'contractionary' in nature, meaning the economy will contract as GoPNG tries to balance, optimise and manage inflation concurrently. Wherever the economy is on the business cycle and that contraction happens, the GoPNG must ensure that we do not go down too deep in the trough of the business cycle and stay there too long. That is why Demand Side Policies are short term measures to regulate an economy experiencing either recession or inflation.

The current inflationary situation that is experienced now means that the economy is heating up due to increasing price and to cool the economy down the GoPNG will be expected to use Monetary Policy to either reduce money supply or increase interest rate. Reducing money supply will have less to no effect on price because at or near the peak of the business cycle the business activities are high and there is sufficient demand for money. Therefore because of this high demand for money, GoPNG is highly likely to increase interest rate. Interest rate is the price of money. As in the tri-factor relationship of supply, demand and price stated at the start, short supply of money and high demand for money means price of money will rise. This increase in interest rate will also have the desirable effect of boosting foreign exchange and increase foreign exchange reserves, which is also in high demand and this will have a cascading interrelational effect on the eventual reduction on prices.

To foreign investors, interest rate, is the price on their foreign capital. The higher the price, it is expected to attract their capital onshore. More foreign currency will demand for PGK and this increase demand for PGK will increase exchange rate. That is, a big foreign currency number as the numerator divided by a small PGK number as the denominator, you now get a big number or exchange rate. Hence exchange rate escalates. Increase exchange rate will make our produce dearer to foreign consumers so they will demand less thus lowering export volume and export earning. High exchange rate makes overseas produce cheap for local consumers thus increasing import volumes and negative earnings. This will result in negative net export. Negative net exports plus reduced unnecessary spend by GoPNG in its application of fiscal discipline will lower the Aggregate Demand (AD). A Lowered AD is expected to result in lower GDP and lower prices.

Unfortunately by the three key GoPNG economy management initiatives so far, all have indicated that we are not taking the expected contractionary policy path to manage inflation and we continue to be taking the opposite 'expansionary' policy approach by:

1. Increasing borrowings to spend into the economy by legitimising the previous legal limit of debt-to-GDP of 35% to a new high of 43% so we can borrow more and spend into the economy. It is not wrong to spend into the economy but if we borrow to spend then we must spend the borrowed funds into enabling capital infrastructures where return on investment is guaranteed and not on non-value adding areas like public service wage bill.

2. Now having interfered into BPNG operations which I suspect is to print money and increase its supply but not to regulate interest rate.

3. Attempting to impose the 'super tax' on banking firm BSP and telecommunication business Digicel which will cull back on their respective wide reaching coverages. This contradicts GoPNG's strategic objective of e-banking and e-commerce which enables and increase the velocity of money in the circular cash flow. The quicker money exchange hands, it stimulates the commercial activities and the more commercial activities, the economy grows.

These three key endeavours rises the question: on whose advise are we listening to?

Our past experience showed that past GoPNG and PMs have had foreign advisors has their economic advisors: late Sir Bill Skate had Hamidan Rhad; Somare GoPNG and Don Polye had Flannigan; Peter O'Neil had Weiss/Hawkins and etc). The risk of foreign interest interfering cannot be completely ruled out as we have tendencies not to ignore sunken costs consultant fees and management often listen to advise that it paid for. If we make use of economic advice from our own State Institutions like BPNG, Treasury Dept, Institute Of National Affairs and etc and heed their advices I am sure they will have the best interest of the nation at heart and can't lead us astray economically. Besides by not ignoring but engaging and valuing our own State Institutions advises, we indirectly empower them as being still relevant and having meaningful roles to play and contribute.

Our GoPNG's economy recovery initiatives todate, especially to reign in inflation that is experienced now, appears contradictory to the expected educated ways and this now should raise questions on the motives of the do-gooders external economic advisers.