The means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy or in short, the fiscal policy gives foreign investors the confidence to invest in a given country.
However as Dr Mark Evans, a senior policy analyst and economist at Pacific Institute of Public Policy in Vanuatu notes, there are some serious issues facing both the government and business.
Dr Evans’ analysis on the investor confidence in Papua New Guinea is founded on his argument about the management of the fiscal policy and a weakening kina.
“The rapidly weakening kina, deficit spending and the financing of government. The depreciating kina, with its potential impact on inflation, official foreign exchange reserves and investor confidence, is the biggest challenge to face the Bank of Papua New Guinea in recent years,” Dr Evan says.
The depreciation was predicted to coincide with the winding up of the construction phase of the LNG project. However, when it came, it came quicker than expected, causing a lot of uncertainty.
“The important point to note is that the recent intervention by the Bank of PNG does not change the fundamental driver of the depreciation—a shortage of foreign exchange.
”In the near-term, inflows from the PNG LNG project are unlikely to provide relief as a source of foreign exchange and the continued fiscal stimulus is driving the demand side: this means the foreign exchange shortfall will remain,” Dr Evans says.
He argues that attracting further foreign direct investment is therefore vital.
“For the exchange rate, the important thing to keep an eye on is the official foreign exchange reserves, particularly the direction and rate at which they are travelling. Looking ahead, if little else changes, this will be the most significant factor that will drive the central bank’s decision-making,” Dr Evans concludes.
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