PNG Kina Devaluation: Managing Financial Risk Amid IMF-Mandated Reforms

A recently published report from Papua New Guinea’s National Research Institute (NRI)  has outlined a five-point plan to stabilise the nation’s struggling economy, as the country grapples with the severe impacts of a depreciating currency.

The analysis, released in May, urges the government to create a more attractive environment for foreign investment by addressing key issues like law and order and deteriorating utility services.

It also calls for greater support for non-resource industries to boost exports , developing the domestic capital market , improving remittance inflows from Papua New Guineans working abroad , and tackling security and travel cost issues that hinder the tourism sector.

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KEY POINTS:

THE KINA’s FALL: From January 2024 to April 2025, the Papua New Guinea Kina lost 8.2% of its value against the US dollar.

THE IMF CONDITION: The currency reform is a key part of a deal with the International Monetary Fund (IMF) for a US$918 million loan.

WHY THE REFORM?: The IMF found that under the previous system, the Kina was overvalued by 13.4% in 2022, which discouraged investment and exports.

COST OF LIVING SQUEEZE: The weaker Kina has increased the cost of imported goods, leading to higher prices for consumers.

GOVERNMENT DEBT BURDEN: With a falling currency, the government now has to spend more Kina to repay its foreign debt.

THE WAY FORWARD: Long-term solutions include creating a better business environment, supporting local exports, and developing the tourism sector

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These long-term measures are deemed critical following a currency reform that has seen the Kina’s value plummet, driving up the cost of living for ordinary citizens and increasing pressure on the national budget.

The reform was deemed necessary to correct a long-standing imbalance.

The author of the analysis, Dr. Thomas Wangi, explains that the previous “crawl-like” exchange rate regime had artificially propped up the currency’s value. In his report, he states that the Kina was “overvalued by 13.4 percent in 2022”. Dr. Wangi argues this overvaluation “made foreign investment less attractive, impeded export growth in the non-resource sector and caused foreign exchange shortages”.

While the depreciation was an expected outcome of the reform, the anticipated benefits of a weaker currency have been slow to materialise. A cheaper Kina was supposed to make PNG’s exports more competitive and attract foreign currency, thereby alleviating the very shortages the reform was meant to fix. However, the response has been sluggish, hampered by a difficult business environment and the long-term nature of investment. As Dr. Wangi observes, “so far, the depreciation has not delivered enough foreign currency inflows to alleviate foreign exchange rationing and clear import orders”.

Given the ongoing pressure on the Kina, the report outlines a series of long-term strategies required to stabilise the economy. Dr. Wangi proposes a multi-pronged approach, stressing that the government must “create a conducive business environment for foreign investment, supporting production and export in the non-resource sector, developing the domestic capital market, improving remittance inflows, and addressing constraints to tourism activities”.

These policies are presented as essential to building sustainable demand for the Kina and improving the nation’s foreign reserves.

In the meantime, the falling Kina has had severe real-world consequences across the country. The cost of imported goods has risen, leading to higher prices for basic food items and production inputs. This has fuelled a cost-of-living crisis, negatively affecting consumer welfare and retail sales. The government itself is also under immense strain. With foreign-denominated debt becoming more expensive to repay, more of the nation’s resources are being diverted from essential public services to debt servicing.

Ultimately, the currency reform is viewed as a difficult but necessary step toward correcting long-standing economic issues and achieving full convertibility for the Kina. The downward adjustment is expected to continue for the foreseeable future. The nation’s ability to navigate this turbulent period will depend on how effectively it can cushion the short-term pain while implementing the foundational economic changes needed for long-term stability.