Papua New Guinea reforms central bank and forces out governor

A wide-ranging reform to Papua New Guinea’s central bank law has provoked criticism from former governor Loi Bakani, who was effectively forced out of office by its provisions.

The Central Bank (Amendment) Act 2021 was passed in a single day by the country’s parliament on December 2. The leader of the opposition supported the measure, and it appears to have passed unanimously.

The law reduces the governor’s term from between five to seven years to four years. It also limits the governor to two terms in office. Bakani had already been governor since December 2009. Thus, the passage of the act last month forced him out of office two years before the end of his second seven-year term.

On December 29, newspaper the Papua New Guinea Post-Courier reported that the government appointed deputy governor Benny Popoitai as acting governor on December 24. 

The government also nominated five of the seven external members of the new central bank board.

The law made extensive changes to the governance structure and powers of the Bank of Papua New Guinea. It transfers the power to set monetary policy from the governor to the BPNG board.

The law also restructured the board, which now has nine members, down from 11. Seven of these are external members, named by the governor-general on the advice of the government, in consultation with the board. The governor and a deputy governor are the remaining members.

One or two of these external members must “have international experience of central banking and not be a resident of Papua New Guinea”, the law states. The governor still sits on the board but no longer chairs it.

The new provisions also change the limits on central bank financing of the state. In 2020, parliament altered the law to allow the BPNG to make larger advances to the government. The central bank had leeway not to do so. The 2021 amendment law requires the BPNG to make these advances.

The law also caps the proportion of public debt the BPNG can hold at 25% of revenue averaged over the past three years, not including asset sales. In times of national emergency, this would rise to 40%.

Because Papua New Guinea has no real secondary equities market, it is difficult for the central bank to transact in government securities without also financing the state. From 2014 to 2021, the BPNG periodically purchased government debt directly when the state was unable to market its full equities issues. This practice, known as the “slack arrangement”, was technically a monetary policy measure to lower interest rates.

However, since there was no limit on the amount of government debt the BPNG can hold for monetary policy operations, the central bank could engage in unlimited monetary financing of the state.

Papua New Guinea’s finance minister Ian Ling-Stuckey convened a three-member expert panel to recommend reforms to the 2000 central bank law. The panel consisted of University of Papua New Guinea chancellor Robert Igara, former BPNG governor Wilson Kamit and Australian National University economics professor Stephen Howes.

This committee published its “phase one report” in October. The report recommended a six-year term and a maximum of two terms for the governor.

It also called for the BPNG to establish an autonomous monetary policy committee to steer monetary affairs. The final law vested monetary policy-making powers with the board instead.

The review also recommended somewhat tighter limits on advances and on BPNG debt holdings than the law eventually implemented, at 20% of average revenue rather than 25% in the latter case.

Bakani protests over law

The former governor has publicly objected to the central bank reforms. He has questioned the speed with which they were adopted and complained that the government never discussed plans for a leadership transition with him, according to the Post-Courier.

Bakani also questioned the financing provisions of the new law. He said that as written, the legislation could allow up to 10 billion kina ($2.85 billion) in central bank lending. “This is easy printing money and is inflationary,” he argued.

Isaac Lupari, a former senior civil servant, also condemned the new statute, saying it diminished the independence of the central bank. “What we are seeing now is what happened with our state-owned enterprises with boards becoming politicised and independence being removed,” he said.

Ling-Stuckey accused Bakani of “spreading inaccurate rumours”, according to the Post- Courier. He argued that Bakani’s BPNG had overseen high levels of monetary financing of deficits in the mid-2010s. He also said that the limit on advances was 3.321 billion kina.

The Post-Courier quoted Ling-Stuckey as saying: “I can understand the disappointment of the former governor of the BPNG in not being asked to continue in the role. I’d encourage him to take a more informed and considerate approach to the reform process.”

The finance minister accused Bakani of not co-operating with the review panel he established. “He declined requests for meetings and failed to appoint any BPNG staff to the secretariat for the review,” Ling-Stuckey told newspaper The National.