Structural causes: Offshore retention of export revenues

A primary factor contributing to PNG's FX shortage is the systematic retention of export earnings offshore, particularly by firms in the mineral and petroleum sectors. In 2023, PNG recorded total export receipts of $14 billion—yet only $5.6 billion flowed into the domestic financial system. This large disparity shows that more than half of PNG’s foreign earnings remain abroad, out of reach for local businesses and importers. This practice is enabled by project development agreements (PDAs) that permit resource companies to keep a portion of their export earnings offshore to service their long-term investment contracts. While these agreements were designed to attract foreign capital, they have inadvertently exacerbated the country’s FX shortfall and weakened PNG’s ability to manage its external balance.

Economic impact: Imports, Investments, and Jobs

The FX shortage has profound implications for PNG's import-dependent economy. Businesses routinely face delays in accessing foreign currency, constraining their ability to procure essential inputs from international markets. This situation led to a reduction in import volumes, adversely affecting production processes and the availability of consumer goods. It sometimes disrupts both domestic and international travel due to fuel shortages. The PNG 100 CEO survey confirms that FX access is among the top constraints on business operations and expansion, suppressing investment, reducing competitiveness, curtailing employment opportunities and lowering social welfare over the long term.

Policy Responses and Outlook

The Bank of Papua New Guinea initially implemented measures such as FX rationing, alongside a managed exchange rate regime. While these policies aimed to stabilize the Kina and preserve official reserves, they also contributed to a backlog of FX orders. Recognizing these limitations, the International Monetary Fund (IMF) and other stakeholders recommended a gradual transition towards a market-driven exchange rate system, believing the Kina to be overvalued. A more flexible exchange rate, paired with improved FX liquidity, could enhance currency convertibility, attract foreign investment, and improve the external balance. This transition must be managed carefully: sudden devaluation could cause inflation and worsen living conditions in urban areas already under stress from climate displacement and social tensions. Critics argue that any “necessary pain” must be balanced with social protections to avoid destabilizing fragile communities. 

Perhaps the most glaring inconsistency in PNG’s FX dilemma is that these FX shortages are occurring alongside current account surpluses, the result of PDAs that allow export earnings to remain offshore. Revisiting and renegotiating PDAs to encourage or mandate greater repatriation of export earnings should underpin any long-term solution. Increasing the domestic retention of FX receipts would directly enhance liquidity, reduce the need for rationing, and support import activities—especially for small and medium enterprises with limited access to offshore financing.

In 2023, PNG reached a staff-level agreement with the IMF under the Extended Credit Facility and Extended Fund Facility (which has since been reviewed and modified). These programmes aim to support economic reforms, including measures to address FX constraints and strengthen macroeconomic governance. While the road ahead remains uncertain, these developments mark a growing consensus on the need for a balanced, multi-pronged approach—one that includes policy reform, renegotiation of existing agreements, and strategic economic planning.

PNG’s FX crisis is not merely a balance-of-payments issue. It is a symptom of deeper structural challenges in managing resource wealth, attracting sustainable investment, and supporting inclusive growth. Solving it requires a political and institutional commitment to rethinking the terms of extraction and the mechanisms by which wealth is transformed into public good, including by learning from the experiences of other resource-rich economies that have faced similar dilemmas. In doing so, PNG can move toward a more resilient, inclusive, and sustainable economic future, with higher living standards for all its people.