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Borrow Your Way Through a Temporary Crisis, Adapt to a Permanent Crisis, Part 2

The words of graduate school still ring in my ears. If the kina is overvalued, devalue it. The government hates devaluation. Voters are getting even poorer. Riots break out. Promises of stability (that should never have been made) are broken. As you can see from the ECG, the Bank of Papua New Guinea tries to keep its exchange rate roughly pegged to the Australian dollar (subject to details and fine print).

In such a nasty system of floating exchange rates, exchange rates are allowed to change. Just not very much. And compared to the Australian dollar, this has not been the case since the 2008 global financial crisis.

If exchange rates spiral out of control, Ms. Genia and the boards that advise her have two choices. Defend the pin with the foreign countries they have saved. Or adjust the exchange rate to the new reality.

No wonder the IMF believes Papua New Guinea should simply weather the storm. As evidenced by the country’s ‘rainy day fund’ (below), the financial authorities have sufficient foreign reserves. They can use them to buy up the cinchona, and stability – sweet stability – remains. Amen.

Note, however, dear reader, that if a random graph from the Internet is to be believed, foreign reserves are not just high. They are about double that. As if policymakers saw an international financial storm on the horizon. Because they do. They have to. Lights don’t lie.

Every country I know that had a blackout eventually suffered some sort of banking/financial/reserve crisis. You don’t get an aggressive Puma (the company, not the animal) without some very serious problems in obtaining foreign currency working capital.

See part 3 about: “Two couples fight while two others kiss”

Part 1 The cougar who paid the price for overvaluation

(Mr. Michael advises the Hong Kong government on blockchains and the digital economy. A PhD economist from Harvard and Oxford, he had taught more than 2,000 executives from SMEs to state-owned enterprises at Oxford and Columbia, with a law degree from King’s College London.)