Get ready for a financial turnaround! The foreign exchange market is about to undergo a significant shift, and it's a story that will leave you wanting more.
The FX Backlog Mystery Unveiled
An economist predicts a remarkable transformation, moving from a deficit to a surplus, where buying Kina becomes the dominant force. But here's the intriguing part: this surplus is expected to strengthen the Kina's position, starting in the second half of 2026.
Kishti Sen, a senior international economist at ANZ Bank, attributes this shift to a boost in export revenue, which will enhance liquidity and slow down the Kina's depreciation.
The country has experienced a steady influx of foreign currency this year, improving the FX market's liquidity. Combined with the market backlog, which refers to eager buyers of available foreign currency, this has led to a substantial increase in market turnover, with a quarterly average of K17.1 billion in the first nine months of 2025, up from K14.6 billion in the same period last year.
Sen explains that the improved liquidity in 2025 has been primarily driven by commercial flows, with more foreign currency channeled through authorized FX dealers, mainly commercial banks. These flows have come from agriculture exporters, who, due to high global prices, have converted their larger foreign currency receipts to pay local suppliers along the value chain.
"These higher volumes were used to settle new and outstanding sell Kina orders," Sen said.
The result? A significant reduction in the FX market backlog in the first three quarters of 2025, with the private sector taking the lead in reducing the backlog.
And this is the part most people miss: the PNG FX market has never been closer to a balanced state. This has led to smaller declines in the PGK's value against the US dollar this year, with an average drop of 39 points per quarter, compared to the 42-point decline in 2024.
However, Sen urges us to consider the record increase in soft commodity prices, which is now over, with coffee and cocoa prices expected to retreat in 2026. This means that the flows associated with these exports will likely return to their 2024 levels, pushing the backlog even higher in 2026.
Most of the mining and petroleum taxes and dividends flow through to the government via the BPNG, and the central bank deposits these into the national foreign reserves account, crediting the government's account with the Kina equivalent.
While some gold exports will enter the inter-bank market as commercial flows, they may not be enough to maintain elevated commercial flows into 2026.
To keep the FX market backlog in check and limit Kina depreciation, Sen believes greater involvement or intervention from BPNG is necessary, particularly in the first half of 2026.
"We anticipate commercial flows to regain their position as the primary driver of FX market liquidity in the H2 of 2026, with a boost from foreign direct investment in US dollars," Sen added.
So, what do you think? Will the FX market's transformation live up to expectations? Share your thoughts in the comments and let's discuss this intriguing economic journey!
