The World Trade Organisation’s first review of PNG’s trade policies took place late last week. Here’s an abbreviated version of the background paper…

WHILE ECONOMIC GROWTH, earlier reforms and the massive LNG project hold promise, PNG faces many priorities: improving governance, reducing corruption, kick-starting reforms and building public infrastructure, all of which are sizable impediments to investment and development.

PNG’s resource-rich economy remains heavily reliant on subsistence agriculture. Its average GDP per capita was just over $1,000 in 2007. PNG is heavily trade dependent and vulnerable to world commodity price movements.

Since 2000, PNG's relatively steady economic environment has helped sustain growth, but structural reforms have waned, particularly since 2006, and fiscal discipline eased. PNG's robust growth since 2000 peaked at 7.2% in 2007 and remained at 4.5% in 2009, despite the global recession.

A major economic challenge confronting PNG, with wide trade policy implications, is how to manage the effects of the kina's appreciation. Substantial foreign investment in LNG and other projects is accentuating the economy's "two speed" nature.

The government views agriculture as a key sector in promoting export-driven growth, rural development and poverty reduction. Food security, interpreted as self sufficiency, is a priority.

Except for oil palm, agriculture has under-performed because of low productivity, largely reflecting inadequate research and development, poor take-up of technological improvements, and lack of scale economies inherent in smallholder farming.

Other major constraints include inadequate transport facilities, unreliable and expensive utilities, prevalent crime and lawlessness, and insecurity of land tenure.

Logging unsustainability remains a major problem, due largely to permits issued in contravention of the licence moratorium. Concerns persist over lack of sustainability in fishing.

The state-owned, inefficient, monopoly power utility, PPL, supplies unreliable and expensive electricity, thus raising business costs. While PPL was corporatised for privatization, this did not go ahead. It has been under financial pressure, compounded by difficulties in servicing government loans and overseas borrowings.

Competition on air routes to Australia has increased recently, with Pacific Blue entering to compete with Qantas. Improvements in airline access, infrastructure, utilities, and telecommunications are necessary prerequisites for expanding tourism.

While PNG's economic outlook will depend on world commodity prices and other developments, more important will be whether it can successfully meet its domestic economic policy and related challenges.