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PNG: Looking like a textbook case of how to ruin an economy

MARTYN NAMORONG | The Namorong Report

Pgk-usd-365-day-exchange-rates-history-chartIN THIS PERIOD leading to the 2014 budget, the Papua New Guinea government’s spin has gone into overdrive about deficit spending being required to stimulate economic growth.

In a strange coincidence (or perhaps it wasn’t), both daily newspapers have been peddling this government propaganda from the Central Bank Governor and the Prime Minister.

At the height of the global financial crisis, when the Somare regime was in charge, the country had a low debt to GDP ratio of 9%. According to the O’Neill regime’s 2013 Annual Issuance Plan for Inscribed Stock and Treasury Bills, government debt as a proportion of GDP is projected to increase from 26% at the end 2012 to 32% by the end of 2013.

When a nation’s economy is not performing well, there are several measures a responsible government will take to arrest the situation. These include but are not limited to encouraging foreign direct investment, encouraging private sector growth and maintaining fiscal discipline to ease pressure on monetary policy. That has not been the case in PNG.

The story of the troubles of PNG’s economy is illustrated in the decline of its currency. Since September last year the kina has lost over 20% of its value.

Observers of government behaviour will note that, despite the economic decline PNG has experienced, the government’s actions have been contrary to prudent economic management.

The economic woes began in the second quarter of 2012 when the Central Bank pointed out in its monetary policy statement that prices of PNG’s key export commodities were declining.

Around the same time, in November 2012, the government banned the former chairman of PNG Sustainable Development Program and Ok Tedi Mining Limited, Ross Garnaut, from entering the country.

The Director of the Development Policy Centre at the Australia National University, Stephen Howes, would later criticise the Australian government, over its silence over the matter.

"Australia should be supporting free speech in PNG and Australia should certainly be supporting the rights of its citizens to engage in lawful business activities in other countries," Dr Howes told ABC News.

The Australian government’s failure to heed Howes’ advice has allowed the PNG government to act with impunity and deport another Australian citizen, the PNGSDP communications director Mark Davis. Ironically, the deportation of Davis coincided around the one year anniversary of the imposition of a travel ban on his former boss Garnaut.

The travel ban on Garnaut triggered a series of events that eventually led to the expropriation of the Ok Tedi mine in September this year.

The expropriation of Ok Tedi came despite earlier warnings by the PNG Chamber of Mines and Petroleum that the industry was going through difficult times.

Whilst industry players believe the OK Tedi takeover was an isolated case, Craig Michaels from ratings agency Standard and Poors told Business Advantage PNG that if Ok Tedi raised miners’ perceptions of sovereign risk, the effects on the PNG economy would be detrimental.

The main reason cited by Michaels is that foreign direct investment into PNG is skewed to extractive industries.

The government continued to send the wrong signals to those who wish to invest in PNG.

As if the Ok Tedi saga wasn’t enough, rather than encouraging foreign direct investment, the government of PNG blocked Kulim (Malaysia) Berhad’s takeover bid for New Britain Palm Oil limited (NBPOL).

The Australian newspaper reported a warning by lawyers from Norton Rose Fulbright that the government’s moves to restrict foreign ownership of media outlets "has the potential to discourage foreign investment in PNG companies and is likely to have a negative impact on the share price of such companies".

The government’s response as highlighted by Treasurer Don Polye’s speech to the IMF Board has been to increase deficit spending in the construction sector to spur economic activity.

However, in recognition that this has produced macro-economic instability, the Treasurer acknowledged that “future spending growth must be contained to maintain macroeconomic stability.”

A friend of mine who is an economist explained macroeconomic stability in these terms:

You’re at a party and it is the role of the Central Bank to manage the supply of beer. If there is less beer, the party is boring.

If there is too much everyone gets drunk and it’s chaotic. He said that through its monetary policy role, the Central Bank tries to maintain price stability.

The problem with the PNG economy he said was that the government was supplying too much beer to the party i.e. through its fiscal policy of deficit spending.

The consequence of this was the downward pressure on the Kina, driven largely by increased Government demand for imports as PNG’s export earnings decline.

According to the Asian Development Bank (ADB), Papua New Guinea’s trade deficit is projected to be 15.1% of GDP with an inflation rate of around 6%.

In terms of the prices of PNG’s key commodity exports, the ADB noted that Gold has fallen by 20%, copper by 12%, and oil by 6% resulting in government revenue shortfalls.

However, rather than maintain fiscal discipline the Treasurer admitted to a $US60 million budget blow-out that would raise the budget deficit from 7.2% of GDP to 7.7% of GDP.

In addition, against the Central Bank Governor’s advice to borrow locally to finance its deficit spending, government has defended its decision to borrow from China. With a depreciating currency, the government has exposed itself to increases in the cost of borrowing in foreign currencies.

Against the backdrop of poor fiscal discipline by the government, the Central Bank has been swimming against the tide of major currency depreciation.

According to the economist who explained macro-economics in beer terms, if one takes a look at a chart showing the movement of the Kina this past year, one would notice upward spikes against a generally declining trend.

The spikes on the chart illustrate times when the Central Bank intervened in the currency market to prop up the Kina. The spikes have increased in recent times indicating an increase in the frequency of Central Bank interventions and raising the question of whether the Central Bank has enough reserves to keep up its act throughout next year.

In the Post Courier, the Central Bank governor assured Papua New Guineans that “they should not be worried about the value of the falling kina” while The National reported that the government will “hand down a deficit budget for 2014 focused on economic growth”.

Comments

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Francis S Nii

Not long ago we all pressed the panic button on Dutch Disease when the kina was appreciating at an unprecedented rate against the currencies of our trading partners and the improvement in the foreign currency reserves as a result of the LNG investment activities.

We are now critical of the cheap kina.Where do we draw the consensus?

Wait until end of 2014 or 2015 and we will see the outcome of the monetary and fiscal policies that are pursued by the government in this and last year.They do take time.

Mrs Barbara Short

Thanks Martyn. The Governor of the Central Bank probably needs to have other groups, who represent the "ordinary man" in PNG, speaking to him about the way the falling kina is affecting those people.

I hear from some of the older, honest, retired public servants, who naturally don't have a nest egg in Cairns, that life is starting to be difficult for them back in the village.

Nationalising your largest mine was probably not the wisest move in a time when there is a downturn in the resources boom.

In Australia the heavy earth-moving machinery companies are starting to lay off people. A sure sign that there is a downturn.

We might have to wait until India "takes off" before we see another one. China has probably done its major building of infrastructure for awhile.

In Australia we love a falling dollar as then the local manufacturers can start to compete with the imported goods which start to cost more. People will start to take their holidays in Australia instead of travelling the world so local Tourism will benefit.

Maybe the falling Kina will stop the politicians and others from travelling all over the world.

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