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The economic and financial reality facing Papua New Guinea


THE prime minister and his advisers must accept the incontrovertible evidence that Papua New Guinea is in the midst of an extensive and deepening economic and financial crisis.

Only by the prime minister acknowledging the nature and scale of the problem, and sharing it with Papua New Guineans, can we find solutions to fight the problem, hand in hand.

Everyone knows something is seriously wrong. Everyone is talking about it.

Everyone is living with the growing effects.

Families can see that the cost of food is skyrocketing.

Students know that there are insufficient jobs when they leave school.

Public servants know they aren't being paid on time and in full.

Businesses know that they can't get foreign exchange to pay their suppliers, and that the economy is stagnating.

The problems are urgent and obvious.

The 2016 Budget

The budget has failed as a result of lower economic growth, lower than budgeted commodity prices, a failure to secure the $US1 billion sovereign bond and the $US300 million International Finance Corporation loan, and failure to adjust immediately to cushion the effect of these changes.

Revenue is likely to be about K800 million lower than expected, and the financing shortfall is heading towards K1.3 billion, so there is a K2.1 billion hole in the Budget.

Delivery of essential services such as health, education, transport and productive infrastructure continues to worsen.

Debt servicing costs in the 2016 Budget of K1.5 billion are now higher than spending on individual essential services such as health, education and transport Government Debt.

The government has stated that public debt is K18 billion.

Government debt is far higher than the Government is admitting, because it excludes all the off-balance-sheet liabilities, such as borrowings by State-Owned Enterprises, the UBS loan, unfunded superannuation and other contingent liabilities.

Taking into account all these other hidden liabilities, true debt is likely to be at least K28 billion, almost 50 percent of GDP and almost double the maximum 30 percent permitted by the Fiscal Responsibility Act.

The 2016 debt servicing cost of K1.5 billion is about 10 percent of expenditure Cash Flow crisis.

Lack of cash is severely reducing the delivery of essential services such as health and education, preventing full and timely payment of wages and entitlements to public servants and causing businesses to close or sack staff because of nonpayment of government bills.

Continued foreign exchange rationing is adding to cash flow pressures.

Foreign exchange crisis

There is a shortage of foreign exchange, with the value of the kina collapsing and foreign reserves dwindling.

In early 2012 the kina was worth 47 US cents, but today it is worth only 30 cents.

Over the same period foreign currency reserves have fallen from $US4.7 billion to $US1.7 billion, officially estimated to be 10 months import cover.

But talking about 10 months import cover is disingenuous: $1.7 billion reserves are overstated because the Central Bank is not meeting foreign exchange demand, and $170 million imports per month are understated because companies can’t get foreign exchange.

Adjusting for those two factors and allowing demand to be met, and Papua New Guinea only has one to two months of import cover.

On top of this there is demand for foreign exchange to meet capital and financial commitments, including the forthcoming need for Kumul Petroleum to complete the refinancing of the K3 billion UBS Oil Search loan in foreign currency.

It is no good pretending that these problems will magically disappear by themselves, or that flowery words and deceptive numbers are the answer.

Nor are expensive, ad-hoc temporary measures that have more to do with propping up the Government than saving the nation. What is needed is an agreed plan involving all of Papua New Guinea society and the nation’s international friends and multi-lateral allies.

Need for a mini-budget

The 2016 Budget is no longer workable, with revenue continuing to collapse, the GDP growth rate falling to 4.3 percent this year and even lower from then on, unplanned and unproductive debt continuing to rise and misallocation of scarce funds away from essential services and productive infrastructure spending. The deficit keeps rising and there are few prospects of financing it.

The government should not wait any longer: it needs to bring a mini-budget to Parliament in the next session

A sovereign wealth fund

The government has ignored the fact that the PNG economy is essentially commodity driven, and therefore cyclical. It needs permanent mechanisms to lessen the impact of price shocks such as the one the nation is now experiencing.

A proper sovereign wealth fund, as originally envisaged in 2011, will help insulate PNG from commodity cycles and will have the additional benefit of protecting funds.

The House of Kumul, a shaky structure thrown together on weak foundations, is swaying. It should be rebuilt, with revenue flows channeled into a Sovereign Wealth Fund and insulated from misapplication.

Preventive measures

Faults and blockages in the systems and processes that have allowed waste, mismanagement and abuse to flourish must be identified and remedied. In particular economic and financial management tools must be sharpened then applied.

Transparency and accountability need to be dramatically improved so that the country’s real financial position is known with certainty.

For example the Central Bank recently announced that the National Statistical Office had calculated that GDP had risen from K51 billion in 2015 to K64 billion today. That increase, which has not been explained, included a rise in 2006 GDP by an extraordinary 48 percent, and 35% in 2013.

As a result the economy is suddenly one-third bigger!

The need for economic and financial reform is urgent; there is no time to waste. The longer the government delays, the greater the pain of adjustment will be.

The need to act is highlighted by the poor standing of Papua New Guinea in international financial markets, demonstrated by the government’s lack of success in securing the $US1 billion sovereign bond issue or the IFC K1 billion loan, and the slashing of the nation’s credit rating three times in the past 12 months.

I am advised that an IMF mission will be visiting the country in June; I encourage the Prime Minister and his advisers to take advantage of this opportunity and seek its assistance with a full economic reform agenda.

There is nowhere else but the IMF for the Government to go. Any other type of commercial borrowing will just add to the country’s debt burden and not solve the underlying problems.

The time for shallow, short-term thinking and expensive borrowing is over. We cannot borrow our way out of this quagmire. Comprehensive economic and financial reform, implemented with strict discipline over a period of three or four years, as will come with IMF balance of payments support, is the only answer.


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Corney Korokan Alone

Important discussion folks. Thanks for the challenges too.

I am fully aware of the quality of data that the principal economist of country - the Governor of the Bank of Papua New Guinea - is using to do his key presentations, like the one he did at Cairns during the 32nd Australia PNG Business Forum and Trade Expo.

The Bank of PNG has a well developed and world class ICT infrastructure that captures real-time trade, foreign exchange movements, inter-bank money transfers with all commercial banks in the country, as well as revenue inflows from the country's Internal Revenue Commission, Customs and expenditures occurring from the Department of Finance.

I will take his advice any day of the week, month, this year and the years to come.

Chris Overland

While I don't agree with Corney Korokan Alone that PNG's economic fundamentals are strong, I don't think that the current situation is so bad as to warrant intervention by the IMF.

There is a lot of resilience within PNG, mostly because so many of its people can house and feed themselves without being dependent on the cash economy.

Those who live in the major cities and who are largely dependant upon the cash economy are much more vulnerable to any economic downturn.

The underlying problem for PNG is similar to that of Australia and many other countries: it is vulnerable to the impact of any major disruption in the world's globalised economy.

We are now collectively the hostages of decisions taken by people living far away, whose motivations and decision making processes are beyond our knowledge most of the time, let alone susceptible to our influence.

So, for example, decisions taken in China to try to manage their huge internal debt problems associated with its "zombie corporations" (basically, unprofitable and debt ridden state owned enterprises) have a great potential to impact adversely across the globe.

Right now, the Chinese government is trying to figure out how to ensure a "soft landing" when, as they must, they finally decide to kill off the zombies that are literally sucking the life blood out of their economy.

If they get it wrong and China has a "hard landing", there will serious flow on effects across the world economy. China is simply too big a player in the world's commodity markets and in both light and heavy manufacturing industries to avoid collateral damage in other countries that trade with them.

If or, more likely, when this occurs, PNG's current problems may well shift from being barely manageable to catastrophically unmanageable. Australia too is at considerable risk owing to its huge accumulation of private debt, much of it on a wildly over valued housing market.

Of course, I fall into the category of those who habitually see risk where others see opportunity, so I could be dead wrong.

Maybe the casino capitalism that dominates the world's finance system will continue to work as advertised. History says no but you never be sure.

Philip Fitzpatrick

Very interesting Gabriel - it is something I've always suspected.

Be interesting what other readers think.

And good old Corney, the eternal optimist, hang in there mate, you are probably right.

Daniel Kumbon

Marcus, even now the country is dependent entirely on subsistence farming. Only buai sellers keep the cash circulating in the villages.

But when the buai trees die off like happened in the Markham Valley a couple of years ago, people will definitely fall back to how their ancestors survived in the jungle.

Those with dual citizenship will disappear for good.

Marcus Mapen

'The fundamentals of the economy are still strong'. John McCain said that and lost the US presidential election because of it.

At the rate we are going now there will be no fundamentals in 50 years when all our mineral resources and other non renewable resources run out.

We will be surviving on Australian aid money and subsistence farming like our ancestors.

Corney Korokan Alone

Papua New Guinea is not really an impecunious state.

What is experienced is a cyclical bad time - nothing strange in economic cycles.

The "fundamentals of this country's economy" are still strong - very different to the attempted fire sales (of State Owned Enterprises) times Sir Mekere Morauta.

That is why it is critical to evaluate the wise counsel of wise men - from both within and without with counter-balanced wisdom.

Gabriel Ramoi

I have a lot of respect for Sir Mekere but I will not subscribe to this conspiracy to invite the IMF in through the back door and to remove a popular nationalist leader from office and replacing him with an even worse one 12 months before the next election.

I am informed that Sir Michael was urged by conspirators to come out of retirement at his 80th birthday celebrations in Wewak to put his name up as the alternative prime minister.

Sir Mekere, Sir Arnold Amet and Kerenga Kua were in Wewak during this period where the plot was hatched.

It explained the sequence of events that has since unfolded with each of the conspirators asking for the resignation of the prime minister.

First by using sections of the Police and the Judiciary and, when that failed, they then turned to the unsuspecting students at the university to do their dirty job.

I know of this events because I was there. I was present at a private lunch at the Boutique Hotel in Wewak on the day after the celebrations and was pleasantly surprised when Sir Michael requested permission from the leader of his party to allow him to put up his hand one more time.

Every one of the conspirators has a reason to see a change in government. It certainly has nothing to do with good governance. It is all about money and greed and the control over resources.

Yes, there will be a mini-budget and there will be no change in the leadership of the nation until the next election.

Leaders are the reflection of their electors and hopefully the student unrest will help shape the outcome of the 2017 election for the better.

Chris Overland

Corney Korakan Alone is not, if you will excuse the pun, alone in his estimate of the IMF.

Its past enthusiasm for austerity as a cure all for economic woes and concurrent lauding of capitalism in its current predatory form, makes the IMF a rather less than ideal source of funding for impecunious states.

That said, even the IMF is beginning to express reservations about the virtues of austerity per se, so perhaps there is hope for a more rational approach to helping out nations in need of a hand up rather than a hand out.

Corney Korokan Alone

Sir Mekere Morauta may be touted as "PNG's financial and economic whizz kid" but, I have serious thoughts in his shameful attempt as a "proxy salesman for the IMF". This is crystal clear by his statement "there is nowhere else but the IMF for the Government to go" gospel.

It seems, the honourable knight hasn't learnt his political and economic lessons well enough considering his involvement in the Lands Reforms agenda in Papua New Guinea.

The world recognises the IMF as the "interventionist global loan shark" whose records over the years have been littered with mounting evidence of peddling the uncontrolled economic interests of the first world.

This Bretton Woods creature is not welcome in Papua New Guinea if it thinks, that it can manipulate the government into causing more misery than good.

Marcus Mapen

Crap statistics. Economic growth bullshit means nothing to me. I am struggling daily to survive in this country and I see millions of my countrymen in the same boat as me.

Albert Schram

PNG statistics are always doubtful, not always valid (e.g. GDP) and certainly not reliable. What is undeniable is the big decrease in imports, and the diminishing tax revenue. Certainly not signs of a healthy economy.

Ronald Gray

Obviously I agree with you that the economy is feeling the pain of a cyclical commodities-driven slowdown now, but a lot of the concrete statistics you give - particularly about the two months of import cover - seem doubtful.

I would very much like to see the data you are referring to.

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