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Mini-budget good thing but wider economic problems remain

PaulPAUL FLANAGAN | Edited extracts

PAPUA New Guinea’s recent supplementary budget is a positive development and confirms that key government ministers accept the importance of budget repair.

The K1,886 million loss of tax revenue has been replaced exactly through revenue-raising measures of K958 million and expenditure cuts of K928 million.

The confidence-building objectives of the announcement are partially undermined by the lack of debate in parliament and the lack of transparency.

The details have not been released and a copy of the supplementary budget is not on the Treasury website.

Unfortunately, the K958 million in revenue measures are largely playing games and certainly do not represent sustainable increases in the revenue base.

The sale of shares in the PNG LNG project to landowners does not improve the government's net worth - it is simply a substitute of one good asset held by government (the shares) with another asset (cash). This is a capital transaction and technically does not reduce the budget deficit.

Interestingly, the expected returns from this sale are well below the K2,500 million assumed in the 2015 budget. Indeed, they appear closer to the K600 million estimated in the 2014 budget.

The other revenue measure of increased dividends from state owned enterprises would seem to come at a time when those enterprises are already facing cash flow issues on their operations.

There appears to be a growing practice of state owned enterprises borrowing from local banks simply to pay dividends to government - this is not a long-term strategy for PNG's development.

The major source of expenditure cuts are in infrastructure. With a K649.3 million cut, capital works spending falls to K1,267 million, a 71% cut relative to the 2014 peak.

It is positive that maintenance expenditure is being protected as it is much better to maintain roads than build new ones. There clearly were wasteful capital projects which would do little to build the welfare of people in PNG.

However, the extent of cuts is a cause of concern.  Infrastructure spending is now half the level of 2012. Well designed, properly tendered, priority capital work projects can be vital for improving development outcomes in PNG.

More effort should be directed towards cutting costs in areas such as the public service and re-evaluating the effectiveness of some of the government's key policies - including the District Services Improvement Program.

It is of concern that the government has, from 2013 to 2016, the largest pattern of deficits in PNG's history. Money was spent, sometimes on grandiose projects, well before money had been received.  Future generations in PNG will pay for this.

The supplementary budget document is primarily a useful confirmation that there are those in government who recognise something needs to be done to repair the budget.

However, based on the information available, it does not appear that actual structural changes are being made to deal with PNG's wider economic problems.

So, although the supplementary budget is a positive step, the politically tough decisions required for PNG's long-term sustainable development are not being made.


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Paul Flanagan

Hi Corney - First, I think it is great that EMTV has introduced such as show in cooperation with Business Advantage.

As Andrew mentioned at the beginning, it can be helpful to get some experts in a room together to discuss challenges facing the business sector. Sometimes these panels can work best when there is scope for more "constructive disagreement".

Economic policy is debatable - this is why Bernie Sanders made such a valuable contribution to the US election campaign (noting your website suggests you were a supporter as was I).

However, I think it is disingenuous for the Governor and the Head of BSP to argue that the exchange rate is freely floating or market based and not under some form of control (the exchange rate margin band is a separate issue).

The IMF also disagrees with the Governor's description - that is why the kina is now officially regarded as being a "managed float" currency rather than a "free float" currency.

The discussion on some of the other issues - such as the level of import cover staying about the same - could have benefited from an alternative view in the room (commenting that PNG does not use the accepted international definition of import coverage, it excludes service imports, and one reason the ratio has stayed as high as it is flows from the foreign exchange controls - imports are at the lowest levels since around 2007 - so even before the gearing up through the PNG LNG investment stage).

Second, I concede that I have a lot to learn, but it will not be on a ukulele. I used to enjoy the long discussions I had with the Governor when I was allowed in the country and hopefully it was an opportunity to learn from each other.

Through time, I hope the website www.pngeconomics.org will include more information beneficial to future students of public policy and economics in PNG.

The old, inaccurate accusation that I somehow work for the opposition I'll let go through to the wicketkeeper.

And of course, my article covered the Supplementary Budget - this was not even released at the time of the panel discussion on EMTV.

PS, I've just seen the comments from Eric Kramer (CEO of PacWealth) on the link you provide. Same ukulele? Having Eric on the panel could have made for an even more informative discussion.

Corney Korokan Alone

Paul's so-called expertise is getting boring now.

Maybe it's time for him to get a refresher tutorial from PNG's two senior economists in a bid to get some semblance of balance than the out-of-tune ukulele he has been playing ....that, sadly his buddy, the unassuming opposition leader and some other personalities are singing from.

Here's a good start: http://www.businessadvantagepng.com/top-bankers-set-the-record-straight-on-papua-new-guinea-foreign-exchange-shortage/

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