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Printing money to fund PNG deficit is a road to disaster


SOME 18 months ago, in an article for the Development Policy Centre, I congratulated the Bank of Papua New Guinea (PNG’s central bank) for its constructive stance in stopping the effective printing of money to fund the government's budget deficit.

I noted how this reflected positively on the independence of the bank, an independence built into its charter by former prime minister Sir Mekere Morauta and then central bank governor Sir Wilson Kamit in response to PNG’s last major economic crisis in the late 1990s.

Unfortunately, from the start of 2016, this independent role appears to have been reversed.

Based on the bank’s latest Quarterly Economic Bulletin, PNG appears to have returned to the slippery slope of effectively printing money by back-stopping auctions in government securities.

The bank started buying surplus government securities (that no one in the private market was willing to buy) in September 2014. This continued until March 2015, the end of first phase of effectively printing money. 

Over the remainder of 2015, despite increasing cash shortages facing the government, the bank persevered with this policy which helped ensure the government finally started to address its budget problems and reduced the risk of accelerating inflation.

In an extremely worrying trend, the central bank again started purchasing large amounts of government debt from February 2016.

Over the next five months it acquired K1,167.7 million in extra government securities. This is over half (55.3%) of the government's expected budget deficit for the full 12 months of 2016.

Indeed, for the single month of June 2016, the increase was slightly over K704.8 million - the largest monthly increase in the bank’s history.

The data stops in June 2016. Has the situation improved since then or become much worse? I recently asked the bank for updates on the figures but there was no response; the usual government reaction to any of my requests for checking or clarification.

So why is this purchase of government debt a problem? Economic history indicates that a central bank buying surplus government bonds is a slippery path towards overheating the economy and hyper-inflation with all the disastrous impacts for growth and well-being.

This is what happened in Zimbabwe and the Germany Weimar Republic before World War II.

"Hyperinflations are usually caused by large persistent government deficits financed primarily by money creation (rather than taxation or borrowing),” states Wikipedia. “As such, hyperinflation is often associated with wars, their aftermath, socio-political upheavals, or other crises that make it difficult for the government to tax the population.

“A sharp decrease in real tax revenue coupled with a strong need to maintain the status quo, together with an inability or unwillingness to borrow, can lead a country into hyperinflation."

Once started, this near printing of money can be a very addictive habit for any government.

So how is this different from quantitative easing in developed countries such as we have seen in Japan and the United States.

First, there are few inflationary risks in these countries – in fact there have been fears in Japan and the US of deflation prior to introducing the policies.  PNG's inflation rate has already started creeping up even though its managed depreciation has now stopped.

Second, the quantitative easing policies in the US were directed at restoring private sector economic growth by increasing the level of credit in the banking system – not simply financing a government budget deficit.

Government spending may also be important for growth, but that depends on the quality of the spending. For PNG, recent budgets have seen massive cutbacks in key sectors such as infrastructure and longer-term social investment spending in health and education programs.

The biggest areas of government expenditure growth have been in interest costs, government administration and political constituency funds – none of which could be seen as pro-growth spending.

Third, developed countries have used quantitative easing as a transparent measure designed to build economic confidence.  In the case of PNG, this appears to be a policy done by stealth. I can find no comment on the public record about this change of approach since February 2016.

Fourth, there is no known exit strategy. The return to a government surplus keeps getting pushed back. The lack of transparency inevitably raises fears.

Finally, PNG does not have the offsetting policies that can help minimise the damage to macro-economic stability from this quantitative easing. Specifically, it no longer has a market-related flexible exchange rate and there is no clear wages policy.

The central bank appears to have moved PNG's economy back onto a slippery slope of effectively printing money.

Providing a blank cheque to the government also squeezes out the private sector in such important areas as getting access to foreign exchange.

Alternative financing options for the government's deficit over recent years have not gone well - and the full costs of the Credit Suisse loan are unknown.

Even minor attempts to increase tax in the 2017 budget appear at risk due to political pressures. Expenditure cuts have been too severe and in the wrong areas.

If there is a change of government in mid-2017, much work will be required to restore PNG's economic credibility.


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Paul Oates

Hear, hear Francis. But who has an answer to the problems they have created?

The real problem is not anything new or as Chris points out, restricted to PNG.

The promise of "Bread and circuses' are nothing new and those who use them to placate the poor and ill informed are only too ready to stoop into the gutter to promote their own ambitions at the expense of those who can't see their own greed is to blame.

PNG desperately need ethical leadership and honesty of government.

But will those who clamber for change be prepared to vote outside of their own tribal loyalties? Would the Highlands accept a Coastal? Would the Sepiks accept an Islander? Would the Papuans accept ?????

Gari Juffa. Will you be able to form a government after the 2017 elections?

It's a good thing we haven't yet all become cynical isn't it?

'In general, the art of government consists of taking as much money as possible from one party of the citizens to give to the other.'
Voltaire (1764)

'Giving money and power to government is like giving whiskey and car keys to teenage boys.'
P.J. O'Rourke, Civil Libertarian

'Government is the great fiction, through which everybody endeavours to live at the expense of everybody else.'
Frederic Bastiat, French economist(1801-1850)

'A government big enough to give you everything you want, is strong enough to take everything you have.'
Thomas Jefferson

'We hang the petty thieves and appoint the great ones to public office.'

Francis Nii

One the one you may be right Paul but on the other hand, the people of Ialibu-Pangia and PNG never mandated Peter O'Neill and his PNC members to rundown this country.

Now that they have created this mess, they should be dumped in the coming election.

Chris Overland

In the post-colonial world one of the more depressing developments has been the willingness of the governments of new nations to plunge down the path of economic Armageddon.

It seems that the ruling elites in much of the developing world are pathologically incapable of pursuing sensible fiscal and economic strategies with the objective of improving the lives of all citizens, not just a lucky few.

Thus we have Zimbabwe, converted by Robert Mugabe's personal brand of socialism from a thriving economy into a total basket case, where hyperinflation is rampant and genuine economic and social progress is just a dream.

The stories of Somalia, Ethiopia, the Sudan, Uganda and, of course, most of the Middle East, are pretty similar. A great deal of economic and human potential has simply been squandered by a combination of incompetence, corruption, ethnic conflict and sheer stupidity.

Even South Africa, far and away the most potentially wealthy African nation, is still struggling to meet the aspirations and expectations of its people.

The situation in Asia is hardly better. Japan has been wallowing in the economic doldrums for 20 years, China has brought about an economic miracle based mostly upon accumulating a mountain of debt (250% of GDP and rising).

Places like Thailand, Malaysia, Vietnam and Indonesia appear to be doing somewhat better, apparently being blessed with slightly less incompetent, venal and ideologically hidebound governments. Even perennial basket case Myanmar seems to be clawing its way back into something resembling a stable and coherent situation.

Mind you, the so-called western world is hardly much better, sinking under the combined impact of rampant consumerism, the accumulation of idiotic levels of debt and appallingly inadequate political governance.

It seems to me that PNG simply conforms to the well established international pattern.

What has me stumped is why, in an age where the resources, knowledge and skills to devise and implement very sensible and workable economic policies, we are collectively going backwards?

Frankly, good economic policy is not rocket science yet our various governments seem pathologically incapable of doing the blindingly obvious.

The common factor is, apparently, us. Yep, we humans seem to have a gift for making bad choices and, right now, we seem to be in an era where we are unerringly doing so. There is no other sensible explanation for the state of the world, where a range of idiotic social, economic and political ideologies (especially unfettered capitalism) now, potentially at least, pose a mortal threat to us as a species.

What the hell is going on? How could the promise of the age of enlightenment and its wondrous love child, science, have produced a world like ours?

Paul Oates

Yes but Kenta, who is ultimately responsible? The people who mismanaged the PNG economy or those who put them there in the first place at the last election?

Perhaps you could suggest why this may not happen again next year in the General Elections? No one seems to connect the two aspects that give rise to the same situation come every five years.

That's the real problem that no one seems to have solution to.

Em as tru blo displa bel hevi blo ol. Sapos oli putim aiglas lo ai bilo ol na lukim gut lo displa samting bai emi namba wan samting pastaim. Olgata narapla hevi bihain ikamap lo displa as tru.

Kenta Pora

These are all self-inflicted economic harms. There is no one else to blame than our ....

(i) current government for mismanaging the economy with its continuous reckless decisions on key economic areas that are important to our economy and the welfare of the people and

(ii) key public agencies for compromising their independence and dancing to every rhythm of the government.

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