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PNG faces a tough road ahead but positives are emerging


You can read Paul’s complete article together with links here

CANBERRA - The press release from the latest mission of the world’s International Monetary Fund highlights the difficult road ahead for Papua New Guinea in dealing with recent years of bad luck and economic mismanagement.

On the fiscal front, the IMF considers that the PNG government will fail in the supplementary budget to bring the 2017 budget deficit back to the target of 2.5% of GDP. Rather, it estimates the deficit will be “a little over 3%” – so a gap of some K370 million relative to the 100 day plan target.

The goal to reduce the debt to GDP ratio back to the legislated level of 30% as part of the 2017 supplementary budget is also recognised as infeasible. Instead, the suggestion is a medium-term objective of moving to a balanced budget by 2020 (and GDP growth will work to reduce the ratio).

So the first two targets in new Treasurer Abel’s 100 day plan are likely to fail.

Expected growth is also wound back from the 2.7% estimate in 2017 down to 2.4%.

Despite these negatives, my overall reaction to the IMF report is a very positive one.

First, as the government would have had to approve the IMF post-mission press release, it indicates a very different attitude than the attempts to suppress the 2016 report.

PNG’s behaviour ten months ago placed it towards the bottom of all countries and ensured it had little chance of issuing a sovereign bond. The release is a very positive step towards transparency.

Second, the IMF Article IV report comes out at a very similar time to another report from an IMF tax reform mission. PNG appears to be engaging positively with the international community.

Third, indications are that the consultation process in these missions were positive and wide-ranging.

There is feedback that Treasurer Abel also worked to ensure a very broad-based approach towards the preparation of the 100 day plan. Broad and constructive engagement makes for better decision-making.

The IMF report highlights the tough road ahead for PNG to start crawling back up from its slippery slope of economic mismanagement in recent years.

On the budget side, the IMF targets public sector wage costs. As anyone with experience in the largely failed attempts to reform and reduce the size of the public service in the early 2000s, this is actually very difficult to achieve.

The second target for expenditure cuts in the DSIP and PSIP programs will also be a political hot potato.

On the revenue side, there is optimism for increasing tax collections on both the resource and non-resource sectors.  Given the precipitous drop in PNG’s tax revenues – most of it in the non-resource sector – it still seems very likely that new taxes will be required or rates increased.

The early days of a new government are often seen as the best times for such difficult adjustments.

Loi Bakani’s shameful approach to monetary policy gets some stick – of course diplomatically worded between the lines.

The rigidity of the foreign exchange rate controls is seen as damaging current growth as well as undermining PNG’s international competitiveness (and thereby adversely affecting moves to strengthen other sectors such as agriculture and tourism).

On the exchange rate, it is interesting that the IMF is suggesting a gradual move towards a more competitive rate given inflationary concerns (an alternative approach sometimes tried is the “short, sharp shock”).

The IMF notes PNG’s core inflation rate is only 2-3%, suggesting the IMF considers there is scope to start moving to a more competitive currency immediately.

Overall, the IMF’s suggestions are sensible. The two-track approach of dealing with short-term challenges while building the base for longer-term inclusive and sustainable growth is appropriate.

The return to transparent and consultative processes by the new Treasurer is very welcome.

However similar sentiments and plans have been put forward in the past – in much greater detail than currently. PNG failed on much of this promised reform in the mid-2000s.

The challenge is credibility around on-going implementation.  There is some very tough politics ahead to get such reforms in place. 

The Treasurer is only one voice in the National Executive Council. He will need to galvanise his cabinet colleagues around the reform path and transform fine words into tough actions.


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Michael Dom

Abel is a lap boy and false god for some fools.

He talks nicely and makes all the right moves but look at his bed mates.

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