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| PNG Economics

CANBERRA - The World Bank recently released its update on economic prospects for countries in the East Asia and Pacific region.

There was some very sad news for the people of Papua New Guinea.

PNG, for each year from 2017 to 2019, is expected to have the worst economic performance in the region (see this table from the report). Papua New Guinea is coming last.

And with economic growth of 2.1 to 2.5% and population growth of 3%, it means the economy is going backwards in per capita terms.

Since the last report six months ago, experts at the World Bank have taken off 0.9% from growth expectations in 2017 and a further 0.7% off growth in 2018.

These major cuts in expectations came after the new O’Neill government released its Alotau Accord II, its 100 day plan and the supplementary budget.

It is a very negative vote about those new policies.

PNG’s “moderate” growth rate in the non-resource sector is expected “due to the expected on-going shortage of FX (foreign exchange) and continued fiscal consolidation.”

In a forthcoming article on the recent Bank of PNG monetary policy statement, I’ll explore further the extremely adverse impact of these foreign exchange restrictions (and how BPNG is trying to cover them up).

When the engine of growth dies in an economy, so do inflationary pressures. Inflation is now expected to drop to only 4.1% in 2017. BPNG still expects 6%.

So after high rates of growth flowing from the PNG LNG project (PNG had the best growth rate in the region in 2015) there is no wind left to power the PNG economy.

PNG is much too resource dependent. It needs to diversity its economy, especially towards building on its agricultural potential which would also provide much more inclusive growth.

After reviewing the supplementary budget, the World Bank estimates that the deficit will not be 2.5% of GDP but 3.2%. This is in line with the IMF’s earlier expectation of the deficit being just over 3%.

The public debt to GDP ratio would be slightly under 35% by the end of 2017.

Going forward, the World Bank estimates that the deficit will fall slightly to 3.1% of GDP in 2018 and then increase to 3.5% in both 2019 and 2020.

The debt to GDP ratio is expected to climb to nearly 40% of GDP.

There is not much international confidence about PNG’s claimed path back to a budget surplus and reduced debt levels.

Given past experience, those concerns are justified.

Genuine budget savings are very, very difficult to deliver because of entrenched political interests in key areas such as the electorate funds to parliamentarians.

PNG failed in its attempts a decade ago to make for a more efficient and effective public service. With higher public debt levels expected, interest costs will continue to rise.

The cuts in budget expenditure in recent years have already been more draconian than those imposed on Greece. And the report actually indicates that PNG needs to spend much more on basic services to improve PNG’s worst rating in the region on the Human Development Index.

Fig 2 - PNG-ongoing-deficits-rising-debtMuch more needs to be done on the revenue side. The best way to get revenues up is to get growth going again. In addition to better pro-growth policies, there will be a need to look at either raising tax rates or introducing new taxes.

So yet another outside umpire is extremely worried about the health of the PNG economy and its budget. There is a need for some tough medicine.

The 2018 budget, due to be delivered in a month’s time, will hopefully turn around the current negative perceptions. But this will require much more whole-of-government unity than shown in the supplementary budget.

I still hope Charles Abel, the new treasurer and deputy prime minister, can perform a miracle and get his prime minister to accept that real change is needed after the economic mismanagement of the previous five years.


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