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Poor policy choices, & budgets based on hope, curse PNG

Peter-oneillPAUL FLANAGAN | PNG Economics | Edited

CANBERRA - The Papua New Guinea liquefied natural gas project is having a very negative impact on the PNG economy during the current production phase that began in 2014 and is expected to end around 2035.

The most likely explanation for this outcome is the poor “resource curse” economic policies by the O’Neill government induced by the project.

The resource curse phenomenon occurs where countries like PNG with plentiful natural resources frequently have less economic growth, less democracy and worse development outcomes than countries not so blessed.

The negative impacts of PNG LNG are expected to continue to grow and by 2020 will swamp the initial boost to GDP provided by the early gas exports after 2014.

The project had a positive impact on the non-resource economy in the construction phase (2010-14) – slightly greater than the level of 5% predicted by project partners. The boost to the LNG sector was almost exactly as expected. In 2016, its direct impact on GDP was a gain of some 14.4% – more than offsetting falls in the mining sector overall.

However, the policy implications of the project were poorly handled by the O’Neill government.

There was both a failure to capture the gains during the construction phase as well as the pursuit of policies than ran directly opposite to recommendations on how to handle the potential “resource curse”.

Budget policy fell into a “pre-source curse” – money being spent before the revenues were received and, as a result, PNG has experienced its worst budget performance in more than 40 years.

The exchange rate was locked in at an unsustainable level leading to foreign exchange shortages that are crippling the economy – contradicting lessons that should have been remembered from the 1990s.

And there were poor investment decisions, such as buying into Oil Search.

Furthermore, in a self-defeating attempt to support the agriculture and manufacturing sectors, PNG is moving back down a path of protectionist policies that will damage growth prospects.

Examining these adverse policy responses of the last six years, they are clearly linked to the PNG LNG project and the government’s inflated hopes of its potential.

The PNG economy should be able to sustain an underlying growth rate of 5% per annum. It did so with better economic policies, as well as some luck, in the period after the structural adjustment programs in the early 2000s.

The Papua New Guinean people need better policies to return to at least to that 5% growth.

But it’s worth noting that even if the economy can grow at 5% per annum for the next 15 years, it will simply return PNG to the level of economic welfare it had 35 years ago.

The easy path for hitting a big overall GDP figure by 2024 is to focus on more big resource projects – the potential resource “super-cycle”.

But a more sustainable and inclusive way forward is to focus policy attention on the non-resource parts of the economy like agriculture and tourism.

This is harder and more indirect but a much better option than the current boom-bust experiences of PNG’s resource curse.

New resource projects should be promoted if they sustainably increase PNG’s non-resource potential. If the benefits mainly go overseas, then other options should be actively explored.


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Hipson Aiyopa

Why doesn't the government focus on sustainable resources such as tourism and agriculture?

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