PAUL FLANAGAN | PNG Economics | Edited extract
I’ve been enjoying a welcome break in outback Australia, where I have had no mobile phone access for the 1,400km from Alice Springs to Newman in Western Australia. I’ve just begun heading back to Canberra – about a nine day trip through remote desert tracks. While in Newman, the 2018 PNG mid-year budget update was released – the MYEFO. What follows is a summary but my full analysis of this document is available here – PF
NEWMAN – Papua New Guinea’s mid-year economic and budget update (MYEFO) was released on Tuesday. The summary snapshot presented by PNG treasurer Charles Abel could be expressed as this
“What this MYEFO is telling us is that the policies of the government are working, the budget is back in control and the economy is improving.”
Unfortunately, the MYEFO is more a reiteration of government targets rather than a true updated forecast of what is actually happening.
The key claims of the MYEFO are:
- the deficit will be exactly the 2018 budget level of K1,987.2 million
- a small increase in expected revenues of K213.2 million driven by even further forecast increases in net GST collections (K112 million) and mining and petroleum taxes (K142 million)
- this windfall revenue is being spent largely on increased wages for public servants and teachers (K233m);
- public debt falls as a percent of GDP to 31.2% relative to the 2018 budget forecast of 32.2% (mainly as a result of a forecast increase in nominal GDP)
- expectations of $US500 million received from the 2018 sovereign bond (up from $US200 million as a first tranche in the 2018 budget)
- 2018 inflation forecasts reduced from 6.9% to 5.9%
- non-resource GDP growth revised downwards in 2017 from 1.9% to just 0.2%, and in 2018 from 3.5% to 2.8%
- overall GDP growth rates from 2019-22 are expected to increase from an average of 1.4% to 3.5% (based on a change in forecasting methodology rather than better prospects)
The good news from MYEFO is that treasurer Abel is clearly committed to the medium-term fiscal policies set out in 2018 – and on paper these look pretty good.
The fact that the MYEFO has been produced, and on time, is a positive indication of this element of economic governance structure.
There is some acknowledgement that the PNG economy is performing poorly – showing more openness about this reality than revealed by prime minister O’Neill’s constantly upbeat comments.
However, there are serious problems with this document.
In summary, revenue figures appear to be overstated significantly by at least K200 million. No information is provided about the K800 million assumed to be received from the National Fisheries Agency.
There are repeated examples of where it seems government agencies have been instructed to simply state that a revenue target will be achieved even when underlying economic fundamentals have changed.
On the expenditure side, the spending controls focus almost entirely on areas of capital budget and concessional loan financing. This indicates that PNG is aiming for an expenditure target that will hurt its longer-term growth rate.
There is no transparency on expenditure arrears and there is confusion on the level of interest payments, with indications that these may total over K2 billion in 2018.
Domestic borrowing in the first six months of 2018 totalled about K6.4 million, well above the expected level. Reliance on a sovereign bond as a fix appears to be a high risk strategy in the light of recent credit downgrades.
Indications are that PNG has borrowed some K480 million extra in 2018 to pay expenditure arrears from 2017, casting even more doubt about the reliability of the previous budget outcome figures released in March.
There is no doubt that treasurer Abel is trying to improve PNG’s economic credibility. Perhaps he believes one way to do this is to continue claiming that the targets of the 100 Day Plan and the Alotau II accord are all on track.
But a better way is to be more transparent and truthful with what is really happening and acknowledging that PNG needs serious financial assistance to start turning around its poor economic performance.
A deep hole has been dug by the O’Neill governments over the last six years and the ladder out of this hole will require more honesty and transparency than contained in this most recent economic forecast.