Jekyll and Hyde – the World Bank PNG economic update
20 February 2019
PAUL FLANAGAN | PNG Economics
CANBERRA - The World Bank’s economic update on Papua New Guinea was released in early February and offers a Dr Jekyll and Mr Hyde picture for the government.
The front end is undoubtedly very kind to the government, resembling the friendly support of Dr Jekyll in the famous Robert Louis Stevenson story.
There is much praise for the government and any criticism is buried in the middle of paragraphs or implicit in graphs and numbers in tables.
It’s hard work to read between the lines to find out what is really going on.
One example of the friendly treatment is the conciliatory discussion of the K3.4 billion breach (called a “policy deviation”) of the medium-term fiscal deficit targets agreed in the 2018 budget and made the first condition of the World Bank’s budget support loan in September last year.
Even allowing for expenditure arrears of nearly a billion kina, K2.5 billion (or 72%) of this massive deficit blow-out from 2018 to 2022 is left unexplained.
Overall, what is remarkable is the lack of reference, yet alone analysis, of the seven key issues identified by the World Bank in its own December 2017 update.
But the details show that the PNG government has failed to implement its fiscal strategy, revenue strategy, wages strategy and measures to disentangle PNG’s budget fortunes from the whims of international commodity prices.
In just over a year, the World Bank has retreated from its own benchmarks.
The second part of the report has a “special focus” on the private sector, and the tone is very different.
This is the Mr Hyde part of the report – the local business sector will like it but the government’s efforts over the last seven years are found to be seriously flawed.
Under the heading ‘Removing constraints in the business environment to boost private sector investment’, the government gets a hammering for “a largely unfavourable business environment”.
One section is particularly tough on the government’s proposed reserved activity list concluding that “the level of business environment risk has been dramatically increased”.
I’ve been analysing these World Bank reports on PNG for over 40 years. My first policy paper in the public service in 1978 considered the first World Bank report on PNG after Independence. My career included seven years in AusAID and Treasury on the World Bank/IMF desk. And I’ve attended more World Bank/IMF annual and Spring meetings than any person should.
But, even after all that, I find this to be an unusual report.
It needs to be read in an historical context.
The World Bank’s relationship with the PNG government was essentially broken in the early 2000s, especially because of the failed land reform program, and the Bank has been slowly rebuilding the relationship through normal project funding, although at a much lower level than the Asian Development Bank.
I mentioned that this is the first PNG economic update since the budget support loan taken out in September 2018 and there was a need for a public report.
The big picture is that the World Bank is extremely worried about PNG’s declining standards of economic management – that is why PNG’s economic management has been seriously downgraded in recent years to a “fragile situation” according to the Bank’s governance indicators.
So how does the World Bank try to maintain influence in encouraging better policies especially with a history of virtually being kicked out of the country?
Its main stakeholder in PNG is Treasurer Charles Abel. One cannot publicly criticise his macro-economic performance at this stage if seeking to maintain influence. However, it is quite possible that Treasurer Abel also has concerns about the extremely nationalistic and anti-business policies of Trade Minister Richard Maru.
I suspect the World Bank knew it had more of a green light to discuss more openly the challenges facing PNG when discussing the private sector.
Seen in this context, and seeking policy influence in a country with declining economic management, the report is possibly less surprising.
In this beginning phase of the relationship between the World Bank and a relatively new PNG Treasurer, the politics probably meant that a Dr Jekyll (nice to PNG government on macro-economics) and Mr Hyde (publicly critical of the government on private sector policies) approach was most appropriate.
The longer-term requirement, however, is that the World Bank must not only keep the PNG Treasurer and government happy, it must also maintain its own professional standards around analytical rigour and honesty. Its credibility depends on this.
In the modern era of geopolitics, one hopes that a distinguishing feature of democratic political systems continue to be frank, public assessments of what is going on. That is why democracies have (or should have) auditor-general offices and public accounts committees with public reports.
These internal institutions need to be reinforced by independent international institutions such as the World Bank.
Looking to the future, the World Bank should be more open and balanced in its assessments to support both its international policy advisory role as well as in encouraging the maintenance of accountability in democratic countries.
Try as I might a lot of Paul's financial articles go right over my head.
It's not that I don't care either.
I suspect that I'm not the only reader who feels this way but I guess there's no other way of doing it.
Keep them coming Paul. I'm off to try to figure out what a franking credit looks like (icing on a cake maybe?).
Posted by: Philip Fitzpatrick | 23 February 2019 at 03:02 PM