PNG's budget raises concerns about the state of economy

On paper, the 2015 budget, delivered in late 2014, was a solid financial plan. It anticipated PGK13.9bn ($5.3bn) in revenues and called for PGK16.2bn ($6.1bn) in expenditures, leading to a high but manageable 4.4% budget deficit.

Commentators called it restrained, bringing the deficit down from 7.3% of GDP in 2014 without pulling back too much. The year was seen as a transitional one, in which the government moved from aggressive deficit spending between the construction and production phases of the Papua New Guinea liquefied natural gas (LNG) project to a more sustainable path and an eventual end to deficits.

The idea was to keep building through the slowdown and focusing on priority areas, so that when surpluses from the project started to flow, the country would be in good shape and able to build on the work it had done during the relatively lean years.

All Good

The original document anticipated 15.5% growth, down from earlier predictions of 21% – in part because an early start to the PNG LNG production phase had lifted growth in 2014 from a forecast of 5% to 8.4%. The budget saw debt to GDP at 27.8%, much lower than earlier estimates of 35%.

A number of priority areas were to receive considerable increases in funding. Education, which is implementing a tuition-free programme and a new curriculum, was slated to receive PGK1.9bn ($719m), compared with PGK1.5bn ($567.6m) in 2014. “Law and order” was to receive PGK1.6bn ($605.4m), up from PGK1.3bn ($492m) a year earlier. The government is also hiring more police, military personnel and judges, and has had to allocate PGK30m ($11.4m) to Pacific Games security. It also planned to spend PGK180m ($68.1m) on the Waigani Court House.

Another area of priority was the health care sector. The government committed PGK1.8bn ($681.1m) to the sector, up from PGK1.4bn ($529.8m) a year earlier. These funds were earmarked for free health care and the refurbishment of two major hospitals.

Society Under Focus

Concerns had been raised in the past that the proceeds from the LNG mega-project would not flow into the community. Also, with GDP growth so rapid, expectations were high that the average Papua New Guinean would benefit from the prosperity. The budget was designed to speak to the interests of the citizens and invest in areas that would help them directly and over time. The idea was that it would maintain growth and stability while at the same time creating opportunities.

In the budget, the Treasury recognised the challenge of meeting the demands of society, providing more yet at the same time not creating too much debt. It felt as though much could be accomplished by targeting priority areas and by focusing on efficient implementation, monitoring, evaluation and compliance. The Treasury identified a number of key areas where investment could yield the right sort of dividends. These included affordable housing, national transportation corridors, better higher education and universal primary and secondary education, the provision of utilities and tackling preventable disease.

Investment Focus 

Some of the contents of the 2015 budget are of interest to international investors. According to the document, the government is highly focused on and making significant investments in agriculture, and it is seeking foreign participation in the coffee, cocoa, palm oil, rubber and livestock industries. Tourism will also benefit from government support. More broadly, the budget states that the government is committed to improving the domestic business environment, removing impediments to business, making the economy more competitive and tackling security problems.

Questions Remain

Critics immediately questioned a number of elements in the budget. While they thought the government had emphasised the right priorities in health, education and security, they worried somewhat about the way the money was being spent. The disbursement of PGK445m ($168.4m) of education funds directly to the districts raises red flags about accountability and transparency, for example. Analysts also wondered whether the numbers truly reflect the state of the economy.

Paul Flanagan, a visiting fellow at the Development Policy Centre at the Australian National University, argued that when using advanced accounting standards, the deficit is higher than reported. However, Flanagan is most concerned with what the government will have to do to get its budget balanced by 2017. After 2015 it will have to make cuts for two years running, with spending declines in education, health and other key areas. He believes that these cuts are unrealistic, that the budget will stay level or increase, and that debt levels will then have the potential to reach crisis levels.

Concerns

Other issues include the sources of revenue. According to analysts, the government is expected to raise PGK2.5bn ($946m) by selling landowners equity in the LNG project. This is considered highly unlikely, as the landowners themselves believe they already own the equity and are not going to be easily convinced to buy the stock.

Another problem mentioned is that of transparency. Analysts say that about PGK3.3bn ($1.2bn) of mineral and LNG revenues from dividends and taxes have been taken off the balance sheet and are not being properly accounted for. Overall, the document is seen as a political effort, yet lacking in credibility. While it makes a good case for fiscal responsibility, the numbers do not add up as they should, and this has shaken the confidence of many long-time observers of the country.

Some international institutions are also looking warily at the budget and concur that the 2015 budget is not realistic and does not adjust enough to the changing circumstances. In May 2015, Moody’s Investors Service reaffirmed the country’s B1 rating but changed the rating outlook from “stable” to “negative”. In part, the change in outlook was a function of the country’s external payments position. But it was also related to its inability to adjust to the volatile economic environment.

“Government revenue will fall short of the medium-term projections in the 2015 budget due to the impact of lower prices for petroleum, natural gas and other commodities on royalties, dividends and the profitability of associated companies. However, the government has not formulated a policy response that would realign expenditures to conform to the planned glide path to a balanced budget by 2017,” Moody’s wrote in its review.

Under Control

By early 2015, with the price of commodities dropping, officials within the government were starting to reassess the budget. The original assumptions did not take into account a steep fall in the price of commodities (the budget anticipated Kutubu Crude at $95.50 per barrel in 2014 and $89.70 in 2015). By mid-2015, officials began to concede that the budget would have to be revisited.

According to reports in the local press, the 2015 budget had been adhered to through June, but at that point it was accepted that the government would need to make adjustments. Patrick Pruaitch, the treasurer, told the parliament that the drop in commodity prices had led to a fall in revenues to the government, which would necessitate the production of a so-called mini-budget that lowers some outlays to better balance the cash flows. “These developments have sharply impacted on PNG’s export revenues and resulted in a moderation of our anticipated LNG revenues,” he was quoted as saying.

Officials, however, have been assuring politicians and the public that the country is still solvent and will be able to meet its obligations. In May 2015, James Marape, the finance minister, told parliament that steps were being taken to ensure costs were being cut so obligations could be met. He noted that bureaucrats were being paid on time, the government had paid its electricity bills and funds had been released for the free education programme. He shot back at critics and said the government was doing a good job of managing the situation.

History Lessons

Observers have noted that there is not necessarily a strong correlation between GDP growth and long-term economic success. When a good implementing environment, effective management and foresight are lacking, economic booms can bring little to the average person within a country and can sometimes cause long-term economic damage. A high growth rate is often seen as a sign of good times ahead, but history suggests, and observers advise, that much more is needed to translate the number into tangible results.

According to Paul Barker, the executive director of the PNG Institute of National Affairs, “Some may recall that in 1993 PNG also enjoyed a meteoric growth rate of 16.8%...Strong growth rates should certainly not be scoffed at, but nor should they be seen as some panacea or indication of subsequent economic performance, let alone social wellbeing.”

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The Report: Papua New Guinea 2015

Economy chapter from The Report: Papua New Guinea 2015

The Report: Papua New Guinea 2015

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