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Economic boom to fiscal crisis in Papua New Guinea

Staff Reporter 1/05/2016 | | | |
Many foreign companies have invested in PNG that result in Economy boom . The Photo is a new Raintree Hotel under construction in Port Moresby credit: Kelly Taipu 
THE 2016 financial year will be one of crisis management for Papua New Guinea, says economist Paul Flanagan from the Australian National University.

This is outlined in Mr Flanagan’s year review article on The East Asia Forum.

In this article he compares 2016 to 2015, a year he describes as the year of economic boom; which started off well and finished not as expected.

He says 2015 started with the view of PNG having the highest gross domestic product growth rate in the world at over 21 per cent, but finished in crisis management and cash shortages instead.

While Flanagan states a number of reasons for this situation, he said a more complex answer to what went wrong was based on the tendency of PNG’s political leaders to focus too much of its hopes on the resource sector rather than its people.

"Like in the 1990s, the Government started spending up big before actually receiving any revenues from major new resource projects. PNG’s budget deficit levels reached 9.5 per cent of GDP in 2013 and 8.6 per cent – the highest deficits in its history," he said.

In addition, he also said the overly simplified short-term answer was to blame the fall in oil prices.

He says he observed that the PNG LNG project is functioning better than planned and export volumes are booming; despite this being an opportunity for PNG to improve its international credit rating. Watchdogs Moody’s and Standard and Poor’s had consequently moved PNG onto a negative watch list.

Flanagan goes on to say that greater focus on improving the performance of the agriculture sector would do much more for the people of PNG than a focus on the resource sector.

"Around 80 per cent of PNG’s population still depends on subsistence agriculture. From 2003 to 2015, real per capita growth rates in the agriculture sector averaged only 1.1 per cent per annum — one-third of the growth rate of other non-resource sectors," he said.

He also noted earlier on in the article that extensive currency controls are hurting businesses and undermining their growth.

"Local businesses are facing major drops in sales and most believe the outlook will not improve in 2016.

"The high exchange rate is possibly the most important policy instrument that undermines incentives for growth."

Going forward in the year, Flanagan outlined a number of areas to manage.

"A harder path politically would require a more balanced and realistic approach to PNG’s medium-term development. A lower, market-based exchange rate would improve the incomes of agriculture exporters and import-competing industries, as well as boost the prospects for foreign investment.

" The revenue base will need reinforcement and tax reform proposals suggested by the Government’s recent tax review need to be embraced. The expenditure focus should be on effective implementation and fighting corruption.

"The easy option will be to talk up the foreshadowed major Papua LNG project. Providing generous tax concessions will help get the project underway.

"And the investment stage of such a project could start injecting cash into the economy by the time of the 2017 election. But such resource tax concessions are part of the reason for PNG’s current fiscal problems."

Wages and competition policies also need to support longer-term growth.

"PNG has muddled through similar crisis in the past. But on each occasion, there has been a change of Prime Minister and an international assistance package.

"PNG has great prospects, but slow policy responses and a growing number of poor policies hinder its outlook. Yet, given the politics, it is unlikely that PNG will benefit from the leadership required for making the tough decisions rather than taking the easy way out," he said.

Source: Post Courier/eastasiaforum/onepng

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