Diversification to improve PNG infrastructure

In an effort to reduce dependency on extractive industries, the government has increasingly focused on non-mineral diversification as an economic growth strategy, with an emphasis on domestic industry, tourism and new special economic and industrial zones aimed at attracting foreign investment. Government efforts, including the publication of Papua New Guinea’s first-ever National Trade Policy (NTP) 2017-32, should help support this agenda, although severe infrastructure challenges will likely continue to constrain investment, with transport upgrades standing as the most important first-step to future non-extractive growth.

Extractives Dependency

PNG’s dependence on its petroleum and mining sectors has created significant challenges for the government. In its December 2017 economic update of the country, the World Bank reported that PNG’s fiscal policy framework had historically failed to separate government spending from commodity revenues, leaving it vulnerable to external volatility and fluctuations in global commodity prices.

This has resulted in highly procyclical public expenditure, putting a great amount of strain on monetary and exchange rate policy, as well as debt and liability management. PNG’s non-resource economy continues to lag, with the Department of Treasury reporting that non-mining real GDP growth stood at 0.7% and 1.9% in 2016 and 2017, respectively, compared to total real GDP growth of 2% and 2.2%.

Although ongoing reforms to boost revenue collection and improve public financial management will help address some of the challenges, Prime Minister Peter O’Neill’s administration is also targeting diversification as a strategy to reduce economic volatility, limit foreign exchange outflows and boost domestic growth.

Diversification

One of the first policy announcements made under the new administration in August 2017 was the NTP, a 15-year trade development agenda emphasising protection of domestic industries to boost job creation and non-extractive growth. In addition to calling for new tariffs on imports that are already produced locally, the NTP also set diversification targets including increasing exports of coffee by 10%, cocoa by 7%, palm oil by 19%, copra by 16% and fish by 20%; boosting downstream oil and gas processing; growing service exports; and diversifying merchandise exports. As a result of such efforts, 50,000 new jobs are expected to be created by new small and medium-sized enterprises in the wholesale, retail, tourism, ICT, and professional services sectors.

Some of these objectives have already received international support. In June 2017, prior to the release of the NTP, the World Bank approved the PNG Tourism Sector Development Project (see Tourism chapter), which will provide $20m of funding for tourism infrastructure upgrades in East New Britain and Milne Bay.

Infrastructure Upgrades

While the government has pledged to develop a network of special economic zones and fishery industrial zones, which offer attractive investor incentives, a chronic and severe infrastructure deficit continues to delay development (see Industry chapter). One major development intended to address infrastructure gaps is the upgrade of the Highlands Highway, an arterial road linking the Highlands Region, where much of the country’s agricultural exports are grown and 40% of the population lives.

The highway is extremely vulnerable to weather events and frequently washed out by rain and landslides. This has led to years of complaints from various stakeholders, such as the one made in February 2018, when the Road Transport Association called on the government to rehabilitate the road immediately, after sections near Goroka were washed out.

The government and its donor partners are moving to address the situation. In June 2017 the ADB announced that it had approved up to $866.5m to finance the project under its $1bn Sustainable Highlands Highway Investment Programme. The Highlands Highway is also a capital expenditure priority under the 2018 budget.

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The Report: Papua New Guinea 2018

Economy chapter from The Report: Papua New Guinea 2018

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