Covid-19 and Papua New Guinea: self-sufficiency, bilateralism or both?

In recent years, Papua New Guinea has moved away from its long-held policy of tariff reductions, towards import substitution and self-sufficiency. As the coronavirus pandemic underlines vulnerabilities in public finances and international supply chains, efforts to scale up local industrial production are likely to take on renewed importance, as is the need to reduce exposure to unsustainable debt.   

Policy shift

Under previous Prime Minister Peter O’ Neill, the PNG government published the National Trade Policy 2017-32, with a view to boosting exports and supporting the expansion of small and medium-sized enterprises (SMEs).

Simultaneously, the government announced it would suspend the import Tariff Reduction Programme that had been in place since 1999.

As a result, 323 tariff line increases were implemented in 2018-2019.

According to the Customs Tariff Bill 2018, the purpose of instituting tariffs was to protect “local pioneer industry and existing local manufacturers from cheap imports”.  

Such an objective is very much in line with the vision of current Prime Minister James Marape, who is seeking to rebalance the economy away from dependence on the extractive industries by spurring growth in agribusiness and downstream processing.

Bilateral vs. multilateral

Since the publication of the National Trade Policy in 2017, the government has tended to focus more on bilateral trading relationships with major powers than on multilateral agreements.

For instance, PNG declined to sign up to the Pacific Agreement on Closer Economic Relations Plus (PACER Plus) trade deal with Australia, New Zealand and other Pacific Island states. Alongside Fiji, which also withdrew from the deal, PNG expressed concern about the impact on its nascent manufacturing industry of reducing tariffs on goods from Australia and New Zealand.

Despite not signing the multilateral agreement, the Marape administration has looked to deepen engagement with Australia and New Zealand on a bilateral level. For example, it agreed a concessional loan of PGK1bn ($288m) from Australia for budgetary support in November, which was described by Treasurer Iain Ling-Stuckey as “cheap, good debt from a long-standing and trusted partner”. 

Media reports have also suggested that Marape and Australian Prime Minister Scott Morrison have held discussions over further fiscal support measures to address revenue shortfalls as result of the Covid-19 pandemic.

Although the two countries differ in their approach to PACER Plus, they remain committed to enhancing relations. After meeting in July 2019, the two leaders issued a joint statement in which they agreed to start negotiations on a new, enhanced Comprehensive Strategic and Economic Partnership (CSEP) between Australia and PNG.

The CSEP will focus on several key areas: security cooperation; bilateral trade and investment relations; governance; people-to-people and institutional links; development programmes; and regional cooperation.  

Meanwhile, New Zealand has also made efforts to deepen engagement with PNG under Prime Minister Jacinda Arden’s ‘Pacific reset’ policy.

Marape made an official visit to Auckland in February 2020, where he reiterated his objective for a bilateral trade agreement between the two countries. As well as rebalancing the bilateral trade deficit, Marape is keen to model PNG’s public service on that of New Zealand.

China’s growing influence

Efforts made by Australia and New Zealand to strengthen relations in the Pacific are motivated partly by the continued expansion of Chinese influence in the region. Indeed, while Australia remains PNG’s largest bilateral trade partner, China has overtaken it as the largest source of FDI inflows into the country in recent years.  

In 2018 PNG became the first Pacific island nation to formally sign up to China’s flagship Belt and Road Initiative (BRI) for transnational infrastructure development. In line with its dealings with other Asia-Pacific powers, the Marape administration is looking to expedite discussions on a bilateral free trade agreement with China.

The extension of the BRI into the South Pacific comes as China has positioned itself as one of the region’s largest aid donors over the past decade, injecting some $6bn into roads, ports and other projects through grants and concessional loans.  

However, the economic shock of Covid-19 has also raised some questions about the sustainability of the debts that PNG and other Pacific island states owe to China, as they struggle to plug revenue gaps in 2020.

China has emerged as PNG’s largest bilateral creditor in recent years, holding 85.8% of its bilateral debt and 23.7% of its total external debt, according to an analysis of the 2018 budget. Prior to the Covid-19 outbreak, PNG was already facing escalating debt obligations to China, with annual repayments to the country forecast to increase 25% by 2023.

The US and other Western allies remain concerned that China’s extension of influence could also have negative geopolitical implications.

Among these, unsustainable debt levels could leave Pacific island nations beholden to China’s strategic interests, and there are some fears that China may eventually establish military bases in the region to further its Pacific security objectives. There have been no indications that PNG could be the location of such a base, however.

Covid-19 implications

The IMF has projected that lower export revenues as a result of falling prices and global demand could result in PNG having a balance of payments shortfall equivalent to 4% of its GDP this year. PNG will therefore need to carefully weigh offers of external fiscal assistance against the investment required to develop a broader industrial base capable of meeting local demand for key goods and expanding export revenues.

Since the start of the pandemic, the country has benefitted from enhanced local production capacity in staples such as bottled water, canned fish, poultry and hard biscuits. Many manufacturers had already made efforts to expand domestic facilities and actively source local ingredients to hedge against shipping disruptions and previous shortages in foreign exchange. 

Looking ahead, the government has a target of reaching food self-sufficiency by 2025, and had previously earmarked PGK200m ($57.6m) annually to fund an agriculture incubation programme to help achieve this goal. With the pandemic exposing the fragility of pre-existing regional supply chains in the South Pacific, it may now be more determined to ensure funding is available to boost domestic manufacturing.

Taking into account the fiscal challenges ahead, it would be wise for the development of local production capacity in PNG to be undertaken in tandem with concerted efforts to diversify trade and investment partners, and to prioritise sustainable and trusted borrowing options to hedge against future debt concentration risks. 

These issues and more will be explored in OBG’s The Report: Papua New Guinea 2020, which will be published in July 2020. Register here for updates on the launch of this report and for our expert analysis on more than 30 of the world’s most exciting growth markets.  

 

 

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