Papua New Guinea: Balancing the budget

The new government has targeted post-electoral stability with pledges to tame the budget deficit, boost infrastructure and curb expenditure. However, Papua New Guinea’s (PNG’s) opposition says Port Moresby’s plan to accept a large loan from China is an early misstep on the path to long-term growth.

In his September 5 state-of-the-nation address, Prime Minister Peter O’Neill reminded parliament that the 2012 mid-year Economic and Fiscal Outlook Report by the Department of Treasury (DoT) found that the economy grew at around 11% in 2011 and is expected to be around 9.9% this year. Growth in the non-mining sector increased to 13.1% in 2011 and is expected to be 10.4% in 2012, said O’Neill, adding that risks to the PNG economy were modest, as “internal drivers for growth continue to dominate the external factors”.

However, a combination of revenue shortfalls and overspending indicates a projected budget deficit of PGK513.1m ($243.34m), with the DoT report noting that this was “a significant deterioration from the 2012 budget forecast”.

The report added that mining and petroleum tax revenues were estimated to be PGK545.8m ($258.85m) lower than the 2012 budget projection, reflecting lower commodity prices and the strong exchange rate. However, this was offset by higher-than-expected revenues from personal income tax, company tax and other direct taxes.

”The immediate challenge for the government is to make tough decisions to address the potential budget deficit of PGK513.1m ($243.34m), as well as to maintain fiscal discipline throughout the second half of 2012,” said the DoT.

While pledging to stamp out corruption, O’Neill’s address also echoed the DoT in stressing the need for tight macroeconomic management. However, the PM also flagged a number of risks, including appreciation of the kina and disruptions to the $15.7bn-PNG liquefied natural gas (LNG) project, which is expected to increase real GDP by 25% through LNG exports after its completion in 2014.

“Our immediate challenge is to impose austerity measures and to maintain fiscal discipline in the second half of the year. ... Corrective options are now under consideration to return the 2012 budget to one that is balanced,” said O’Neill. “Let me remind all of us again that we are a responsible, inclusive government.”

However, the opposition says that the re-elected PM has not acted responsibly in his plans to seek a PGK6bn ($2.85bn) loan from China’s Exim Bank to overhaul crumbling transport infrastructure. While the government insists the loan is needed to improve links in the heavily forested, mountainous island, critics are asking how such a large loan will be managed, disbursed and repaid.

“The PGK6bn ($2.85bn) loan is equivalent to 70% of the country’s total internal revenue and will increase PNG’s total public debt from PGK8.6bn ($4.08bn) to PGK14.6bn ($6.92bn),” Joseph Lelang, the shadow minister of finance, told The National on September 27.

Don Polye, the treasury minister, responded by stating that economic conditions in the country were conducive for such investment capital and the loan could be used on sound investments to stimulate further economic growth. He added that the funds would be used for an overhaul of the Highlands Highway – a vital road link – and state-owned electricity provider PNG Power, as well as to develop port facilities and telecommunication services, reported The National.

Improving the ports and the transport network have been flagged as crucial to the nation’s long-term growth, which will allow PNG’s rural areas to share in economic progress. “The weak condition [of transport] is often cited as a major constraint on economic growth and improved social service provision in PNG,” the Asian Development Bank (ADB) wrote in a 2011-15 sector assessment.

The ADB has said that in addition to transport, another priority area for reform is state-owned enterprises (SOEs), with the bank writing in a September report that the poor performance of SOEs, such as those delivering water, electricity, telecommunications and transport services, was having a significant impact on the country’s finances.

Pivotal to the success of post-election pledges to revitalise SOEs and for the future of the Chinese infrastructure loan will be how the country manages a sovereign wealth fund (SWF) established in February to invest and distribute resource revenues. While a portion of the SWF will be allocated to the re-capitalisation of SOEs, it is widely expected to be used to repay the Exim loan.

While all future mining, oil and gas revenues will be deposited into an offshore stabilisation fund, critics suspect that this may not be enough to ensure revenues reach the population and boost development. To make sure the SWF delivers on responsibilities, such as providing better services and lifting rural areas out of poverty, improving the functioning of ministries, tightening anti-graft mechanisms and fighting the temptation to over-spend will all be necessary.

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