Papua New Guinea scales back spending in supplementary budget

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Weaker commodity prices and lower government revenues have prompted Papua New Guinea’s current administration to revise its growth forecast and release a supplementary budget in late August.

Tabled by Patrick Pruaitch, minister for Treasury, on August 25, the supplementary budget sought to curb state spending while also reinforcing revenue streams in order to narrow the burgeoning state deficit.

Slowdowns in the country’s extractive industries, along with declines in retail, wholesale and manufacturing in the first half of the year, offset modest economic growth in primary industries, Pruaitch told parliament. This resulted in a sharp decrease in government revenue, which necessitated a revision of the 2016 budget approved last November.

Commodity cycle impact

According to the annual mid-year economic and fiscal outlook issued by the Treasury at the beginning of August, real GDP is expected to grow by 2.2% this year, down from the initial estimate of 4.3% and the 11.8% growth recorded last year.

The Treasury report also revised its headline inflation estimate upward, from a projected 5.7% to 6.6%. This marks an increase from 6% in 2015.  

Inflation expectations are largely the result of higher import costs due to the depreciation of the kina – down 13.8% against the US dollar in 2015 and another 5.1% year-to-date – as well as an anticipated gradual recovery in commodity prices, and in particular, crude oil.

Under pressure

The combined pressures on this year’s budget generated a deficit of PGK624.8m ($197.1m) for the first six months of the year, with revenue and grant funding totalling PGK4.2bn ($1.33bn) over the period. If offsetting measures were not implemented, Pruaitch said, total annual income would have only reached PGK10.7bn ($3.38bn), compared to the initial revenue forecast of PGK12.6bn ($4bn).

This revenue shortfall would result in a near doubling of the projected year-end deficit of PGK2.1bn ($662.5m) to PGK3.9bn ($1.2bn), a gap the treasurer said had to be plugged through fiscal consolidation and only delivering services deemed essential.

With the aim of bringing the 2016 budget back to its original deficit levels, Pruaitch said PGK928m ($292.8m) in savings had been identified, mainly by scaling back public service travel, accommodation and consultancy fees, and deferring some investment projects.

Nonetheless, the government plans to prioritise developments that offer fast and high returns on investment, and those that have donor counterpart financing.

Other measures include consolidating some departments and agencies, and putting a freeze on new public sector recruitment, as well as improving collection rates on a number of taxes, while also potentially raising fees and excises.

An additional PGK958m ($302.2m) worth of revenue is also due to come from in part increased Treasury contributions by state-owned enterprises (SOEs).

Combined, these measures are expected to return the budget deficit to PGK2.11bn ($655.2m), or 3.8% of GDP, while leaving the debt-to-GDP ratio at 28.9%.

Mixed reviews

Reaction to the supplementary budget has been mixed. Satish Chand, professor of finance at the University of New South Wales’ School of Business, said focusing on development projects that offer significant returns was an encouraging step.

“Investments into public infrastructure delivering returns in excess of 20% per annum could create jobs, raise GDP and increase exports,” Chand told local media in September. “The challenge will be in picking these projects right and ensuring that waste is kept to a minimum.”

Some observers, however, suggested the additional revenue projections were optimistic, particularly as many SOEs were already tapped last year.

“In a fiscally constrained environment, it will be difficult to get much more out of the SOEs without drilling down into how they operate and how they are structured,” Helen Hamilton-James, managing partner of Deloitte, told local media this month.

Moreover, while reduced spending will help rein in the deficit, cuts in capital works programmes are likely to have a negative impact on a number of other sectors, including construction and logistics – both of which have experienced a downturn since the completion of the massive PNG LNG project in 2014.

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