Papua New Guinea Year in Review 2013

With 13 consecutive years of growth under its belt, Papua New Guinea (PNG) is gearing up for the next phase in its economic development, which is set to be largely defined by the country’s new role as an exporter of liquefied natural gas (LNG).

The completion of a huge LNG project, which attracted some $19bn in investment, has triggered an anticipated slowdown across several sectors of the economy, although momentum is expected to pick up again in 2015. The government will now be looking to revenues from the initiative to drive forward its long-term plans for growth, which include rolling out infrastructure projects, particularly in the transport sector.

PNG’s status as one of the world’s last frontier economies, combined with its abundant mineral reserves, makes it an alluring proposition for investors. Challenges, led by high capital investment costs and infrastructure shortfalls, have done little to dent investor interest, which has remained high, prompting an acceleration of growth since 2007.

The Bank of PNG, the central bank, anticipates GDP expansion of 5.1% for 2013, rising to 6.2% this year. While LNG exports are expected to produce a spike in growth from late 2014 onwards, agriculture, forestry and fisheries will act as the principle drivers of PNG’s economy. Reducing reliance on agro-related activity is expected to play a key part in the drive to generate inclusive growth.

Economic enablers

Since taking office in 2012, the O’Neill administration has begun rolling out a series of national development initiatives that will be supported by LNG revenues.

The long-term plans, which extend to 2050, are based on national blueprints drawn up in the early years of the LNG development. Economic reforms are expected to be rolled out gradually.

The O’Neill government laid the foundations for its development plans with two record, back-to-back budgets for 2013 and 2014, both aimed at providing broad economic stimulus. Allocations to infrastructure, education, healthcare, law and order, agriculture and small businesses in the 2014 budget amount to PGK7.67bn ($2.98bn), or 40% of planned spending, up from 20% the prior year.

Extending the benefits of development to the population as a whole is part of the government’s plans for a more modern economy. Less than 15% of the working population holds a formal job, and many people are reliant on subsistence farming.

Similarly, the pool of formalised domestic capital remains small, consisting of four commercial banks, three superannuation funds and several smaller financial institutions. According to the Asian Development Bank, 85% of the population has no access to financial services, although this is changing as local lenders have begun to focus on tapping under-banked rural communities, in part through mobile banking.

Like other emerging markets, PNG has largely bypassed fixed-line telecoms and has a vibrant mobile segment thanks to a 2006 decision to liberalise the market. Mobile operators have extended their reach into financial services, e-money, bills and payroll services.

Looking ahead

While the LNG project received much of the attention last year, longstanding sectors of economic activity, such as agriculture, forestry, fisheries and mining, will still play a key part in driving expansion, although industry players will be looking to stronger commodity prices on the global markets in 2014 to fuel growth. The possibility of a minimum wage hike, currently being examined by a government task force, could also have an impact on investment decisions and profitability.

Investors have already broken new ground by setting up fish processing and cannery plants, while mining operations across the country are expected to find their stride when they begin production this year. However, with the closure of several prominent forestry zones, timber exports are set to decline in 2014.

Elsewhere in the private sector, the mining and construction sectors are projected to slow in 2014, with the latter forecast to contract by 6.4%, although a resumption of growth is anticipated for 2015. Public funding for national infrastructure projects, including facilities for the 2015 Pacific Games, should spearhead a return to 4.4% growth for construction.

With efforts to attract investment proving highly successful in recent years, confidence remains PNG’s strength. All eyes will now be on the government as it begins upping the tempo of its plans for generating inclusive growth.

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