Preparing for production: Revenues from large-scale energy and mining projects will help fund a long-term national development strategy

Currently in the midst of its longest period of expansion since the country achieved independence in 1975, Papua New Guinea’s economy has grown every year since 2003, buoyed by developments in the energy and mining sectors. In 2011 PNG reported GDP growth of 8.9% – one of the highest rates in the world – due largely to strong domestic demand as a result of ongoing construction activity at ExxonMobil’s PNG liquefied natural gas (LNG) project, which is expected to begin producing in 2014 and has the potential to bring in up to $150bn by 2044, according to investment reports from the Commonwealth Business Council. Others find this estimate to be rather high, as the bulk of revenue is projected to come far in the future.

The 2012 government budget projects the LNG project will bring in PGK1.5bn ($714m) over the first 3-5 years of production, and some PGK4bn ($1.9bn) annually thereafter. Initially, the national budget suggests the increase in public revenues will be modest and will only manage to offset an expected loss in revenues from a number of existing mining and oil operations as they come to the end of their lifespan. Over the longer term, the government is planning to use the financial gains from the LNG project and a series of other major upcoming energy and mining schemes to fund a long-term national development strategy.

CHALLENGES: The country also faces a number of challenges. Security, for example, continues to be a major issue throughout PNG, and this has likely had a negative impact on foreign investment and economic activity in recent years. Similarly, land use and ownership laws in PNG are complex. In general, land is not viewed as a saleable commodity, which means land usage rights can only be acquired by negotiation with increasingly powerful indigenous landowners.

This has been a major issue for energy and mining companies. Boosting economic activity among citizens is also a challenge. According to AusAID, the Australian government’s foreign aid organisation, PNG’s formal economy only accounts for around 15% of total economic activity in PNG. The remaining 85% consists primarily of semi-subsistence agricultural activities.

Expanding the formal sector – widely viewed as a prerequisite for increasing economic diversification – is expected to be a tough hurdle in the coming years.

LOOKING AHEAD: These issues aside, forecasts for future economic growth are broadly optimistic. According to March 2012 projections from the Bank of Papua New Guinea (BPNG) – the central bank – real GDP growth in 2012 is expected to remain high, at 8% for the year, due primarily to continued construction activity at the PNG LNG project. A handful of other private sector-led projects are expected to come on-line over the course of the year or in 2013, including the PGK3.1bn ($1.47bn) Ramu nickel and cobalt mine, a large-scale Chinese project in development since 2005.

The government is working to ensure the expected influx of energy and mining income over the next decade benefits the entire population and not just the oil firms and local elites. In February 2012 Parliament approved legislation for the creation of a sovereign wealth fund (SWF), which will be used to manage hydrocarbons revenues, ensure economic stability and pay for the national development plan. With these plans in mind, PNG is looking forward to continued economic expansion for the foreseeable future.

BY THE NUMBERS: GDP at constant prices in 2011 came in at PGK12.53bn ($5.95bn), up 8.9% from PGK11.51bn ($5.47bn) in 2010, according to statistics from the IMF. The 2010 figure, in turn, was up 7.5% from PGK10.69bn ($5.08bn) in 2009. GDP per capita was PGK1880 ($894) in 2011, based on a population of 6.6m, compared to PGK1770 ($840) in 2010, PGK1688 ($800) in 2009 and PGK1627 ($773) in 2008.

According to IMF predictions, GDP growth will remain high in 2012, at just under 8% for the year, which will bring the country’s GDP at constant prices to PGK13.49bn ($6.41bn). This would make 2012 the 10th consecutive year of growth in PNG. In 2013 the IMF expects growth to drop to around 4%, primarily due to slowing construction activity as the LNG project nears completion and mining output declines. In 2014 the LNG project is expected to begin producing, however, which should push GDP growth back up to around 7.7% for the year. The scheme is expected to reach peak production in 2015, resulting in a jump of nearly 20% in GDP, according to IMF forecasts.

INFLATION: Inflation has remained relatively low in recent years. Over the course of 2011 it dropped from just under 10% at the end of the second quarter to an annual headline rate of 6.9% at the end of the year, down from 7.2% at the end of 2010. The decline was primarily the result of monetary tightening efforts at the central bank and kina appreciation.

Historically, most inflation in PNG has been imported. In June 2012 the government plans to introduce a new, updated consumer basket. The existing basket has been in place since PNG’s independence in 1975, and has attracted criticism for being somewhat out of date. “The new basket should fix the issues with inflation,” said Sali David, the manager of the economics department at the central bank. According to BPNG, headline inflation is set to jump to 8% in 2012, partially due to rising liquidity levels in the financial system (see Banking chapter).

PUBLIC DEBT: Public debt as a percentage of GDP has fallen in recent years, from 32.1% in 2009 to 26.6% in 2010 and 24% in 2011, according to the Department of Treasury (DoT). This is largely the result of rising GDP, as opposed to falling debt levels. According to BPNG, public debt as a percentage of GDP is expected to drop to 23.2% in 2012. After several years of surpluses, in 2009 PNG’s current account fell into a deficit of just over 7% of GDP, primarily as a result of inflows related to the LNG project and weakening commodities prices. In 2011 the current account deficit jumped to around 35% of GDP, up substantially from 8% in 2010.

According to the IMF, “the widening of the current account deficit to 35% of GDP is financed by foreign direct investment (FDI), and is therefore not a cause for concern.” Indeed, construction material imports for the LNG project are worth around PGK22bn ($10.5bn), according to the DoT. Similarly, salaries and other payments made to expatriate LNG employees residing in PNG on a temporary basis are expected to reach PGK18bn ($8.6bn) over the course of the project’s construction. These figures have contributed to the current account deficit in recent years. The current account is expected to return to surplus in 2014, when construction finishes and production begins.

NATIONAL DEVELOPMENT PLANNING: The government has introduced a handful of interconnected strategy documents in recent years. In September 2009 the state launched Vision 2050, an ambitious long-term national development strategy with the goal of turning PNG into one of the top 50 countries on the UN’s Human Development Index by 2050, up from 153rd out of 187 in 2011 (see analysis). In March 2010 the government launched the 2010-30 Strategic Development Plan, which sets out a development framework for the first 20-year period of Vision 2050. More immediately, the 2011-15 Medium-Term Development Plan, launched in October 2010, serves as a blueprint for development through 2015. The strategies described in these plans will be put into action through the government’s annual budgets.

The SWF, which was approved by Parliament in February 2012, will eventually form a cornerstone of the government’s national economic development strategy. The fund is scheduled to be up and running by 2014 to receive the first round of revenues from the LNG project. All taxes, dividends and other income from the project will be deposited directly into the SWF. According to the DoT, the fund will be managed onshore, invested offshore and spent onshore. The SWF will consist of two units. The stabilisation fund, which will be held offshore, will be used to ensure macroeconomic stability. The development fund, meanwhile, will be drawn from the SWF on an annual basis, and will be put to use on major national development projects in support of Vision 2050 (see analysis).

BUDGETING FOR GROWTH: The 2012 budget – with total expenditure and net lending of PGK10.6bn ($5.04bn) – is the largest in PNG’s history, up 13.2% from PGK9.3bn ($4.4bn) in 2011. Some PGK6.1bn ($2.9bn) of the 2012 budget will go towards recurrent expenditure, with the remaining PGK4.4bn ($2.09bn) set aside for development spending. Recurrent expenditure, up 14.7% from 2011, includes government wages, goods and services and a number of new spending initiatives. Perhaps most importantly, for the first time the recurrent budget provides funding to cover tuition fees for all public school students from elementary through grade 10, and 75% of fees for grades 11 and 12. Funding was also provided to recruit 6700 additional teachers in the provinces. This expenditure is in line with the government’s current focus on improving education (see Education chapter). Other new recurrent spending will go towards transport infrastructure, improving health outcomes, and addressing ongoing law and order issues.

The development budget, meanwhile, is up 13.1% on 2010, and includes funding for a variety of projects, including infrastructure, accommodation and sports facilities for the 2015 Pacific Games, which will be held in Port Moresby. The development budget also includes funding for a number of projects that are meant to directly address the UN’s Millennium Development Goals, which play a central role in Vision 2050. The development budget includes PGK8m ($3.8m) set aside for the National AIDS Council, for example, plus PGK20m ($9.5m) for private health and education programmes, the majority of which are administered by churches and other civil society organisations. The development budget also includes funding for major upgrades to the Highlands Highway (see Transport chapter) and capacity-building projects for provincial and local governments, especially in rural areas.

MINING: The mining industry has dominated PNG’s national economy since the 1970s. The country is a major producer of gold and copper, and a new project – the PGK3.1bn ($1.47bn) Ramu mine – is expected to result in substantial output of nickel and cobalt in 2012 or 2013. PNG is home to a number of major gold extraction sites, including the Porgera mine in Enga province, the Lihir mine in New Ireland province and the Ok Tedi mine in the Western province, near the Indonesian border. In 2010 mining firms in the country produced an estimated 70.5 tonnes of gold, making PNG one of the top-10 gold producers in the world.

The Ok Tedi project, which was launched in the early 1980s, initially focused on gold extraction, but eventually targeted a major copper deposit as well. Today gold, copper, silver, platinum and other minerals account for around a quarter of GDP (see Mining chapter).

ENERGY: In addition to minerals, PNG boasts major hydrocarbons reserves. Oil production peaked in 1993, at 125,880 barrels per day (bpd). Since then, according to data from US Energy Information Administration, the industry has been in decline.

In 2010 the country’s total crude oil exports reached 10.39m barrels, which equates to 30,360 bpd, a significant drop from the 1993 figure. Proven oil reserves have also fallen substantially, from 400m barrels in 1996 to around 88m barrels in 2011, though an increase in exploratory licences in recent years could result in several new discoveries in the future.

PNG is also home to substantial deposits of natural gas, though estimates as to the precise amount vary significantly. According to official government estimates, at the end of 2010 the nation had 14trn cu feet (tcf) of natural gas reserves, while Wood Mackenzie, a UK-based energy consultancy, put total reserves substantially higher, at around 22.6 tcf. The $15.7bn PNG LNG project, which is expected to produce around 6.6m tonnes of LNG annually beginning in 2014, is the first of a series of major gas projects set to come online in the coming years. Others major projects are currently in development, with the participation of Interoil, a Canadian firm; US-based Bechtel and ConocoPhillips; and Korea Gas, among others (see Energy chapter).

AGRICULTURE: Despite the growth in the energy and mining sectors over the past few decades, agriculture continues to be one of PNG’s largest economic contributors. Around 85% of the population is thought to be involved in semi-subsistence agricultural activities. In 2010, the latest year for which data is available, PNG exported PGK2.75bn ($1.31bn) in agricultural products, including palm oil, rubber, coffee, cocoa, copra, tea, fisheries, spices, wheat, fresh fruit and vegetables, amongst several other products.

Production prices are generally fairly high, largely due to transportation costs, which means that many segments cannot compete in the more price-sensitive international markets. Instead, a number of firms focus on producing high-quality products in an effort to earn premium prices. Growth in the sector has been somewhat limited by a lack of training among farmers, volatile crop prices, and PNG’s challenging terrain, climate and poor infrastructure.

Over the past decade palm oil has become the market leader in terms of production and revenue. New Britain Palm Oil, which is listed on both the Port Moresby Stock Exchange and the London Stock Exchange, is the world’s largest producer of sustainable palm oil, accounting for around 16% of the global crude palm oil supply in mid-2010. Other major agricultural companies include the Pacific Trading Company (coffee and tea) and the government-owned PNG Rubber Industry, among others (see Agriculture chapter).

INDUSTRY: Expanding PNG’s industrial base has only become a priority in recent years. The government is currently in the midst of an endeavour to expand the manufacturing sector’s contribution to GDP by 30%, primarily by building up PNG’s downstream processing capabilities in a variety of existing industries. The downstream mining and energy segments, for example, are currently almost non-existent, though this is changing slowly as a result of investments made in support of and in conjunction with the LNG project. The existing manufacturing sector is focused on a variety of products, including food and beverages (F&B), building materials, handicrafts, furniture, industrial chemicals, plastics, paint, personal care products and packaging, among others. The F&B sector, in particular, has been growing recently. Leading F&B producers include Paradise Foods, the Lae Biscuit company, SP Brewery and Coca-Cola Amatil. Major potential industrial growth areas include tuna fish processing, light manufacturing and timber, among others (see Industry chapter).

A BIGGER SLICE OF THE PIE: A number of other sectors have the potential to become major economic contributors in the coming years. The local construction industry has been a significant secondary beneficiary of the LNG project, for example. A handful of local subcontractors have benefitted substantially from the scheme in terms of increased revenues, but also – and perhaps more importantly – from technology and skills transfer initiatives. Indeed, when ExxonMobil began work on the LNG project in 2009, the firm signed a five-year contract with the PNG-based Institute of Banking and Business Management (IBBM). The resulting venture, the IBBM Enterprise Centre, has a mandate to improve business practices and build capacity at local firms involved in the LNG project. A substantial percentage of the centre’s clientele is made up of subcontractors and other construction-related companies. Taking into account the substantial number of largescale government-led infrastructure projects currently in the pipeline, these firms should play a major role in coming years (see Construction chapter).

MONEY MANAGEMENT: The financial services industry is also poised for expansion. PNG’s four commercial banks have grown substantially over the past decade, largely as a result of economic activity related to the LNG project. With a well-respected, independent regulator in the central bank, and a mix of profitable local and international players, the banking segment has the potential to become a major contributor to GDP. Corporate banking is currently the primary source of revenues for most institutions. That said, a number of banks are in the early stages of developing products and services aimed at PNG’s large lowincome population, with the long-term goal of aiding the retail side of the market (see Banking chapter).

PNG is also looking at potentially developing its tourism industry. With a unique and diverse cultural heritage, scenic geographical features and pristine beaches, the nation has all the components of a major tourism destination. To attract visitors, however, the country needs to deal with a number of ongoing challenges, including those relating to security, infrastructure and the high cost of travel. These latter two areas in particular are benefitting from a substantial amount of government investment in the lead up to the Pacific Games in 2015 (see Tourism chapter).

TRADE: Australia is PNG’s largest trading partner by a substantial margin. In 2010-11 total trade between the two countries was worth A$5.7bn ($5.9bn), according to Australia’s Department of Foreign Affairs and Trade. Total exports from PNG to Australia were worth A$3.5bn ($3.6bn), while imports from Australia were valued at A$2.2bn ($2.3bn). PNG’s exports to Australia include gold, crude oil, silver, platinum and coffee.

The country imports civil engineering equipment, vehicles, specialised machinery and crude oil from its neighbour to the south. Australia accounts for 42.1% of total imports into PNG, with the remainder coming from Singapore, China and Japan. Some 27.9% of PNG’s exports go to Australia. Other major export destinations include Japan, China and the Philippines.

In addition to trade, Australia is the single largest donor of foreign aid to PNG. In 2011-12 Australia has committed to delivering A$482.3m ($502m) in aid to the country, primarily under the umbrella of the PNGAustralia Partnership for Development.

CHALLENGES: PNG faces several development concerns. Security continues to be a major issue throughout the country, though especially in rural areas. In addition to inflating the cost of doing business in PNG, the country’s poor reputation vis-à-vis security has likely had a negative impact on FDI inflows over the years.

Land issues continue to be a nuisance for mining and energy firms looking to gain access to land in rural areas, in particular. Around 97% of the total land in PNG is held under “customary tenure”, a legal designation under which traditional lands are held by indigenous peoples. Land that is held in customary tenure is notionally public, but is controlled by tribal communities, and cannot be purchased or even owned in the sense that is traditionally understood in the West. This has been a major issue in recent years, as multinational firms have moved to set up shop in PNG.

PNG is potentially vulnerable to a number of economic and monetary risks. International price volatility, especially due to current or future export commodities, is arguably the most pressing long-term risk to the country’s ongoing economic vitality.

While oil prices have risen dramatically since falling to $40 a barrel in the wake of the 2008 international economic downturn, they remain rather unstable. Similarly, minerals – including gold, copper and nickel, all of which are major contributors to GDP – have seen a substantial amount of volatility in the last few years.

According to the Australian government’s Export Finance and Insurance Corporation, investors and exporters alike face a number of moderate risks in while doing business in PNG. These include an occasionally volatile business cycle, a potentially unstable banking industry, and legal issues related to enforcing contracts and other business agreements. Additionally, while the kina is currently strong, wide swings in the balance of payments in coming years could potentially result in steep currency depreciation.

OUTLOOK: Despite these challenges, PNG’s economy is expected to continue to expand over the coming decade. The development of the PNG LNG project has had positive knock-on effects for most sectors. While construction activity is expected to wind down in 2013 as the project nears completion, the beginning of production in 2014 will mark the start of a large increase in the government’s revenues.

Under Vision 2050, a substantial percentage of this income will be used to invest in sustainable industries, such as agriculture and manufacturing, among others. The government plans to use inflows from the LNG project and other future mining and energy projects to jumpstart initiatives to benefit the population.


You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Papua New Guinea 2012

Economy. chapter from The Report: Papua New Guinea 2012

Cover of The Report: Papua New Guinea 2012

The Report

This article is from the Economy. chapter of The Report: Papua New Guinea 2012. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart