PNG institutes reforms to accelerate GDP growth


Despite some weak headline numbers, Papua New Guinea’s economy is set to see a recovery in 2017. Depreciation of the kina and the shortage of US dollars have slowed imports and led to pockets of strength. Robust activity at the small and medium-sized enterprise (SME) level and in the informal sector is being observed, while key statistics, such as the current account, are indicating a return to balance. The recent drought has come to an end, and two major mines are back on-line and ramping up production. Importantly, commodity prices seem to have stabilised globally. The near- to medium-term conditions are right for GDP to edge back up to a more comfortable range. Major gas and mining projects could contribute significantly to growth, while reforms currently being put into place are likely to add to the sustainability of the economy.

Balancing The Books 

The country’s finances are no doubt strained, and living conditions are difficult for many. Over the next year to 18 months, the government is going to have to work at keeping the books balanced and avoiding shortfalls in key areas. It will be a challenging course to navigate. Budget cuts will have to be made without negatively impacting the economy or damaging the country’s long-term growth prospects, while new funding will have to be raised in spite of high debt levels. Some immediate worries also hang over the market. Elections raise issues of stability and fiscal discipline, while the outlook for commodities is far from certain. But PNG is benefitting from some momentum in the global economy, and longer-term trends suggest a slow and steady return to healthy growth. “I don’t think we will see it in 2017, but in 2018 or 2019 we will see the bottom of the J curve,” Ian Tarutia, CEO of superannuation service provider Nasfund, told OBG.

Performance In Numbers 

Like many other resource-rich countries, PNG has been hit hard by the decline in commodity prices. GDP growth in 2016 declined to 2% from 11.8% in 2015 and 12.5% in 2014, according to statistics from the Bank of PNG (BPNG), the central bank. The weak performance leaves PNG, once a star and an economic engine of the region, as a bit of an outlier: its 2016 GDP growth was lower than both the 2.6% average in the Pacific and the 4.7% average in South-east Asia.

However, some figures do suggest reasons for tempered optimism. The country’s current account balance has been positive since 2014 as exports have risen and imports have fallen. It swung from a deficit of 36.1% of GDP in 2012 to a surplus of 10.9% of GDP in 2015, and was at approximately 7.7% in 2016.

Signs of recovery in employment were also beginning to show in 2016, according to the BPNG’s quarterly economic reports. Inflation remains surprisingly tame despite the fall in the currency between 2014 and 2016. The rate was 6.6% at the end of 2016, up from the low of 1.38% in 2012, but still below its historical average of approximately 7%.

“2016 was a challenging year, but for the first few months of 2017 it looks good. We are happy and surprised,” said Mathew Rabui, assistant secretary, economic forecasting branch, macroeconomic policy division, at the PNG Department of Treasury.

Indeed, according to the results of the 2017 “OBG Business Barometer: PNG CEO Survey”, which tracks business sentiment among the country’s C-suite executives, expectations are broadly favourable. More than 60% of those surveyed described their outlook for the coming 12 months as positive or very positive CURRENCY ISSUES: The local currency has also stabilised somewhat. After appreciating by 16% in 2014 when the BPNG tightened the trading band, the kina depreciated below where it was before the bank’s move, declining from PGK2.40:$1 to around PGK3.15:$1. The currency has been largely steady since the end of 2016, though according to the IMF, remains overvalued. While the country still faces a backlog of dollar orders, the shortage appears to be less severe than it was previously.

According to the BPNG, intervention in the currency market totalled $425.1m in 2016, down significantly from $825m in 2015. The bank says its actions in the market, combined with currency inflows, should have been enough to cover the shortfalls. Nevertheless, it adds that because some of the currency was used for activities such as trade finance, rather than filling orders, shortages persisted.

Expectations are that recovery will come, albeit slowly. The central bank sees the GDP growth rate rising somewhat in 2017, climbing to 2.8%, before levelling out to 2.7% for the following two years. The Asian Development Bank (ADB) has a slightly more modest forecast, with growth of 2.5% in 2017 and 2.8% in 2018 cited in its “Asian Development Outlook” report. The IMF, meanwhile, projects GDP growth will reach 3.4% by 2019 and stay there until at least 2021.

Luck & The Markets 

Some of the renewed stability is the result of the resolution of a series of specific, one-off events in recent years.

For example, the Ok Tedi mine was temporarily closed in August 2015 due to low water levels on the Fly River, which is used to transport copper concentrate. The Ramu nickel mine was also closed in 2016, following the death of a worker and subsequent protests. In 2017 both the Ok Tedi and Ramu mines are seen returning to full or near-full capacity.

The end of the recent drought is significant. Due to dry conditions and frost at higher elevations, an estimated 1.4m people went hungry in 2015 and 2016. Sanitation became a problem, an increase in communicable diseases was reported, and schools and businesses were closed. Ultimately, around 40% of the country’s population was affected, according to the National Disaster Centre. Prompted by the El Niño weather pattern, the drought was much worse than originally forecast, and ranked among the top-10 under-reported humanitarian crises of 2016, according to the international NGO Care.

Improving global economic conditions are also providing upward momentum. While commodity prices are still far lower than their recent peaks, prices have risen as demand has rebounded. This has fed through to the agricultural sector and has had significant knock-on effects for the economy as a whole. Copra and cocoa prices have increased, palm oil production has been steady and prices firm, and the country has had the strongest coffee crop since 2011. The agricultural sector, which accounts for around 20% of GDP, grew by 3% in 2016, according to ADB estimates, while output in the sector is seen rising by 3.6% in 2017 on increased production and higher prices.

The diversity of the economy is a large part of the stability story and an important element in the country’s resilience. While most sectors lagged the extractive industries for a number of years, and were thus a drag on the GDP growth rate, they have held their own since the fall in commodity prices and have been performing nicely. It is very possible that for the next few years the non-mineral economy will outperform and take up the slack for sectors that remain weak. Non-mineral GDP is projected to expand by 3% in 2017, 3.5% in 2018 and 3.5% in 2019, outpacing the mineral sector forecast every year.

Domestic Demand 

Observers have started to note certain benefits of the weak currency and lack of dollars. The inexpensive kina and the foreign exchange backlog have helped local manufacturers significantly. PNG-made fast-moving consumer goods are selling especially well, while in some lines of business new local companies have been formed to meet demand. Although the retail sector overall has been weak as a shortage of foreign currency disrupted supply, purchases of products from SMEs and local suppliers have generally been on the rise.

The PNG Business Council noted in its first quarter 2017 business report that larger companies are in a consolidation phase, and this has resulted in mergers, downsizing and some closures, but it added that small companies are doing well because of the lack of imports and dollars. Import substitution and local content has increased as a result. The council did find an influx of Asian companies seeking opportunities as some of the larger foreign firms cut back or leave.

PNG remains a significant focus for investors, and not only those in extractive industries. Some sizeable projects are currently being discussed. International media reported in December 2016 that investors from China will be building two industrial parks in West Sepik province, around 30 km from the Indonesian border. The total investment is estimated to be $3.8bn. One park will focus on the processing of timber, fish, cassava and spices, while the other will be involved in the processing of steel, cement and related products. According to the government, construction is expected to start in 2017.

Other recently announced projects include ExxonMobil’s 50-MW power plant, which will supply the Port Moresby area. Construction of the facility is set to start in 2017 (see Energy chapter).

With lower commodity prices, the rest of the economy has been setting the pace. And while the overall contribution from commodities has been disappointing, investments made in the extractive sector have been performing well in terms of output, and the PNG LNG project is now running above capacity. According to the PNG Extractive Industries Transparency Initiative, the project produced some 7.9m tonnes of LNG in 2016, an increase of 14% from the original design specification of 6.9m tonnes per year.

In 2018 the country is set to benefit from the hosting of the APEC leaders’ meeting in Port Moresby in November of that year. The 2015 Pacific Games, which were held in Port Moresby in July of that year, were seen as boosting the economy and helping in terms of international acceptance, though the opposition has questioned the net effect of the games given the money spent on the event.

Legal Changes For Doing Business 

PNG has been busy in recent years passing laws and approving regulations that are relevant to the economy. The list is extensive, and some of the reforms are of fundamental importance. The Personal Property Security Act (PPSA), written in 2011 and effective as of 2016, creates the Personal Property Security Registry (PPSR). The PPSR allows for the online registration of movable assets and the checking of that registry by parties evaluating collateral for a loan.

A number of notable laws were written that change the structure of state enterprises, especially those related to extractive industries. Among these is the Independent Public Business Corporation of PNG (Kumul Consolidated Holdings) (Amendment) Act 2015, the Kumul Minerals Holdings Authorisation Act 2015, the Kumul Petroleum Holdings Authorisation Act 2015, the Oil and Gas (Amendment) Act 2015, Constitutional Amendment No. 44, and the Organic Law on PNG’s ownership of Hydrocarbons and Minerals and the Commercialisation of PNG’s Business.

The constitutional amendment makes it clear that all hydrocarbons assets in the country are – and have always been – owned by the state. This effectively reiterates what has already been set down in law, but removes any doubt on the matter.

As a result of these and other efforts, PNG has moved up in some key rankings. The country achieved significant improvements in the World Bank’s “Doing Business Report 2017”, rising from 133rd to 119th out of 137 countries. Categories in which it did well include starting a business – up six places in the ranking to 130th – and getting credit – up 77 places at 32nd. The PPSA was a factor in improving the getting credit score. Overall, PNG still ranks behind Fiji, Tonga and Samoa, but ahead of Kiribati, Marshall Islands, Palau and the Federated States of Micronesia. Indonesia, meanwhile, was ranked 91st, the Philippines 99th, Malaysia 23rd, Myanmar 170th and Timor-Leste 175th.

In Transparency International’s transparency perception index 2016, PNG shared its 136th position out of 176 countries with Myanmar, Nigeria, Lebanon and Kyrgyzstan. The country’s ranking has continued to improve, rising from 162nd in 2007 to 154th in 2010 and 139th position in 2015.

The PNG Extractive Industry Transparency Initiative National Secretariat also said in May 2017 that it is pleased with the level of transparency from Exxon-Mobil in terms of its PNG LNG project.

Extractive Sector 

While efforts have been made to invigorate the non-mineral economy, it is ultimately the extractive sector that will decide the rate at which the economy grows. In this respect, PNG is doing well. As of early 2017 the timeline for the Papua LNG project had been set. According to Total PNG, the front-end engineering work will be completed by the end of 2018, and the final decision on investment will be made by early 2019. The IMF says that Papua LNG and an expansion of PNG LNG could result in increased economic activity in 2018.

Much depends on the price of LNG, but there is some reason for optimism in this regard. The LNG situation seems to have turned around somewhat, to the surprise of many. Demand from China has held up, the winter was colder than expected, and new demand is coming for countries that have historically not been large buyers. Pakistan and India, for example, are starting to use more of the feedstock. While the long-term picture suggests rising supply, it also projects rising demand, especially from Asia.

However, uncertainties remain, especially given the rise in US production, and prices are nowhere near the levels seen when Japan’s demand for LNG soared in the wake of the accident at the Fukushima nuclear reactor. But demand remains firm and a premium in Asia is still the rule. Spot LNG was trading in the region of $5.80 per million British thermal units in early 2017. That compares with the highs of around $20 reached in 2014, and prices of around $14 in 2014, $9.70 in 2015 and $6.80 through to December 2016.

In addition to the main LNG projects, PNG has a large and dynamic extractive sector, with a full portfolio of opportunities in the works as of March 2017: 123 active exploration licences, 68 exploration licences pending renewal and 72 new applications for licences, according to the IMF.

Major projects in addition to Papua PNG include the first deep seabed copper mine Nautilus Solawara 1, the Wafi-Golpu copper project, the Frieda River project, the Crater Mountain project, the Mount Kare project, the Yandera project, the Mayur resources project and the Kili Teke project.

Near-term Challenges 

Despite the depth and resilience of the economy, PNG is facing significant challenges in the near term. The country is short on cash, and some recent shortfalls have been dramatic. In February 2017 PNG Power cut off electricity to a number of state customers, including the Parliament House, the national police headquarters and the Government House. The state-owned company said that the customers had not paid their bills, with the amount owed totalling more than PGK1m ($317,000) and outstanding since November 2016.

In early 2017 PNG’s voting rights in the UN were suspended for failing to pay its dues. The shortfall was reported to be at least $180,000. Other countries that were suspended included Venezuela, Libya, Sudan, Cape Verde and Vanuatu. The government insists that the failure to pay the dues was the result of an administrative error, saying that the money went to pay operational costs in PNG’s overseas missions in error. The opposition, meanwhile, claims that the problem is a result of the country’s lack of cash flow and suggested that payments to other international organisations could be held up.

Similar slippage in meeting international commitments has been noted. The country missed a sustainable development conference in Dili, Timor-Leste in May 2017 despite all expenses being covered. The publication of the IMF’s Article IV report was also delayed by PNG. Meanwhile, internally, the country is debating whether it should be hosting the APEC meeting in 2018. While it wants to play a larger role on the world stage, its resources are limited.

Around the country, critical expenditures are not being made. There have been reports of food shortages, crumbling infrastructure and staffing issues at the Baisu Correctional Service Centre in the Western Highlands. The facility was built in the 1970s and has not been upgraded since. In early 2017 caterers stopped delivering to the jail because they had not been paid. In May 2017 the Bougainville government said the national government had not made necessary payments required under the peace agreement, and that the autonomous region was owed $250m.

In early 2017 Patrick Pruaitch, then-Treasurer, said the government’s finances had “fallen off a cliff”. Due to lower-than-expected revenues, debt has ballooned. He blamed bad spending decisions in the boom times for many of the problems. James Marape, the minister of finance, responded that the government has been able to offer free health care and build necessary infrastructure despite falling commodity prices. He added that the treasurer’s comments were political ahead of the 2017 elections.


Nonetheless, the PNG economy does face external headwinds. It is sensitive to lower demand for commodities and an increase in interest rates in the US, which could lead to a higher cost of funds for the country and its enterprises. The ADB has noted that the maintenance of the kina trading band could make the economy particularly susceptible to exogenous shocks. And while the current account balance is good on paper, it is not having a significant impact on the real economy. Inflows are immediately consumed by outflows to pay international shareholders in resources-related projects. In many cases, much-needed hard currency does not enter the system ever temporarily due to special arrangements made with resource investors. Under these agreements, foreign currency can be kept in offshore accounts to pay non-PNG liabilities. The BPNG has argued that while these agreements provided investors with a high degree of operational certainty, they lack clarity and do not always work well with policy, regulations and legislation, and a proper cost-benefit analysis should be carried out.

Observers have noted a split in the economy, where oil and gas producer Oil Search is reporting strong results based on its shareholding in PNG LNG, as people in the country run out of cash. The landowner situation raises the most concern. While the LNG project is working as planned, some living in the area argue they have not benefitted from the $19bn investment. This perception increases the potential for disputes, a negative political response and instability. The ADB has noted that overall output could be affected, while others wonder whether any sense of disappointment for the first large LNG project could affect the next. “The second LNG project brings hope, but it depends on what kind of deal can be done,” Ernest Abel, programme manager, trade affairs and investment facilitation, at the EU delegation, told OBG.

Cause For Concern 

Overall, the economy remains very close to the edge. While GDP growth has stayed in positive territory, risks remain. Gross foreign reserves fell from $4bn in 2012 to an estimated $1.7bn in 2016, declining from four months of import cover to 3.2. The IMF sees gross official reserves rising to PGK3.27bn ($1bn) by 2022, with import cover back above five months. However, until that cushion returns, the country is vulnerable. And while the kina shortfall appears to be correcting itself, the continued lack of flexibility exposes PNG to exogenous shocks.

Another worrying variable is nature. The drought has ended, but it could return, with the UN placing the odds of another El Niño in 2017 at 50%. If the agricultural sector is weakened, the country may not have the cushion it needs to maintain growth through to the next big project. Other concerns also persist. While much progress has been made, long-term, structural issues, such as general security problems, weak property and land rights, and contract enforcement issues, hang over the market.

Reform has also been incomplete, and some important legislation lingers. As of May 2017 the sovereign wealth fund – scheduled to be launched in 2016 – was still in the process of choosing its board. It is expected that the new Mining Act will also be delayed until after the general election in 2017. Capital markets reform was introduced but has yet to be implemented.

In April 2017 negotiations on the Pacific Agreement on Closer Economic Relations Plus were concluded; however, PNG did not sign the regional trade deal although it was part of the negotiations since 2009.

In Numbers 

While some metrics have held up well, others have not. The IMF has noted a sharp reduction in money supply growth, with domestic credit expansion falling from 40.9% in 2013 to under 5% in 2016. Broad money supply growth similarly eased, from 10.9% in 2012 to 2.1% in 2016. FY 2016 was a challenging one for many local businesses, with media reporting sales down 15-20%. Observers have also noted a reduction in the number of workers despite official statistics showing stability in employment.

Paul Flanagan, an economist from Australian National University who used to work with the PNG Treasury, has suggested that PNG seek assistance from the IMF. Speaking to international media reported in March 2017, he said this would allow the country to continue to make investments in education, health and infrastructure – investments that are needed to ensure longer-term economic prospects. In addition, Flanagan also noted that PNG is risking high inflation as the central bank has been buying too much government debt.

Recent Downgrades 

Credit ratings agency Moody’s downgraded PNG in April 2016 from “B1” to “B2” with a stable outlook, and that rating held through early 2017. The agency said its opinion reflects a number of factors: weak GDP growth, pressure on government finances, low commodity prices, weak governance, a poor security environment, low incomes and political uncertainty.

Another ratings agency, Standard & Poor’s, has rated the country “B+” with a negative outlook. The outlook was changed from stable in October 2015.

While Moody’s is somewhat positive on the APEC meeting in 2018, and believes that improved performance in the mining and agriculture sectors will boost the outlook, it noted that at the same time the government is fighting fiscal imbalances, rising interest rates and a high dependence on short-term financing. The ratings company sees increased refinancing risks and expressed concern in its April 2016 statement that foreign currency reserves had fallen to $1.69bn at the end of 2015. Moody’s calculated that by the end of 2015 short-term debt as a share of the total was 48.1%, while interest payments as a share of total revenue had increased to an uncomfortable level of 9.8%, up from 5.3% in 2013.

While Moody’s downgraded the country, in its recently released annual credit analysis the ratings company was more positive about the economy in the medium to long term, in part because it remains competitive in the world markets in terms of hydrocarbons. The agency added that the Medium-Term Fiscal Strategy 2018-22 should help improve clarity and could bring the ratios down if properly implemented.

The context is important. The Moody’s downgrade took place as ratings agencies came in with a record number of adjustments globally – a total of 14 downgrades in the first six months of 2016 – with falling commodity prices largely to blame. Included on the list were the Congo, Kazakhstan, Saudi Arabia, Brazil, Nigeria, and Trinidad and Tobago.


PNG’s prospects for next few years will depend in part on luck and in part on policy. Much depends on the prices of resources, and the country has little control over those. If LNG prices hold steady at around $5 or rise, then stability and somewhat higher GDP growth rates are almost assured. Lower prices, however, would put many assumptions in doubt and could mean a protracted recovery period.

In the longer term, growth will depend on what the government does in terms of cutting costs, spending wisely, and initiating reforms and programmes that support the broader economy and society in general. Development of non-mineral sectors remains crucial, while education and health need to improve to ensure productivity, stability and sustainability.

If the right sort of initiatives are undertaken, the country could experience exceptional growth, and could effectively hedge against the boom-andbust cycles with a more diversified economic base.


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The Report: Papua New Guinea 2017

Economy chapter from The Report: Papua New Guinea 2017

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