The Active Economy of Papua New Guinea (PNG‏)

In response to the Central Bank's statement on Tuesday's National News Paper about "Economy Active" in terms of the six points mentioned. In fact, Economy is Active as a result of surplus national budget of PNG in the recent years due to minerals boom. The minerals boom has resulted in a greatly increased flow of revenue into PNG Treasury Account.

Ironically, on yesterday’s National News Paper, government urged the members to tighten their belts when they draw down their proposed development budgets for their respective electorates because their will be no supplementary budgets for the years to come until 2012 due to no windfall gains. Do we have these to administrations, BPNG and Government, working hand-in-hand to formulate monetary and fiscal policies to gain strong financial position in PNG?

The current balance of payment was reported to be K616 million for the last six months compared to K400 million in 2007 and 2008. I want to stress on last point that was mentioned by the BPNG on its statement. As a measure of how sensitive the budget figures are to a change in minerals prices, K1, 900.6 million out of the K6, 161.8 million in tax revenues in 2006 were from mining and petroleum taxes (equivalent to 31 % of the total).

While there was fiscal discipline in early years of the Somare Government, in 2005-2008 expenditures rose as fast as, or even faster than revenues in 2008 and first quarter of the 2009 fiscal year. The rapid rise during the minerals boom is a worrying sign. In boom times, the budget should ideally be run in surplus to buy down the debt incurred in times of low minerals prices.

Emergent canopy tree fall for timber in the Gulf Province, Papua New Guinea

There is some (small) buy-down of debt proposed in the 2007 Budget. However, does the PNG government buffering itself sufficiently for the inevitable drop in minerals prices in the near to middle term? The wisdom of running a small deficit during a minerals boom seems doubtful indeed.

A further worrying sign is the increase in recurrent expenditure. Recurrent expenditure is budgeted to increase from K3, 447.6 million in 2006 to K3, 824.6 in 2007-an 11% increase. Likewise, wage bill portion of recurrent expenditure is rise from K1, 265. 8 million in 2006 to K1, 404.2 million in 2007-also an 11% increase to compensate for the price increase at the same rate. Now that due to the inflation government has increased the minimum wage rate.

The wage bill portion of recurrent expenditure is politically difficult to cut in PNG. These rapid increases in the public sector wage bill will leave future government in a difficult situation when revenues fall. If mineral revenues fall during the term of the next government, it will find itself in the same position in which previous governments found themselves.

High level of politically untouchable recurrent expenditures and falling tax revenues meant that the only recourse was to substantially increase public debt. Apparently government is panicking about the next year’s budgets and onwards because it realised that the budgets will not be backed up by any windfall gains.

It is really unpredictable for one to say ‘we are rich enough just because we have the mineral resources’ without taking other factors that affects the revenue into consideration like exchange rate volatility, aggregate demand, world financial crisis, etc...

Therefore, what is the BPNG's advise to the Government and what are the current government’s effective plans to cater for this? Or government wants to use up all the reserves and leave the country suffering in silence for the years to come?

PNG, this is the real situation we are facing now but we are being brain washed in media reports. We will face this problem sooner than later, what is your say on this?

Mathew KAKARAYA,

Nanjing, CHINA.

Economy of Papua New Guinea (Facts)

*** Papua New Guinea is richly endowed with natural resources, but exploitation has been hampered by rugged terrain and the high cost of developing infrastructure. Agriculture provides a subsistence livelihood for 85% of the population. Mineral deposits, including oil, copper, and gold, account for 72% of export earnings.

Former Prime Minister Sir Mekere Morauta had tried to restore integrity to state institutions, stabilize the kina, restore stability to the national budget, privatize public enterprises where appropriate, and ensure ongoing peace on Bougainville.

The Morauta government had considerable success in attracting international support, specifically gaining the backing of the IMF and the World Bank in securing development assistance loans.

Significant challenges face the current Prime Minister Sir Michael Somare, including gaining further investor confidence, continuing efforts to privatize government assets, and maintaining the support of members of Parliament. The third quarter (September, 2004) Reserve Bank Report by the Governor of Bank of PNG showed positive economic stance by the Government, with inflation at zero.

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