PROSPECTS FOR GROWTH IN PAPUA NEW GUINEA

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PROSPECTS FOR GROWTH IN PAPUA NEW GUINEA

• BY
• JOSEPH LELANG
• NANCY LELANG

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OUTLINE OF PRESENTATION

• 1. REVISION OF MACROECONOMIC POLICIES AND
  PERFORMANCES OVER THE LAST DECADE
• 2. PROSPECTS FOR GROWTH OVER THE MEDIUM TERM
• 3. IMPEDIMENTS TO GROWTH
• 4. EXPLORING OPPORTUNITIES FOR GROWTH

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Understanding the Past- Economic Policies of the
90s

• 1990- 1994 Fiscal Expansion
• Starts with Borrowing
• Results debt, liquidity
• foreign reserves
• Ends in economic crisis
• Adopted IMF Standby- Arrangements (1994-97)
• 1995- 1999
• Failed to implement Reforms
• In 1997- Economy battered by exogenous shocks
  (Drought, Asian crisis)

• 1990s riddled by poor governance of public
  institutions- undermines private sector
  confidence
• Monetary policy supports fiscal deficit
• Growing inflation and BOP pressures. Private
  sector crowded out
• In 2000- PNG adopts IMF Program to avert major
  economic disaster

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ECONOMIC CRISIS CONTAINMENT POLICY

• Australia Provided US80 million ( 30 million
  aid advance) at end 1999
• PNG Adopted IMF Program- Introduced Reforms in
  2000
• But mid- 2002, budget spin out of control as
  Mekere Govt borrowed from BPNG. Projected Deficit
  at K700- K800 million

• Supplementary Budget of 2002 Tighter fiscal
  controls averted another disaster
• 2003/2004 Budget. Fiscal Consolidation Policies
  (PERR, FMIP, MTEF)
• Sets Foundation for future growth amidst
  declining mineral sector

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Effects of Policies- 90s Decade

• Revenue continues to perform below expenditure
• Excessive borrowing
• Total Liquidity remained high
• Total debt rose (especially external debt)
• In 1990, Debt-GDP ratio (47.6), but reached
  (72) in 2002, fell to 54.5 in 2004.

External Debt
Domestic Debt
Debt - GDP Ratio
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Effects of Policies- 90s Decade
Food Prices
CPI

• T- Bill rates remained high, hurts budget
• Lending rates also high, hurts p/sector
• Kina depreciated by over 60 bet. 1994-02
• High Inflation hurts ordinary people

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Economic Growth (Real) Employment
Growth ()
Jobs (2002100)

• Growth Strong 1991-1993, Mixed (1994-1999,
  Negative (2000-2002), Recovery (2003, 2004),
  especially in the mining, agric., finance,
  Construction, insurance, banking properties
  sector
• Employment Mixed (Early 90s low) Strong growth
  (1996- 1999), Declined in 2000- 2002. Strong
  recovery (2003, 2004)

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Poverty Impact- Some SignsStill Persistent over
time!

• 30 of Population below lower poverty line
  (K399/year)
• Social Indicators
• Low Life Expectancy
• High Infant (64) Child Mortality (88)
• Weight of Under Five Children
• Rising crime rates, prostitution (HIV/AIDS),
  street children, beggars, drug peddling

• Per capita Income GDP US510- 580 per year (is
  low) PNG ranked 171 in the world (World Bank,
  2004)
• Gini Coefficient, 0.51, High Income Inequality
  (Fiji (0.46), Australia (0.35)
• Poorest 20 of Population (4.5 of Income)
• Rich 20 receives 56.5 of nations wealth
• Rural- Urban migration rate (13) Urban- Rural
  rate (0.7)

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MAPPING OUT MEDIUM TERM PROSPECTS FOR PNG
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POLICIES AND REFORMS OVER THE MEDIUM TERM

• Stable Investment Climate
• Efficient, Effective and Affordable Public
  Service
• Enhanced and Competitive Private Sector

• Prudent Economic Management, Debt Management,
  Affordable Wages Policy
• MTDS, Provincial Resource Allocation (NEFC),
  Improve Governance Accountability, Civil
  Service Size and Payroll Reforms, Employment,
  Financial (FMIP) Expenditure (PERR) Controls,
  ECP
• Removing Impediments, Free Trade and Investment
  environment (WTO/APEC), Privatization and
  Financial Sector Reforms (RDB)

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MEDIUM TERM POLICY STANCE

• Mining Petroleum revenue to fall from 24
  (2004) to 11 by 2009 and 0 by 2012
• Fiscal discipline stringent budget controls
  Necessary
• Deficit averages -1.0 of GDP to 2007. Surpluses
  in 2008/09
• Pursue active debt management strategy
• Monetary policy maintain macroeconomic stability
  and economic growth
• Continue with structural reforms

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Medium Term Fiscal Debt Management Strategy

• Fiscal Policy Oriented towards debt reduction
• Government is committed to balance budget and
  reducing debt-GDP ratio to 45 by 2009
• Steady debt reduction consistent with high growth
  (2.8), low interest rates (9), low inflation
  rate (5)
• Kina stable
• Fundamental Revenue and Expenditure reforms
  underway (e.g. PERR)

• Debt switching from external to domestic debt to
  ease pressure on exchange rate
• Switching from short term to long term debt
  instruments

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PROSPECTS FOR GROWTH OVER THE MEDIUM TERM

• Inflation, Interest rates to remain low
  averaging 5 9 , respectively.
• Positive growth- Averages 2.8. Agric. private
  sector major determinants

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IS MACROECONOMIC STABILITY SUFFICIENT FOR GROWTH?

• YES.
• BUT, THE FOLLOWING ARE ALSO IMPORTANT
• Continue Implementing Reforms
• Address Impediments to Growth
• Explore Opportunities for Growth
• CONSTANT EVALUATION OF PROGRESS BY GOVERNMENT IS
  ESSENTIAL- WHERE NECESSARY, ADOPT NEW AND MORE
  EFFECTIVE APPROACHES

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BUSINESS CONCERNS

• PNG Business survey on impediments to growth
  highlight the above.
• On delivery of government services Businesses
  gave PNG government a score of 4.5 out of 6(very
  poor)

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Starting Businesses in PNG

• World Bank Doing Business Report (2005)
• PNG needs to improve waiting period prior to
  approval, too long (ingredient for corruption)
• Committee looking into addressing these issues
  including work permits, etc.

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Other STRUCTURAL IMPEDIMENTS- Highlighted by MTDS

• Lack of access to credits
• Lack of access to markets
• Low Agriculture productivity
• Ongoing Land Tenure Constraints
• Lack of extension services

• Lack of Roads
• Decentralization Reforms failed- Service delivery
  system dysfunctional. Widespread confusion
• Institutional capacity problems at all levels
• Wrong approach to development

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EXPLORING OPPORTUNTIES FOR GROWTH

• Agriculture Prospects
• Food Sector (e.g. Rice)
• High value- added food products
• beef
• Other Investment Opportunities
• Mining, nickel, cobalt, chromite, oil, gas
• Fish and fish processing
• Small Medium Enterprises (SMEs)
• Tourism opportunities

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CORRECTING PAST MISTAKES

• Achieving a Stable Investment Climate and
  Improving business conditions- aided by reforms-
  is on track.
• But, addressing structural impediments is not.
  PNGs Problems- now 30 years on- it is still
  there.
• This can neutralize the gains from improved
  economic management.
• Do you think PNG should re- think its development
  strategy? Should GPNG direct public investment
• toward the most binding constraints or spread it
  too thinly?
• Directly address the problem (e.g. rural
  agriculture) or Spend it elsewhere and hope for
  Private Sector to address it?
• Or spend it all on road maintenance and hope for
  the best?
• Are PNGs development approach pro- poor? Is Free
  trade beneficial to the farmer and agriculture
  development? Will agriculture tax incentives to
  benefit rural farmers?

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THANK YOU!