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Hela Spirit

Hela Spirit

The growth performance of Papua New Guinea (PNG) and the status of its public finances improved significantly in the last decade, supported largely by the boom in global commodity prices of key PNG exports, and good macroeconomic policies.

The national budget, which was in deficit from the late 1990s, recorded its first surplus in 2004, public debt fell from more than 60% of gross domestic product (GDP) in 2003 to about 25% by 2011, the trade balance recorded large surpluses, and foreign reserves improved.

The country also passed several record national budgets due to a tripling of revenue.

And yet many suggest, with good reasons, that it was a wasted decade.

Exxon Mobil recently announced that its liquefied natural gas (LNG) project in PNG is 90% complete and is on track to deliver its first LNG cargo in 2014 mainly to the Asia market.

Export of LNG will bring in massive flow of foreign currency into the country.

However, there is a dilemma; on one end, sharp appreciation of kina as PNG starts to export LNG will help to reduce imported inflation and overheating pressures. The urban poor may benefit from the slow down in inflation as prices of goods decline due to lower inflation.

On the other end, the situation has damaging impact to rural citizens relying on export cash crops, such as coffee, cocoa and copra.

Eighty percent of the population live in the rural areas of PNG and has limited alternatives sources of income. The rural mass depends on the income from the export commodities noted in earlier on.

Moreover, kina appreciation will worsen the challenges of developing the non-minerals sector in order to diversify the economy.

Whilst the authorities do not target a specific exchange rate, experts at IMF are concerned that a rapid kina appreciation will hurt traditional exporters and the rural population. IMF therefore favors a more gradual exchange rate adjustment as reported by PNG Loop.

What lessons can PNG learn in terms of its experience with rapid revenue growth moving forward?

The governor of the Bank of PNG, Loi Bakani recently warned the government and stakeholders involved in the PNG LNG project not to have high expectation on the LNG revenue.

“Export receipts and revenue for the Government may be minimal and therefore expectations of windfall revenue and any associated appreciation of the kina might not materialize in the near term.

“With the completion of the construction phase of the LNG project, the government should co-ordinate its efforts and priorities towards utilizing the labour and capital that are released from the project.

“In addition, the government should continue to develop the agriculture sector and invest in vital infrastructure projects in order to enhance the productive capacity of the economy” Mr Bakani says

Bakani favors diversified agriculture sector, including downstream processing, to broaden the export base and build PNG’s resilience to withstand external shocks by lowering instability in export earnings.

The suggestions by Bakani leans towards developing long term in export earnings that, in essence favors a gradual exchange rate adjustment so as not to cause some adverse impacts on the traditional exporters and the rural population in PNG.