PAUL FLANAGAN | PNG Economics | Edited extracts
YOU may not think it, but Papua New Guinea and Mongolia have a lot in common economically.
Indeed, the latest World Bank global economic prospects report portrays them as near economic twins despite their historic, cultural and geo-political differences.
But there is now one important economic difference – last week Mongolia recognised it needed help from the international community.
By doing so, it mobilised $US440 million in International Monetary Fund financing and an estimated additional $US5.5 billion in cheap loans and grant assistance.
In contrast, the O’Neill government has failed to concede that its economic mismanagement requires a similar solution – low cost financing conditional on improved economic policies.
Foreign currency restrictions are the new norm for business, but this is hurting growth and discouraging further foreign investment.
PNG and Mongolia are both resource commodity exporters but Mongolia’s growth rates have been much higher than PNG’s in recent years. Building on this, Mongolia’s average standard of living is now nearly double PNG’s when 30 years ago is was less than half.
Poverty rates in Mongolia have fallen dramatically from an estimated 39% in 2010 to 22% in 2014 PNG’s most recent figure for 2009 showed a poverty rate of 40%.
Just before the IMF program kicked in, Mongolia’s foreign reserves had fallen to four months of import cover. PNG’s import cover has fallen to just over three months according to IMF figures. The Bank of PNG (the reserve bank) still claims PNG’s import coverage is over 10 months.
Unfortunately, that type of delusional statistic hinders understanding of the need for policy reform. This is similar to the very slow response of the O’Neill government to the fall in commodity prices in late 2014. For six months it fiddled while claiming LNG prices were fixed and there would be no revenue impact. Those people who dared say otherwise were attacked.
There are of course differences between the two economies. Mongolia shares a land border with China so China’s slow-down in growth had a larger impact.
In addition, Mongolia was even slower than PNG to respond to the fiscal impact of falling revenues, and government debt grew even faster. Its banking system is also not as well regulated and its development bank wasted more resources.
However, it did continue with a flexible exchange rate and still has higher foreign exchange reserve coverage than PNG. Mongolia also has a better environment for businesses to thrive: it has less corruption.
Mongolia’s poor decisions were largely around budget policy. PNG’s poor decisions relate mainly to foreign exchange and monetary policy, corruption, excessive cuts in education, health and infrastructure spending, and poor economic growth policies.
There is much good that a similar assistance package could do for PNG’s citizens.
The government’s arrogance should not stand in the way of the interests of its people.