PAUL FLANAGAN | PNG Economics | Edited
CANBERRA - If you’re looking for a happy start to 2018, don’t read the depressing review of the Papua New Guinean economy just released by the International Monetary Fund.
It shows that PNG is facing a great risk of a fiscal crisis.
The IMF projects that the 2018 economy will be K7 billion less than promised by the O’Neill-Abel government
And growth rates will be a little more than half the forecast levels.
Furthermore, the debt to GDP ratio already exceeds the higher limit just set in the 2017 supplementary budget – and is expected to exceed 40% by 2020.
It has become clear that O’Neill-Abel economic policies are the greatest barriers to private sector growth.
Treasurer Charles Abel is to be congratulated for releasing this annual IMF assessment of the PNG economy. An attempt to bury last year’s report hurt PNG’s credibility. Transparency and openness are crucial first steps in addressing PNG’s difficult development challenges.
The IMF 2017 review was written during the more optimistic days of August-September 2017 after Mr Abel had become the new Treasurer, made promises in a 100-day plan and planned some positive expenditure shifts in the supplementary budget.
But economic policy has gone badly downhill in the few months since then as influential advisers in the prime minister’s office apparently took over the 2018 budget.
The politics of holding together a fragile coalition took precedence over good development policy with major increases in expenditure driven primarily by the return to fully-funded local constituency funds (an extra K1 billion) and meeting some of the costs of the foolish decision to host APEC later in 2018.
Contrary to prime minister O’Neill’s New Year message, there is no sign that PNG has turned a corner.
Indeed, the IMF now confirms that there was a recession in the non-resource economy in 2015. Since then growth rates have been anaemic and unfortunately the prospects are for little improvement.
The government forecast that growth in the non-resource sector of the economy will move to 3.5% in 2018 – the IMF says a more realistic estimate is 2.1%.
The government says the growth rate will stay at 3.5% in 2019 – the IMF says it will be 1.9%.
With an official population growth rate of 3.1% per annum, this means that the economy will continue on its backward path of falling incomes.
Indeed, the latest IMF report confirms that PNG has the extraordinary distinction of being the worst forecast performing economy in East Asia for the three years 2017-2019.
The clearest sign of the gulf between what the O’Neill government is promising and the best judgement of a relatively independent international umpire is in estimates of the size of the economy in 2018.
There is a K7 billion chasm between the government’s optimistic claims of a K80 billion economy in 2018 and the IMF’s estimate of K73 billion.
This is an extraordinary difference in forecasts for such a key variable. And the K7 billion gulf of 2018 continues to increase in future years so by 2020 the IMF estimates the economy will be K11 billion smaller than PNG government forecasts.
Why such a large difference? The major reason is the O’Neill government’s failure to recognise that its economic policies are seriously damaging economic growth. Or as the IMF puts it: “The main impediment to private sector development is macroeconomic policies”.
O’Neill was slow to respond to the fall in commodity prices.
He denied the severity of the drought (indeed, his failure to request international assistance at the time may have cost up to 10,000 lives).
He has failed to do enough to address foreign exchange shortages (it is said it was his key advisor who started the downwards slippery slope in 2014 with a foolish 17% appreciation of the kina that pushed possibly another 130,000 people into absolute poverty).
Instead, PNG government forecasts have moved to a business as usual estimate of 3.5% annual growth - however, it is not business as usual.
Foreign exchange shortages are damaging growth and business uncertainties are undermining investment. As the IMF notes, private sector credit growth is negative in real terms. PNG has not faced such dire economic mismanagement since the 1990s.
The IMF also believes budget deficits will be larger than official PNG forecasts: rather than the 2.5% for 2017 and 2018, the IMF forecasts 3.2% and 3.1%.
The IMF estimate for 2017 already seems much more plausible than the claims by Mr Abel as he rather deceptively refused to acknowledge the K408 million revenue shortfall in his recent budget speech even though the PNG Treasury budget documents indicated it.
While there is some additional revenue from scraping the bank balances of statutory authorities (K575 million in 2017), the expected increases in revenue in the 2018 budget simply are not realistic.
In future articles, I’ll examine in greater detail the reasons why the IMF considers “the overall risk of public debt distress is high” – polite language for PNG’s greatly increased risk of a fiscal crisis because of its poor policies as well as the linked issue of failing monetary and exchange rate policies.