PAUL FLANAGAN | PNG Economics | Edited
CANBERRA - There has been some good, bad and confusing news in recent monetary policy statements from Papua New Guinea’s central bank governor Loi Bakani.
In summary, the good news is:
- the central bank has committed to end its imprudent and risky practice of printing money to finance budget deficits
- the balance of payments has improved (but there have been massive changes both up and down)
- possible moves towards a more flexible currency – but there are political obstacles and still a long way to go to fair value
- inflation is at 4.7% and seems well under control
The bad news is the very worrying downward trends in key economic indicators:
- a collapse in employment growth to negative 4.8% in 2017 building on three years of negative growth; this is a sustained employment downturn and bad news for jobseekers in PNG’s already small formal employment wage sector
- private sector lending down by 3.4% in nominal terms (so closer to 8% after allowing for inflation) representing less domestic investment in businesses, houses, vehicles etc
- foreign investment into PNG continues to decline despite a few high profile, government-supported projects (unless PNG becomes a more attractive place for private sector investment then any gains from APEC will come to nought)
- sales figures are negative even in nominal terms (there was an especially bad second half of 2017)
- important information continues to be hidden – including the national accounts as far back as 2015
While the confusions are as follows:
- there is little clarity on use of a K492.4 million cheque float in 2017 that was used to pay for government expenditure as well as much more reliance on private domestic purchases of government securities than expected
- new repo (repurchase) arrangements now require government security backing
- silence on the worst downgrade in PNG’s credit ratings in its history, possibly violating the Central Bank Act 2000
More detail on these factors is available at the PNG Economics website here.
Overall, the recent monetary policy statements were much more balanced than we saw in 2017.
There were no foolish attempts to defend the indefensible – such as blaming foreign exchange shortages on the banks and claiming money printing actions were fully offset. In particular, the moves towards more flexibility on the exchange rate are very welcome, and there are some positive signs in monetary policy (although still too much complacency about falling private sector credit).
However, the overwhelming message from these recent statements is that on most indicators of economic performance, 2017 was probably again a very bad year for PNG.
This would build on what was likely to have been a very severe recession in the non-resource sector in 2015, a likely modest post-drought recovery in 2016 and a likely return to recession in 2017.
PNG needs to turn this around – even more urgently than is being done currently on the fiscal and monetary fronts.
However, even if these macro-impediments are removed, PNG also needs much more concerted action on structural policy changes to improve the health, vibrancy and inclusiveness of the economy.
Moves towards more protectionist policies (such as the tariff increases in the 2018 budget and targeted infant industry attempts which have failed so badly for PNG in the past) are still very worrying examples of policy positions that are strangling sustainable growth.
Increased regulations in areas around foreign exchange management and foreshadowed legislation in other areas are also steps away from improving PNG’s poor ratings on creating a conducive atmosphere for business.
And work is needed to try and reverse what seems like growing moves to punish anyone in government that dares suggest a contrary position – whether it be a well-respected manager in public works raising questions about road construction costs or even a vice-chancellor (since dismissed) seeking greater financial accountability.
There are many parts to the complex puzzle of creating a successful country that is worthy of the people of PNG.
The worried views of international credit ratings agencies, leading to the combined worst downgrades in PNG’s credit rating history, suggests the government still needs to be acting more urgently and on a wider front to undo some of the damage it has done in recent years.