‘What an explosion you have made!’ Alexander’s starburst
Peter O’Neill’s assertions do not stand reasonable scrutiny

Present state of our economy? Looks grim but who really knows?

Busa Jeremiah WenogoBUSA JEREMIAH WENOGO | PNG Informal Economist | Edited

THE health of Papua New Guinea’s economy has lately come under intense scrutiny.

The government, the Treasury and Central Bank (BPNG) have brushed aside claims raised by some economists and critics such as Sir Mekere Morauta that the economy is heading for crisis and urgent intervention from the government is required to keep it afloat.

However, developments on the ground increasingly portray an economy in dire need of stimulus to stay afloat until the prices of key commodities pick up again or new projects comes on board.

News that the government is slashing spending earmarked for priority areas such as health and education, that it has difficulty in paying public servants’ salaries and office rentals, and that it is scampering across the world to borrow additional funds to support the budget and address the foreign currency crisis are escalating fear about the health of the economy.

In a country where data collection is a chronic issue, economic data that gets spun around in the media no doubt generates skepticism. In addition, the government’s tight control on the release of key information about the economy (and its budget) raises question marks about the economic information that it issues publicly.

Information produced by Treasury and Central Bank have always been important. But lately it seems these data have increasingly strayed from reality on the authenticity of this information.

Bearing in mind these limitations; I will provide my own analysis of the state of the economy and offer predictions about the future relying heavily on observation rather than statistics given I am not privy to any inside information.

My belief is that, regardless of what is portrayed by economic data, the day-to-day struggles felt by the private sector and citizens are true reflections of the underlying problems affecting our economy.

Observing these realities provides insights into the state of our economy beyond any numbers that are thrown our way.

Also, for a lot of developing countries such as PNG, even a positive economic outlook does not often translate into improvements in social development indicators. A case in point in PNG are the communities around numerous petroleum and mining projects whose lives have not seen any significant positive changes.

Exchange rate and balance of payments

The Bank of PNG governor’s claim that the current balance is sufficient to cover imports for 10 months can be challenged on the following grounds:

1) There is currently a long backlog in import demand, and

2) The depreciation of kina against the US dollar even though the kina is pegged against the dollar.

Continued depreciation of the kina could mean that the foreign reserves held by the Central Bank will not be adequate to maintain the exchange rate at which the kina is pegged.

BPNG has advised the government to seek external financing arrangement to address this problem. To dispel confusion in the minds of the public, BPNG need to provide details of the unmet import backlogs. The absence of such information is raising speculation and fears among the public.

The backlog of import demand was stimulated by BPNG’s intervention in the foreign exchange market when it imposed a trading ban in an attempt to stop the outflow of foreign currency.

The Central Bank was of the view that ‘unauthorised traders’ and the creation of ‘vostro’ (third party) accounts were responsible for repatriating foreign dollars out of the economy.

Yet given our current predicament it would seemed this measure was too late to stop the deterioration in our foreign reserves. It may have stemmed the outflow of foreign currency but the problem of low foreign reserves persists.

The only other hope is for commodity prices to pick up so we can build up new foreign reserves. However forecasts are that it will be another 6-12 months before prices increase.

So what caused the unexpected drop in foreign reserves?

1) PNG’s rapid private sector investment means that demands for imports increased rapidly.

2) The government is repaying multiple international loans in foreign dollars, for example, the controversial UBS loan.

3) The fall in commodity prices affected exports; meaning less foreign dollars were coming into our economy to boost the foreign reserve level.

These factors created an imbalance between the inflow and outflow of foreign currency on the currency market leading to a backlog in unmet import demands.

This has caused our kina to depreciate against foreign currencies and we don’t have sufficient foreign dollars to buy back kinas and cause the kina to rise against foreign currencies such as the US dollar.

At this point importers are paying more for their imports and, to cover their losses, they are passing the buck to consumers in the form of higher prices of goods and services.

On the export side, the continued stagnation in global commodity price means that, although our mineral, petroleum, and agricultural exports can take advantage of a falling kina, demand has dried up and we are receiving less revenue from exports.

In an attempt to address the backlog and at the same time stabilise available foreign reserves and the value of kina, the Central Bank is prioritising import requests from only three or four major importers. This does nothing to help the backlog.

In addition the Central Bank’s advice that the government explore international financing arrangement to clear the backlog has hit a wall given the recent downgrading of our credit ratings by international credit rating agencies.

Thus we will be borrowing against much tougher credit conditions until our rating improves.

So the reality is that the backlogs are piling up. The longer this continues, it is more likely businesses will be forced to lay off workers or close down operations in PNG.

The government’s 2016 budget

The government should urgently introduce a revised budget or a mini-budget as the 2016 budget is no longer realistic given its assumptions have become irrelevant. We are already in the middle half of the year and if the government endeavours to persist with this budget itwill be forced to seek additional loans domestically and internationally to support it. This will further increase our debt level. Right now rising debt means it is unwise and not prudent to seek additional financing to support the budget.

The domestic economy

Apart from a rise in prices, local industries - including the construction and manufacturing industries - that depend on imports will struggle to operate.

The informal economy so often neglected by the government is poised to once again soak up the bulk of the spillover from a faltering mainstream economy.

The government is once again urged to support the informal economy as a key strategy. Any attempt to suppress the informal economy in these challenging times could backfire against the government.

The 2017 general election

Introducing a mini budget will require humility from the government. Since taking over, the O’Neill government has pursued expansionary policies. Such a budget gives the government leverage over its opponents as it generates spending and popularity with voters.

Examples in PNG include the introduction of the free tuition fees, free primary health, massive infrastructure development and hosting regional and international events.

Right now Peter O’Neill is still popular amongst the general population because of such ‘populist’ policies and any move away could be politically damaging for the government.

In this context, introducing a new budget would be an admission by the government that its initial plan has stumbled. In fact it is looking ominous as each day passes that this is the case.

There is a real need for the government to quickly rein in expenditure and instill control and discipline in spending. Given that we are a year away from a general election, it will be a test of character for the government to adopt this stance.

Past experience demonstrates that the period leading up a general election is one where the government goes on a massive spending spree to prop up its support among voters. However, this time around, given the critical state of our economy, the government will need to forego this pattern.

The frightening thing is that we are not sure of the true extent of the mess we are in at the moment.

I suspect only the prime minister and his close aides know but they prefer to keep things tightly wrapped to prevent any negative fallout.

Yet they must also exercise caution and restraint. This is not the time to bank a nation’s future against an assumption that everything will turn out all right.

Comments

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Paul Oates

Good work Busa. That makes the situation a lot clearer.

The real problem now are the urban populations that depend on the wage and salary earners to survive. The absence of any 'trickle down' resources is going to really start creating desperate situations and desperate situations often lead to urban violence.

Those in the bush can always fall back on their village gardens if they have recovered from the drought?

What is the urban population of PNG these days 10 - 15%? As you say Busa, the statistical information available is rather unclear. Still, that's a lot of people who will start getting restive very soon if it hasn't already happened.

The situation in PNG has the potential to get far worse before it gets better.

Michael Dom

Busa - this is a very clear explanation of the economic situation PNG is facing. Thank you.

This deserves much wider sharing. Now.

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