As elections loom, PNG's weak economy needs urgent attention

PAUL FLANAGAN | PNG Economics

PAPUA New Guinea’s international economic situation is much more frail than the picture presented by the O'Neill government, a recent International Monetary Fund report indicates.

Calling PNG’s foreign reserves position 'weak', the IMF said the country has less than one-third the recommended level in its international bank account.

And this is despite the current foreign exchange rationing that is hurting business, investment and jobs.

PNG claims it has foreign reserves to cover 13 months of imports but the independent umpire, the IMF, says the figure is only 3.2 months. The suggested level for a country like PNG is around 10 months.

PNG says import coverage ratio for non-mineral sector imports increased by 28% over the last five years, which would be how a healthy improvement in PNG's external position. However, foreign reserves actually fell by 61% over the same time period. Something is not right.

Fixing this external weakness requires improving PNG's foreign exchange reserves and the best long-term solution is to make the PNG economy more competitive. But in the short-term, hard choices are required in balancing growth with unacceptable international risks.

If PNG gets an extra $US300 million loan from Credit Suisse, some of it should be put into foreign reserves to build up a buffer rather than relaxing the already crippling foreign exchange restrictions.

Better policy options have been available to deal with the fall in commodity prices and most commodity exporters around the world undertook these.

The policy implications of PNG running down its international reserves have been hidden by using misleading and excessively rosy measures of external health.  PNG should move to accepted international measurement standards.

PNG is also using old views on the adequacy of international buffers such as the "3 month import rule".  The PNG government should keep up with modern understandings of how to properly run an economy.

The IMF report put these concerns in its usual very polite and diplomatic language: "PNG's external position is moderately weaker than implied by fundamentals and desirable policies, given its weak gross foreign reserve position and overvalued real effective exchange rate.”

But even a cautious IMF said PNG has a weak gross foreign reserve position and an overvalued currency.

Economic policy inevitably involves judgements on difficult trade-offs between objectives. The full implications of the O'Neill government's decisions to move away from PNG's market-based exchange rate, especially at a time of falling commodity prices, are becoming clearer.

PNG's international buffers are only around one-third the recommended levels. More of PNG's foreign exchange earnings, and at least some of any new international loans, now should be invested in rebuilding these buffers.

Poor economic decisions by the O'Neill government mean PNG is facing a much more complicated economic mess and tougher path to recovery.

You can read Paul Flanagan's more detailed article here