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Peter O’Neill emerges from 2017: bruised but not beaten

Peter O'NeillPAUL FLANAGAN | East Asia Forum

CANBERRA - Papua New Guinea’s national elections of June–July last year were expected to reinforce prime minister Peter O’Neill’s grip on power. Instead, the poll was most remarkable for its anti-O’Neill sentiment.

There is little doubt the electoral roll was manipulated with thousands of ‘ghost voters’ favouring the government, especially in the country’s highlands.

O’Neill had effective control of all major institutions except social media and the police and defence forces. In spite of this, he managed to lose his deputy prime minister, attorney-general and half his elected members.

His former treasurer left him just before the election, famously commenting that the people of PNG had been deceived and that the economy was going over a cliff.

O’Neill’s new governing coalition is an unusual and possibly fractious one.

Key party leaders include William Duma (who was sacked as minister before the election due to some dubious land deals), former prime minister Julius Chan (who had been a strong campaigner against O’Neill) and, most extraordinarily, Sam Basil (leader of the Pangu Party).

Pangu was the greatest surprise of the election. Its campaign was built around anti-O’Neill sentiment and focussed on the corruption and economic mismanagement of the government.

With this campaign, Pangu won almost all the seats along the mainland’s northern coast. Pangu was initially in opposition and had the second-largest number of seats in the Parliament but Basil split his own party and moved most members to the government.

Despite this, the opposition is larger and more unified than it was before the election and is providing some credible policy alternatives.

2017 was not a good year for the PNG economy. The official growth rate was 2.2%, which is well below the official population growth rate of 3.1%.

Sixty percent of CEOs consider the greatest barrier to business to be the crippling shortage of foreign exchange, which is linked to PNG’s move to a fixed exchange rate.

The latest budget deficit now appears to be around 5.7% of GDP and government public debt has trebled over the last five years. Interest repayments are now equivalent to 15% of total government revenue.

PNG’s new Treasurer, Charles Abel, started well with a 100-day economic renewal plan. His September 2017 supplementary budget tried to fix the expanding deficit but revealed a major split with the prime minister.

The Treasurer wanted to defer spending on politically important electoral constituency funds, which are worth US$3.3 million per annum for government members (opposition members complain they do not receive these funds or at best receive them late). When this cut was announced, O’Neill indicated that these funds would not be cut again.

These funds are worth nearly 10% of PNG’s entire budget. Protecting them, finding money to host APEC and trying to regain the upper hand on the rhetoric of protecting health and education — all within the confines of fiscal responsibility — was simply too much.

Something had to give way — and it was revenue credibility.

The 2018 budget is premised on unrealistic revenue growth of over 20% despite no significant tax increases, no big projects and low growth prospects. Many of the projected budget increases will have to be cut back and the deficit will probably be between 4% and 5% of GDP.

The APEC leaders’ forum will be hosted in Port Moresby in November this year. The meeting was underfunded in the PNG budget with only US$100 million provided but, given O’Neill’s commitment to APEC and his control over Abel, it is certain the required money will flow.

PNG’s hosting is ironic: APEC’s first pillar is trade liberalisation but PNG is moving down a more protectionist path with widespread increases in tariffs.

Chinese influence in PNG politics was most obvious in the signing of a US$5 billion financing package in November 2017 as part of the Belt and Road Initiative. This was contrary to the Treasurer’s 100-day plan to end new tied financing deals — an embarrassing inconsistency.

Another sign of China’s growing influence was the delivery of Chinese military vehicles. Although they represent a small fraction of the defence cooperation provided by Australia, the prominence of the deal in government-influenced media was noteworthy.

The closure of the Manus refugee detention facility in November 2017 will finally remove an important source of leverage that PNG had over Australia. Before Manus, Australia was more assertive about good governance, protecting democracy and good economic policy.

Australia’s new Foreign Policy White Paper states that “supporting a stable and prosperous PNG is one [of its] most important foreign policy objectives”. The funding of a major new telecommunications cable from Australia to PNG and the Solomon Islands — instead of a Chinese alternative — likely indicates a more proactive approach in supporting joint interests.

PNG is likely to struggle through to the November 2018 APEC Summit with O’Neill in charge. Soon after the Summit, PNG will need to undertake major fiscal consolidation.

It is hard to see how it can transition out of the very deep hole it has dug for itself over the last five years unless there is a major program of economic adjustment backed by international funding. With APEC finished in late 2018, O’Neill will face a difficult start to 2019.

Paul Flanagan is director of the consulting firm PNG Economics and an associate at the Development Policy Centre, The Australian National University

http://pngeconomics.org/2016/05/hello-world/

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