Much of this success is attributed to high international commodity prices which have fuelled rapid output and revenue growth. But the growth also reflects increasing output from a variety of sectors and has taken place across a number of regions. Success has not been siloed. Sustained growth has also continued throughout the global financial crisis and despite natural declines in output from maturing mining activities.

The biggest cause of optimism in the PNG economy is the upcoming LNG gas project which comes online in 2014. At its peak, the project is expected to increase real GDP by 25 per cent.  In 2010 revenues attributable directly to mining activities comprised 21 per cent of domestic revenue. By 2018 – once a large portion of concessional taxation arrangements are exhausted – that proportion could be as high as 50 per cent.

In this context, the 2011 Budget seeks to map the transition of the economy from that of moderate to that of high resource dependence. This involves the creation of a new sovereign wealth fund which aims to sterilise export earnings from appreciating the Kina exchange rate and promote a greater level of accountability over fund usage. The Government seems willing to learn from past mistakes.

At a record $3.5 billion, the 2011 Budget also continues the process of scaling up the funding of key service delivery priorities identified in the Government’s Medium-Term Development Plan (MTDP) 2011- 2015. Key beneficiaries include health, education, infrastructure and law and order.

None of this optimism should diminish the development challenges that PNG will face over the coming years.

Despite large funding increases, service delivery is still chronically inadequate for a large part of the population. This is in some measure because of weak public sector capacity to implement expenditure plans. It is also because real per capita expenditures on items such as health and infrastructure have only now reached levels comparable to those obtained in the late 1980s. Real education expenditure per capita is still only half of what it was before huge cuts were made in the late 1990s under the Skate Government.

The prospect of LNG revenues also emphasises the need for further microeconomic reform. A key determinant of the broad based growth experienced to date has been the success of reforms to sectors which generated benefits across the economy – the introduction of competition in the Telecommunications and Airlines industries being the prime examples. As these gains moderate, new microeconomic reforms will be needed to spur on the non-mineral sector.

The largest development risk facing PNG, however, is that with the focus now fixed on long term LNG opportunities there is the potential for insufficient attention to be given to a much nearer term threat – inflation.

Since 2008, consumer price increases have been rising. Official figures put CPI growth in 2010 at 6.5 per cent with an 8.2 per cent outlook for 2011. If inflation is again let to spiral into double digit levels, it will quickly undo many of the development gains made over the last decade. Real per capita incomes will fall – especially for poorer cash income earning sections of society who have a weaker ability to index earnings. This will exacerbate issues of inequality and contribute to the poor law and order situation.

The task facing the Central Bank is not a straightforward one.

Treasury expects inflationary pressures to moderate following an economic slowdown between now and 2014 – mainly from a wind down in LNG construction and declining production from maturing mining activities such as Ok Tedi.

For these reasons the Budget forecasts inflation to return to 5 per cent by 2014. This is highly optimistic.

Current official figures are almost certainly an understatement. The deficiencies in PNG’s CPI basket are well known – it has not been updated since the 1970s and excludes amongst other things housing and rental costs which have been soaring for over 6 years.

Treasury also notes that Budget 2011 alleviates inflationary pressures by investing in productivity enhancing sectors like infrastructure and education. But expenditure composition is a long term solution to a short term threat.

A further threat is the ability of Government to return a balanced budget over coming years. The Budget forecasts a 7 per cent decline in real revenues between now and 2015 (ADB calculations). In contrast, expenditure plans outlined in the MTDP are based on expectations that revenues will increase by 57 per cent between now and 2015 – underpinned by more optimistic GDP forecasts.

The capacity of Government to keep a lid on expenditure in lieu of raised MTDP expectations will be severely tested. The upcoming elections in 2012 will only further weaken the Government’s ability to remain fiscally prudent.

The Central Bank’s task is further complicated by the fact that controlling price levels in an economy that has 80 per cent of the population engaged in subsistence agriculture and a high marginal import propensity has meant that the biggest source of inflation has traditionally been from imported sources.

As a result, since exchange liberalisation in 1994, interventions have typically focused on stabilising or appreciating the Kina – with considerations of domestic factors often secondary to monetary policy decisions.

With the Kina likely to remain strong for the foreseeable future, the economy already experiencing significant skills shortages and continued rapid liquidity growth, addressing the current pressures will thus likely require a rebalancing of monetary policy priorities to a more domestic focus.

PNG has made large development gains over recent years – but the road to sustained high growth is long. Implementation rather than funding continues to be the biggest constraint on Government’s expenditure plans translating into improved service delivery.

Getting price growth under control between now and when LNG extraction begins will be a key determinant of the Central Banks ability to managing the inflation threat over the medium to long term. The lack of coherence in GDP and revenue forecasts across the 2011 Budget and the MTDP exacerbates the uncertainty of this task.

It is likely that a more interventionist monetary policy stance that pays more attention to domestic factors will be required in the coming years.

Aaron Batten completed his PhD in the Crawford School at the ANU, where he continues to be an Associate of the Pacific Program, and currently works in the Malawi Ministry of Finance.

This is part of a special feature: 2010 in review and the year ahead.