Author: Aaron Batten, Ministry of Finance, Malawi

The PNG economy continued to perform well in 2009. Despite declines in the oil and gas sector, lower commodity prices, and reduced international demand because of the global financial crisis, real GDP grew by a solid 4.5 per cent. This growth was also relatively diversified with a 4 per cent increase in formal non-mining sector jobs adding further to the large employment gains made since 2005.

The government’s management of the economic expansion has been mixed, however. The fiscal surpluses of previous years have eroded, with this year’s budget recording a 0.4 per cent of GDP deficit after a 2.2 per cent of GDP deficit in 2008. Read the rest of this entry »

Author: Ron Duncan, ANU

What of PNG trade policy and the various trade agreements that have been signed and those proposed?

The first thing that I would say is to reiterate Prof. Jagdish Bhagwati’s comments on the question of whether preferential regional trade agreements are ‘stepping stones or stumbling blocks’ for trade growth when he delivered the 2006 Heinz Arndt memorial public lecture at the ANU.

Bhagwati called the proliferation of preferential regional trade agreements a ‘pox’ on the world trading system, noting that they result in trade diversion rather than trade creation. This is especially the case with preferential trade agreements among small, developing countries. I would add that they divert tariff revenue and investment from the smaller, less well-developed countries in such trading blocs to the more developed. As regards the Pacific Island Countries Trade Agreement (PICTA) preferential agreement amongst the Pacific island countries, I anticipate that any benefits will mainly accrue to Fiji and PNG and the disadvantage that they will suffer will only make the other Pacific islands countries even more antagonistic towards freer trade (see my ADB study, Pacific Trade Issues, [pdf])

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Author: Ron Duncan, ANU

Despite two major mineral commodity booms, PNG’s average per capita GDP has been on a declining trend over the 30 years since independence. Undoubtedly, some people have done well—which means that people at the lower end of the income scale have done even worse than implied by the trend in average per capita GDP.

A great deal of the revenue from the exploitation of natural resources has flowed through to communities; but why has this revenue not been used to better effect in funding investment, job creation, and ultimately economic growth? An open trading system, leading to good growth in exports and imports, is held to be a key driver of economic growth and incomes. What role has trade policy played in this poor outcome in PNG? Getting answers to these questions is important if PNG is to see a better outcome from the implementation of the huge LNG project now in prospect

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Author: Aaron Batten

There are many reasons to be optimistic about the PNG economy over the coming years. Its relative insulation from the global financial crisis combined with substantial savings still remaining in trust from the commodity boom period leave it well placed to sustain moderate rates of economic growth. This growth will build on the considerable macroeconomic improvements made in recent years particularly in terms of employment creation and business confidence. Optimism is further buoyed by the prospect of new investment in a range of extractive industries – especially the upcoming LNG project.

Certainly, dangers to the relative sense of macroeconomic stability exist. The government is having difficulty reigning in expenditures in light of reduced domestic revenues. This has raised concerns about a return to sustained budget deficits between when the trust accounts run out and the LNG revenues start to flow. The final few years of the commodity boom period also saw a considerable growth in the types of wasteful expenditure patterns that have plagued past governments – in particular large increases in salaries and wages and the emergence of increasing numbers of special interest projects. This, in turn, has limited the growth in funding to core development priorities like health and education.

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Author: Aaron Batten

PNG had another interesting year in 2008. The first half of the year saw economic growth remain strong as the country continued to benefit from yet another boom in the price of its commodity exports. High resource prices underpinned a significant expansion in the manufacturing, construction and agriculture sectors. Towards the middle of the year, however, poor monetary responses to a prolonged growth in domestic liquidity, coupled with a continued strong external sector, meant that inflationary pressures began to increase, with inflation rising to 13.5 per cent in September 2008.

September, of course, also marked the onset of global financial crisis. Barring a couple of jitters on the PoMEX, PNG’s economy weathered the direct impacts of the crisis relatively unscathed. In large part this was because of the healthy supply of foreign exchange reserves and domestic bank liquidity built up over previous years which gave the financial sector sufficient flexibility to cope with any adjustment costs.

The flow on effects of the crisis have led to a large downturn in the price of many of PNG’s key commodity items which had been driving revenue and output growth. This has had an immediate impact on the Government’s fiscal position with the 2009 Budget predicting a 25 per cent overall decline in domestic tax revenue.
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Author: Aaron Batten

Just like the 1990’s trust accounts are shaping up to be a defining component of how PNG manages its resource revenues in this decade. Unlike the 1990’s however current revenues are being channeled into numerous smaller trust accounts instead of the single consolidated Mineral Resource Stabilization Fund (MRSF). Has PNG learnt from its mistakes or is it heading towards a repeat of the past? To answer these questions it is necessary to understand why these trust accounts have increased so much in prevalence over the last few years and what implications this has for fiscal management.

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