Navigating a small economy through the choppy waters of the global economy is never easy.

But it is even harder when facing the peaks and troughs of resource booms and the unpredictable undercurrents of a complex polity. At independence in 1975, when I was Secretary for Finance, we created a mineral resources stabilisation fund (MRSF) to help this process and smooth out resource revenue flows from first the Bougainville copper mine, and later the Ok Tedi mine in Western Province.

Initiallly, the fund worked well. The Bank of PNG invested the mineral revenues and allowed a predictable flow of funds into the national budget. Australia supplemented this with a steady stream of budget support, and the national budget was well managed. We were optimistic that the mining sector would help lift the whole economy.

In hindsight, problems started appearing in the 1980s, with the increasing politicisation of public expenditure and the structural problems of a ‘two-speed’ economy. And in the 1990s, PNG’s donors began phasing out budget support due to of concerns about corruption; fiscal policy fell out of sync with the stabilisation funds; and commodity prices crashed.

Governments had been borrowing heavily against the MRSF and future revenues from the resource sector, notably the big oil development at Kutubu. While investments in the MRSF were safe, they were not earning good rates of return, and the sharp rise in debt in the late 1990s meant that the state’s net assets were falling fast.

When I became Prime Minister in 1999 my government moved quickly to stabilise public finances by drawing down the MRSF — against which governments had been borrowing heavily — to pay off PNG’s crippling debts. We then initiated a short-term measure to stabilise mineral revenues, whereby Treasury would forecast revenues for the year ahead and any surplus was used to retire debt. Had I won the 2002 election, we would have developed this into a more substantial sovereign wealth fund backed by disciplined fiscal policy and effective spending

The Somare government has ridden PNG’s biggest resource boom over the last nine years. The economy and government revenues have grown strongly, but this has impacted little on basic services and living standards. There have been follies and sometimes outright theft: the mortgaging of PNG’s shares in Oil Search to borrow A$1.68 billion from Abu Dhabi; the disappearance of Kina 5 billion from government trust accounts; and the mismanagement of the development budget. With the Somare government stymying debate and refusing to be held to account, it was hard. It was the most frustrating period of my career.

There were bright spots. The first was the reforms that I had implemented to give independence to the Bank of PNG and the financial sector (including superannuation), and for the regulation of public enterprises, paid off with the vibrant growth of financial services and the introduction of competition into the mobile phone market.

A significant high point was the PNG Sustainable Development Program (PNGSDP) we set up in 2002 to manage revenues from the Ok Tedi mine for the direct benefit of Papua New Guineans. While the program’s progress on development projects is mixed, its key strength is prudent management — with a small secretariat overseeing contracts and partnerships with private service providers — and investment of a long-term fund that now stands at over US$1 billion.

The change of government in August 2011, when I became Minister for Public Enterprises, reignited hopes that critical reforms to safeguard PNG’s future wealth could be implemented and the benefits passed on to future generations.

The primary purpose of the sovereign wealth fund (SWF), which recently gained parliament’s backing, is to stabilise potentially volatile revenue flows from the mining and petroleum sectors. Instead of flowing directly to government, mining and petroleum revenues will be paid into a separate fund, managed independently by experts and invested prudently on the state’s behalf.

Current spending is delinked from revenues by specifying that annual budgetary withdrawals from the fund must not exceed the moving average of the last 15 years’ mining and petroleum revenues. This is a fairly conservative rule that has been designed to allow the fund to build up while at the same time allowing a smooth and predictable flow of funding into the national budget.

Predictable funding for the national budget should enable better planning of expenditure. This is important because many programs, such as free education, have large ongoing expenses — and previous national budgets have failed to allocate sufficient funding to meet these costs.

PNG’s proposed solution is to earmark a portion of mining and petroleum revenues for the maintenance of national infrastructure. This reduces the uncertainty that future budgets will be financed through unsustainable cuts to the maintenance of assets, which then require costly rehabilitation projects. The process enables government to enter into longer-term contracts with private-sector providers, reducing transaction costs and focusing on the delivery of quality outputs.

In PNG today, two of the biggest investments are the PNG liquefied natural gas (LNG) project and the PNGSDP. In the first case, Exxon-Mobil is overseeing the construction of an A$15.7 billion LNG project that involves the construction of wellheads, gas processing facilities and pipelines. In the second, Digicel is building mobile phone towers for PNGSDP in Western Province and Origin is partnering with PNGSDP on several major power projects.

I think a model that splits the policy and funding functions from the doing function could also work well for government, and we are developing a concept for an independent infrastructure authority that will oversee the maintenance of national infrastructure. The key features will include an independent board made up of government, donors and independent nominees; a predictable funding stream from the SWF to finance maintenance of national infrastructure; and high standards of transparency and probity in the contracting out of this work to the private sector. By including multilateral and bilateral donor representatives we hope donors will direct funds to the infrastructure trust and thereby integrate donor funding more effectively with national priorities.

Public enterprises will also receive priority funding from the SWF. In some sectors like electricity, telecommunications, ports, aviation and water, strong private-sector participation has improved services. In others, public enterprises are slowly sinking. Finding credible private-sector partners to run these businesses will be tough without first undertaking some emergency rehabilitation, restructuring and recapitalisation. Consequently, some SWF funds, during the first 10 years of its operation, will be used to steer public enterprises toward a more sustainable path, while at the same time facilitating the entry of private-sector providers. Another part of this funding will be for community service obligations. Funding will not be limited to public enterprises, but rather private-sector businesses will compete for funding to deliver essential services in remote or non-commercial areas.

Volatile revenues need to be smoothed out in PNG, but the real challenge is keeping sticky fingers out of the revenues pot — and this is where PNG has come horribly unstuck in the past. Hence the reforms that I have pushed passionately and persistently which aim to tackle this issue: funds that are managed and spent independently and transparently.

As PNG’s economy enters new and uncharted waters, stable fiscal flows and smart investments in infrastructure will help the next generation of Papua New Guineans build an economically independent nation with equitable delivery of services and opportunities for all.

Mekere Morauta is Minister for Public Enterprises in the Papua New Guinean government and a former prime minister.

This is part of a special feature: 2011 in review and the year ahead.

1. Trust accounts and the management of Papua New Guinea’s commodity boom
2. Papua New Guinea: from economic boom to gloom?
3. Papua New Guinea: The informal economy and the resource boom

The Australia-PNG Ministerial Forum convened today in Canberra after a break of over two years.

And today the prime ministers of the two countries will also meet for the first time (outside of sideline meetings) following this significant interlude.

It is an important set of meetings, and not only because these prime ministers and ministers meet not nearly often enough. PNG has recently had a change in government, and although it will not be long before the country goes to the poll next year, the new O’Neill government has a unique opportunity to get the country back on track after years of an increasingly corrupt and paralysed government under Michael Somare. One of the mistakes the previous PNG government made was not making enough of its relationship with Australia. It is encouraging to see PNG’s new prime minister come to press his country’s case.

What should be on the agenda at the meetings? Here are four suggestions: one big and three small.

The big one is that both governments should declare time on the 1999 PNG-Australia Development Cooperation Treaty. As leaders on both sides of the relationship have recently remarked, the PNG–Australia relationship has become much broader than simply an aid one, so it makes no sense for it to be underpinned only by an aid treaty. As the 2010 PNG Aid Review noted, aid from Australia to PNG and trade between the two countries were about equal at the time of independence; today, trade outnumbers aid ten to one.

The foreign ministers of the two countries already agreed back in July 2010 to ‘explore an umbrella economic cooperation agreement encompassing development assistance, trade and economic cooperation’. Under that agreement, proposals should have been ready for consideration more than a year ago, but progress seems to have stalled. Now is the time to take the next step. The aim should not be a free trade agreement — that could come later. For now, the model should be something like the 1976 Basic Treaty of Friendship and Cooperation between Australia and Japan. The aim should be a broad statement of principles, citing the two countries as partners in growth and development, aspiring to closer integration. An agreement along these lines would be an important signal that the relationship has at last matured beyond that of donor and recipient. But the politics of symbolism can only take you so far. Some practical measures are also needed to move the relationship forward and to tackle real problems on both sides of the relationship.

The first is an agreement on the aid program, which should not be the whole of the relationship — but nor should it be allowed to drift. The PNG Aid Review has been broadly welcomed, and last year the foreign ministers agreed to respond to its recommendations. It should not be hard at this meeting to agree on a set of principles that would guide the aid program in the more focused and practical direction the Aid Review recommended.

The second is the release of the Garnaut-Namilau Report on Higher Education. An initiative of Rudd when he was prime minister, and jointly launched with Somare, this report was completed in 2009 but has not been released. No one can deny that revitalising PNG’s higher education system is critical to the country’s future — but it won’t be an easy task to implement. Commissioning that report was a good first step, but it has since been undermined by an inexplicable delay in the document’s release.

The third quick win would be Australia’s undertaking to review and relax the visa regulations which currently make it so difficult for anyone from PNG to visit Australia, including PNG citizens visiting their Australian relatives. This is making Australia highly unpopular — and for no good reason. These onerous visa restrictions undermine the very goal the Australian government claims to support — closer ties with PNG and the Pacific — and should be overhauled.

Currently, Australia is only just scratching the surface of the potential of its special relationship with PNG, which is closer to Australia than New Zealand, has a bigger population and is growing faster. Australia–New Zealand is the right kind of vision for Australia–PNG. Australia might not get there straight away, but it could eventually if it starts moving in that direction now, through steps both big and small.

Professor Stephen Howes is Director of the Development Policy Centre, Crawford School of Economics and Government, the Australian National University, and was an author of the 2010 review of Australia’s aid to PNG, commissioned by both governments.

A version of this article was originally posted here on the Development Policy Blog.

1. Chinese investment in Iran: One step forward and two steps backward
2. Ross Garnaut at the Australia-China Climate Change Forum
3. Obama’s first steps in Asia

The first 50 days of Papua New Guinea’s O’Neill-Namah government have seen reforms take off, including decisive action being taken to tackle corruption, public enterprises being cleaned up, and an 800 million kina (US$362 million) supplementary budget passed focusing on free education and infrastructure.

The next nine months provide an opportunity to put the economic foundations in place for better management of the mineral boom.

According to the latest numbers from Treasury, the economy is growing fast, including non-mineral sectors. PNG’s Treasury has revised its GDP growth forecast for 2011 from 8 per cent to a very strong 9.3 per cent. Non-mineral sectors are doing well (estimated to grow by 10.2 per cent), but this masks considerable variation. Construction is set to grow by 21 per cent and there is rapid growth of 16 per cent in the transport, storage and communication sectors. On the other hand, growth in agriculture is much more modest (at 4.1 per cent) and this should be something for the government to focus on, especially with respect to rural infrastructure, crop yields and making markets work more efficiently.

These recent growth numbers are part of a broader trend. The LNG project promises to double the size of the PNG economy: the project is an AU$15 billion investment. Treasury estimates it will generate AU$31 billion in revenue over the next few decades, thus creating an opportunity to significantly improve living standards in PNG. However, similar opportunities have been squandered in the past — Kutubu Oil in the 1990s and mineral windfalls in recent years are just two examples. Whether the current boom is a blessing or a curse depends on whether the right foundations are established now. Specifically, there are important opportunities to restore accountability, fix policies and put in place better legislation.

There is a significant opportunity for the O’Neill-Namah government to restore integrity, openness and accountability to PNG’s politics. This new government has returned some experienced and familiar faces to Cabinet: Sir Puka Temu as Minister for Agriculture, Bart Philemon as Minister for the Public Service and Sir Mekere Morauta as Minister for Public Enterprises. There are also some rising stars: Sam Basil as Minister for Planning and Jamie Maxton-Graham as Minister for Health.

Changes have been made in the civil service. There is a new Secretary for the Prime Minister and National Executive Council, and a new Secretary for Finance. An investigation has been announced into the Department of National Planning and the 125 million kina (US$56.5 million) Kokopo loan, with a task force that is starting to make arrests. A former Minister has fled to Australia. There have also been changes at the Independent Public Business Corporation with the appointment of a new board and managing director to get the house in order.

Addressing outstanding economic policy issues is another opportunity for the new government. First and foremost is the design of the Sovereign Wealth Fund to manage macroeconomic volatility, mitigate the impact of ‘Dutch Disease’ and invest in the nation’s future. The Fund will need to have secure governance arrangements and clear rules on the drawdown of funds. But there also needs to be concerted reforms to the budget to improve the quality of spending. Building capacity in the public sector is a tough task and can’t be done overnight, and PNG may need to think outside the public sector box to ensure that financial wealth is translated into real wealth.

The third opportunity is to complete some housekeeping on economic governance legislation. For example: the National Information and Communications Technology Act is about to be reviewed; the International Public Business Corporation Act will also need to be amended; an organic law will be needed for the Sovereign Wealth Fund; and the Public Finance Management Act could also be strengthened. Getting the bills ready for the November sitting of Parliament, and possibly another sitting before the elections, will be essential.

The O’Neill-Namah government has made an impressive start on reform. Yet it only has very limited time to rebuild the basic foundations of economic management, which will be needed as PNG continues to enjoy big resource revenues while facing pressing development needs. The next nine months will be an important and exciting opportunity to get the foundations right. If the O’Neill-Namah government can do this, then there is a real chance that the LNG boom could be a blessing rather than a curse.

Matthew Morris is Deputy Director of the Development Policy Centre at the Crawford School of Economics & Government, the Australian National University and an advisor to the Papua New Guinean government. 

This article was first posted here on Keith Jackson & Co: PNG ATTITUDE. A version of this post was also published here on the Development Policy blog.

1. Taiwan’s elections: double victory, double challenge
2. Managing the boom in mineral revenue in Papua New Guinea
3. China: The question of income distribution

The opposition’s nomination of Works Minister Peter O’Neill as Papua New Guinea’s new prime minister on 2 August came as a shock to many.

But there were clues in some earlier press comments. Last year, O’Neill and the opposition agreed he would become the next prime minister if he crossed the floor before the mid-year challenge. And although Deputy Prime Minister Sam Abal was acting prime minister during Grand Chief Sir Michael Somare’s continuing absence in Singapore following heart surgery in April, the opposition succeeded in declaring the prime ministership vacant without following constitutional procedures.

The National Alliance led government’s collapse arose in three phases. First was Somare’s coalition’s gradual loss of public support over the last few years on the back of failing government services across most the country and allegations of corruption over the dispersal of development funds. Second was the increasing frustration among opposition members with Somare’s compliant speaker, Jeffrey Nape, who for five years refused to hear the opposition’s procedural points or allow votes of no confidence. Prolonged and unconstitutional adjournments of Parliament also meant that even government members could not monitor (and only rarely question) the ministers. And third was the pernicious rivalry within the coalition and the National Alliance Party itself.

The Supreme Court’s 2010 ruling on the political party ‘integrity law’, known as OLIPPAC, allowed MPs to not only to leave their parties but even to vote against their own party. In the current sitting, the Speaker accepted the opposition’s claim that the prime ministership was vacant. Refusing to hear the angry protests of key government ministers, the Speaker allowed a vote to fill the vacancy. Some 48 members of the coalition, including the majority of the National Alliance, crossed the floor, giving O’Neill a vote of 70 to 24. While the (former) government challenged the constitutionality of this ‘parliamentary coup’, on 5 August the National Court accepted the fait accompli, and implied the old government had also accepted it by voting in Parliament. Abal will challenge this ruling in the Supreme Court.

The media had focused on the divisions triggered since Somare promoted Abal to Deputy Prime Minister in December 2010, replacing Don Polye, who held aspirations to succeed Somare. Although a respected and honest politician, Abal made fierce enemies. He sacked William Duma, whose management of licensing under the Petroleum portfolio and the Liquefied Natural Gas (LNG) project had been under serious questioning. He also sacked the man now PM, Peter O’Neill, from the Treasury and Finance portfolios.

Tensions grew among government ministers. Public attention was focused on the Polye–Abal feud within Somare’s party, and it became clear there would be some form of challenge to government. Under the Constitution, a vote of no confidence had to be initiated within days of parliament sitting on 2 August, but who would be the new PM? The issue came to a head at an Opposition meeting on 1 August, and it seemed that Polye had majority support among the alternate government camp for the top job. However, he reportedly baulked at the position — perhaps to avoid in-fighting with Abal, from his own province. O’Neill seized the moment, positioning himself for his formal nomination as prime minister. Polye is now his treasurer.

Although Peter O’Neill has not escaped controversy, he has gained a reputation among Treasury officials as a highly competent and professional minister. As treasurer between June 2010 and June 2011 he arranged overdue pay rises for public servants, proclaiming there was no place for ‘commissions’ to release funds, arguing: ‘If we don’t say no to corruption the country will be destroyed’.

O’Neill holds an honours degree in accountancy and worked for an Australian firm before making his fortune in real estate. Former PM Bill Skate made him head of Pacific Finance, which managed the state-owned enterprises: the Motor Vehicle Insurance Corporation, the PNG Banking Corporation and the National Provident Fund (NPF superannuation), all of which nearly collapsed a few years later. The Commission of Inquiry into the NPF failure reported that, in 2002, O’Neill had benefitted from suspect transactions, and should be investigated for perjury. He appeared at the Waigani Committal Court in 2005 charged with misappropriation. The case was dismissed for lack of evidence.

Elected to Parliament for Ialibu in 2002, O’Neill was appointed Public Service Minister, but then became opposition leader in May 2004. From 2003 O’Neill proposed, to the dismay of many public administrators, that District Authorities be created, effectively giving MPs control over government activities in their electorates, including the public servants. O’Neill is also said to be preparing detailed policies for his People’s National Congress Party in 2012.

As prime minister, O’Neill must manage major constitutional issues in the next 8 months, including setting the number of electorates for the 2012 House, creating two new provinces and confirming the existence of seats for provincial governors, and deciding whether to support provincial seats reserved for women candidates only.

Peter O’Neill is a strong supporter of mining and the LNG project, but also shows clear signs of economic nationalism. While Treasurer, he argued that sovereign wealth funds to handle revenues from the LNG projects should be established overseas but controlled onshore. Since his election to prime minister, O’Neill has hit the right buttons. He stated that he will not tolerate ‘arrogance’ in government (a dig at PM Somare’s son Arthur?) and he will deal with the ‘massive corruption’ in PNG. O’Neill also wants to promote transparency in government. But his interim ministry comprises several key Somare ministers alongside the Somare government’s strongest critics. Many have asked how governance will change, implying — as was said when Morauta replaced then Prime Minister Skate in 1999 — that: ‘This will be a new game of cards, but with many of the same players’.

Bill Standish is Visiting Fellow at the School of Culture, History and Languages in the College of Asia & the Pacific at The Australian National University.

1. Sir Michael Somare and PNG politics
2. When the Grand Chief is away: Papua New Guinea’s big-man politics
3. Japan’s lame duck prime minister

In April this year, the Policy Board of the United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UN-REDD) approved the National Programme Document which sets out how the Government of Papua New Guinea proposes to achieve a state of ‘REDD plus readiness’ within the next three years.

This triggers the release of about US$6.4 million towards the cost of making PNG look like it deserves to receive compensation from the international community for various steps taken to reduce carbon dioxide emissions from this source. PNG’s Office of Climate Change and Development is therefore set to lead the rest of the government and the country towards a new era in the financing of forest conservation and sustainable forest management. Or is it?

In the time since the new program of action was approved, Grand Chief Sir Michael Somare has lost the capacity to carry on as PNG’s Prime Minister. This matters because Somare is not only the ‘father of the nation’, he is also the patron saint of REDD, both nationally and globally. He acquired this status in January 2005, when he called for the establishment of a ‘Coalition for Rainforest Nations’ in a speech made to the World Leaders Forum at Columbia University. This wasn’t exactly his own idea, it was the brainchild of Kevin Conrad, whose American missionary parents had befriended the young Somare back in the 1960s. What Conrad offered Somare was a way to kill two birds with one stone. On the one hand, he could postpone the need to take immediate action against the logging industry under the terms of a World Bank loan then under negotiation. On the other hand, he could become the global champion of a scheme that might deliver a larger amount of free money for his government to take the same action later.

Within a year of Somare’s speech to the World Leaders Forum, Conrad became PNG’s official envoy to the UN Framework Convention on Climate Change, the Coalition for Rainforest Nations was established, and Conrad’s Coalition got the Convention to take REDD seriously for the first time. Meanwhile, the PNG government did away with the World Bank’s Forestry and Conservation Project and offered a raft of new concessions to the logging industry. In the new language of REDD, the prospect of additional logging created a new form of ‘additionality’ for anyone prepared to compensate the PNG government for the opportunity costs of forest conservation.

Since 2005, Conrad and the Coalition have played an active role in the negotiation of an international framework for rainforest nations to be paid for what is now known as ‘REDD plus’ — ‘plus’ because improvements in forest management have been added to the conservation of existing forests as activities that could warrant such compensation. But in PNG the progress which had already been made by the time of the Bali climate change conference (COP 13) in 2007 triggered a wave of speculative investment in potential REDD projects which some people have likened to a cargo cult. By the middle of 2009, PNG’s ‘carbon cowboys’ had become an international media sensation. This posed a significant threat to the PNG government’s reputation because Theo Yasause, then Director of the Office of Climate Change, was deeply implicated in the speculation. So Conrad persuaded Somare to dispense with Yasause’s services, announce his government’s official hostility to voluntary carbon agreements, and hired McKinsey and Company to put the climate policy process back on track.

The McKinsey team got onto the case around the time of the Copenhagen climate change conference (COP 15) at the end of 2009. Since then, they have produced a Climate Compatible Development Strategy, an Interim Action Plan, a set of REDD+ Project Guidelines, and have made a substantial input to the UN-REDD National Programme Document. However, their role as ‘technical assistants’ (or phantoms of the opera) in the revamped Office of Climate Change and Development has not been met with universal applause. The ‘marginal abatement cost curve’ which has underpinned the McKinsey approach to REDD-plus policy in several tropical forest nations has got short shrift from radical environmental groups and apologists for the logging industry alike. But in PNG the hostility does not spring from questions of methodology; it is due to the perception that McKinsey’s consultants, like Theo Yasause before them, are simply surrogates for Kevin Conrad, the real target of their animosity.

Conrad’s power to unite the logging industry, environmental groups, and numerous politicians and public servants in opposition to his own designs is partly based on his previous record of business dealings in PNG. This is now supplemented by a strong suspicion that he will find some way to turn REDD into a scam which benefits himself and his close associates. But he does not have many close associates among the people with vested interests in the conservation, management or exploitation of the national forest estate. Now that his principal patron, Sir Michael Somare, has departed the political scene, there is a big question mark hanging over Conrad’s ability to control the REDD-plus policy process, or even to ensure that McKinsey and Company’s bills get paid by the Finance Department. The Office of Climate Change is in danger of becoming a political and bureaucratic orphan while other stakeholders battle it out for a share of the spoils from the UN-REDD Programme and donors grow increasingly despondent about the prospects for effective institutional reform. And that is why REDD-plus is now at the crossroads in PNG.

Colin Filer is an anthropologist and associate professor at the Crawford School of Economics and Government, Australian National University.

1. Managing the boom in mineral revenue in Papua New Guinea
2. Papua New Guinea: from economic boom to gloom?
3. Papua New Guinea: The informal economy and the resource boom

Papua New Guinea’s political dramas have intensified in the 10 weeks that Prime Minister Sir Michael Somare has spent in intensive care in Singapore’s Raffles Hospital.

Only on 22 June did Arthur Somare, the Minister for Public Enterprises, tell Parliament that his 75-year-old father had undergone a heart valve operation plus two further emergency operations. Last Friday, 24 June he stated that the family had decided he would be told he could not return to his job and should resign, and late last week the government made a snap decision to adjourn Parliament for five weeks till August, which will give it some time to resolve its internal divisions.

In May a government minister was chastised for insensitive ambition for angling to replace the nation’s founding PM while he was ill, but since then the power plays are becoming increasingly evident. The current Opposition is not the main force here — it makes up only 21 of the 109 MPs, and a vote of no confidence is unlikely. Conflict has emerged both within and between the dozen coalition parties, most who have been together since 2002. Somare’s National Alliance (NA) is still the largest party with about 40 MPs, but in the event of a mid-term vacancy the party’s leader is not guaranteed the prime ministership; MPs would have an open vote.

The political outcome of these struggles cannot be predicted at this stage. What we are seeing is a currently-muted return to the pattern of ‘horse trading’ between several candidates, with several parties already clearly divided. Some current ministers could also move to the Opposition. The unfolding situation can best be understood by briefly examining the cast of characters.

As flagged previously in East Asia Forum the Somare family has been embroiled in Leadership Code cases initiated by the Ombudsman Commission. In April the PM was briefly suspended from duty for failing to lodge annual income and asset returns over many years, and in July his son Arthur faces a tribunal on charges relating to alleged misuse of electoral-district development funds. Such funds are poorly-controlled honey traps for MPs, and since 1976 some 94 leadership cases have been commenced.

PNG’s politicians are gearing up for the mid-2012 elections and building up political and financial credit for themselves and their parties. The situation has been quite fluid since a Supreme Court decision in July 2010 allowed MPs to swap parties, and several parties in government have grown as MPs hopped around the floor, some more than once. The NA could remain the largest party after the next election, but meanwhile faces leadership struggles. The party’s constitution denies Sir Michael a third term as PM, but observers believe that ‘the old man’ has hung on because his family wants Arthur to succeed him. Arthur has had carriage of the $15 billion Liquefied Natural Gas (LNG) project and in Parliament he constantly extolls the riches it will bring. But he is often accused of arrogance, and the idea of a Somare dynasty attacked, This helped precipitate the split in the NA July last year. Moreover, Arthur Somare is not one of the NA’s four regional deputy leaders, who under party rules should provide the next party leader.

When Sir Michael stood aside last December because of his Leadership case he appointed Sam Abal Acting PM. Son of a respected politician, and trained in Australia as a diplomat, Abal was Foreign Minister from 2007. He is respected as a bureaucrat but is not a flashy politician. Although seen by some observers as lacking political toughness, while provincial affairs Minister in 2005 he took principled action to improve governance, resisting strong pressure from above. His current manoeuvres show a capacity for bold action.

Another person to watch is the NA’s longest-serving regional deputy leader, Patrick Pruaitch. Forestry Minister until 2007, he is allegedly implicated in a secret US$40m fund held in Singapore, derived from logging companies. He became Treasurer in 2007, although lost the position for 11 months and is still facing a Leadership Tribunal. Pruaitch is seen by the Somares as a cousin, and Abal recently reappointed him Treasurer. Commentators say Abal wanted the NA to regain control of Treasury in the run up to the 2012 campaign.

The NA’s Highlands region deputy leader is Don Polye, who was also Deputy Prime Minister. An engineer, Polye, as Works and Transport Minister, gained enormous power after 2002. He excelled in Parliament and over the years built huge political credit, especially in the Highlands. Australian educated, Polye is a smooth speaker and works well with foreign governments and aid donors. Last year Polye, a frankly ambitious man, argued that the NA needed a new leader and let it be known (to no avail) he was interested. Polye’s name was also damaged in the 2007 election, which he won with such a landslide that an appeal judge deemed it was rigged. After spending huge funds in his electorate he was re-elected in a rather violent by-election in November 2009, and other Highland leaders clearly see Polye as a major threat. In December 2010 Abal removed Polye from his power base in Works and Transport to the Foreign Affairs portfolio, only to be sacked by Abal this June for alleged insubordination.

The NA’s deputy leader for the New Guinea Islands is Planning Minister Paul Tiensten. Although not tactically-astute, he has had enormous power in the disposition of the development budget and funds to MPs from the country’s ongoing mining boom ‘windfalls’. Some of his spending has been seriously challenged, and last year NA’s strong Islands Division sought to expel him. Tiensten was also briefly suspended in 2010, but has strong connections with the Somare family who have kept him in the fold.

The coalition’s second-largest group is the United Resources Party (URP) led by William Duma from the Western Highlands, Minister for Petroleum. Duma has been plagued by poor performance and Abal removed him from the ministry in mid-June. The URP is now deeply divided, opening the possibility it will be absorbed by the NA — which would then owe their promotion to Abal and NA, who would no doubt hold URP members beholden to it for their ‘promotions’.

The Peoples National Congress (PNC) is the third major party in government, having grown rapidly since July 2010. Its leader Peter O’Neill was close to PM Somare while leading the Opposition from 2004, and after 2007 he became Public Service Minister. Now reputedly a very wealthy man, O’Neill is the best parliamentary speaker and tactician in government, though he remains under a cloud from the 2002 National Provident Fund Commission of Inquiry. O’Neill used his time as Treasurer in recent months to build political support, but in mid-June Abal sacked him. Some journalists speculate that O’Neill could withdraw his party from the NA coalition, positioning himself  to win an open vote for PM.

These are the key characters and parties around which the narrative of PNG’s politics is unfolding. The outcome remains far from certain.

Parliament was due to sit again for three weeks in July, and the constitution  theoretically allows the Opposition to bring a vote of no confidence until 7 August, but that was unlikely given the PM’s ill health. A VNC is also unlikely because a number of MPs who crossed the floor in July 2010 have returned to government, often to different parties.  One Minister who crossed back is Charles Abel, whose recent appointment as Minister of State Assisting the PM is strongly resented by other coalition MPs. The Opposition’s leaders since 2007, former PM Sir Mekere Morauta and his Deputy, Bart Philemon, stood aside in April in order to allow generational change, wan inducted Belden Namah and Sam Basil to replace them.

Namah was prominent while a young army lieutenant in removing South African mercenaries during the 1997 Sandline crisis, and since then has become wealthy from logging in his West Sepik Province. He was Forests Minister from 2007, which gives him demerits with civil society groups. Namah crossed the floor in July 2010 and after fiery speeches alleging corruption in government the PM Somare warned him not to break cabinet secrets. Basil is a businessman from the mining area of Bulolo, a man of principle who understands the issues of governance as promoted by aid donors and civil society and environmental groups. These first term MPs are strongly disliked by the old guard in government, and are unlikely to be able to form a new government this year or next. Sir Puka Temu, the Deputy PM who quit the government last July and was named then by Morauta as alternate PM has been calmly taking an elder statesman role while the PM is incapacitated.

Government has been in a state of policy paralysis this year and state services continue to decline. Angry landowners are blocking some of the construction at the LNG sites in the Southern Highlands and Gulf provinces, and resource projects in Madang province are under court challenge. The new Police Commissioner Tony Wagambie admits major problems of police indiscipline; brutality by members of the under-resourced and trained force is a major public concern. The Governor of Morobe, Luther Wenge, is leading a renewed push against the Ombudsman Commission. A challenge is under way questioning the constitutionality of the process used for swearing in Abal as Acting PM and Sir Arnold Amet as his Attorney General last December. The National Alliance is considering a resolution from Mr Polye’s Highlands region to expel Sam Abal from the party. Meanwhile, the capital Port Moresby faces a building boom induced by the LNG project. High inflation is making life difficult for the little people. Government services are declining across most of the country.  Resentment of the incumbent government is found across the country, with constant allegations of corruption, so factors such as these could once again lead to  very high electoral losses by sitting MPs in 2012. Meanwhile, on 14 June Sam Abal reassured Parliament ‘there’s a lot of things moving, a lot of things are coming up, for once in this country stabilization has occurred and investors have confidence in this country’.

Dr Bill Standish is Visitor at the School of Culture, History and Languages, College of Asia and the Pacific, Australian National University, and is a former lecturer at the University of Papua New Guinea.

1. Sir Michael Somare and PNG politics
2. REDD-plus at the crossroads in Papua New Guinea
3. Papua New Guinea’s elusive stability

With China’s hunger for resources, its mining ventures into the Pacific continue to expand. With the discovery of vast tracts of copper deposits in New Britain, there are likely to be new investments in PNG undertaken by Chinese state-owned enterprises, quite possibly in partnership with Australian mineral exploration companies.

To date, China’s flagship project in the Pacific islands has been the Ramu nickel and cobalt mine, a US$1.4 billion investment in PNG’s Madang province managed by the China Metallurgical Corporation (MCC), in partnership with Brisbane-based Highlands Pacific.

The project has found itself stalled in the courts since March 2010, and it awaits final approval to proceed with plans to dispose of tailings in Astrolabe Bay. In 2009, the Basamuk refinery site saw a riot between PNG and Chinese workers, triggered by lax safety procedures and communication barriers. Controversies over the migration status of Chinese workers, health, safety and labor issues have been ongoing, spawning a strident and popular blog that now covers all mines in PNG.

Australian and international companies have acquired a reputation for damaging the environment and local communities. This was seen most spectacularly in Bougainville and Ok Tedi, and more recently in revelations of human rights abuses at Barrick’s Porgera mine; but nothing of comparable scale has transpired in Madang.

China’s involvement in Ramu may mean its development will differ from other mines. But there is danger in treating ‘Chinese’ enterprises as monolithic propositions and neglecting the variations found in different communities in the Pacific, as well as denying the significant role of local agency in interactions with powerful international actors. Much of what has unfolded in Madang is specific to both the structure and corporate culture of MCC, factors peculiar to the local communities at the Kurumbukare mine site and the Basamuk refinery site, and the weakness of provincial and local government in Madang.

The background of MCC and its Engineering and Non-Ferrous Institute (ENFI) contractors in infrastructure has been a strength and weakness. It has allowed much of the hardware (including a 134-kilometre pipeline to carry the ore slurry) to be built ahead of schedule, but emphasis on meeting construction deadlines has led to disputes with local communities that have been left unresolved long after the responsible ENFI contractors have returned to China.

As with all mining projects in PNG, Ramu has found itself caught up in complex local landowner disputes, most of which arise whenever a mining company shows up, regardless of its nationality. The levels of expectation that have built up around this project (the exploration lease was issued five decades ago), the haste of construction, and the PNG state’s lack of institutional capacity to resolve disputes regarding who is entitled to receive landowner benefits have exacerbated these disputes.

One notable characteristic of the Ramu project is the propensity of both the Chinese and PNG governments to view it as a ‘state-to-state’ matter, leaving provincial and local governments and landowners sidelined. At first, this approach appeared to be to the benefit of MCC, delivering a 10-year tax holiday, a zero rating on value added tax during the construction phase, and a framework agreement which passed much of the sovereign risk to PNG.

Ramu Nickel’s preference for dealing with the PNG central government arose partly from MCC’s identity as the offspring of the Ministry of Metallurgy, and partly from the lamentable state of political leadership in Madang, which during the negotiation phase entailed a succession of flawed governors who went straight from the provincial government to the lockup. The 2008 PNG National Economic Fiscal Committee Report found Madang to be in the bottom three of PNG’s 18 provinces in terms of service delivery.

But having to rely on PNG’s Somare government has ultimately disadvantaged MCC, the PNG central government having failed to deliver on many projects in the Memorandum of Agreement, and shifting the blame for changes to the Environment Act to MCC — even though government agents primarily drove these changes.

Still, MCC management’s reluctance to engage with local government, civil society and landowner groups led to the court action that has delayed construction for a year; mistakes which future Chinese investors may learn from. While MCC is often described as a ‘giant’, future Chinese investors may bring more in the way of state largesse; in September 2009, the chairman of MCC, Shen Heting, memorably described the level of state support for MCC’s overseas ventures as ‘one hair of nine buffaloes.’

Other elements of Chinese exceptionalism that future projects will face are extensive use of Chinese labour, low wages paid to local staff, and communication problems between the two workforces. A tendency to keep wage costs tight extends to Chinese employees, who only receive 20 per cent loading, and two months of holidays per year — far less than comparable mining companies.

This is an extension of how these companies operate domestically, rather than a strategy devised for PNG. In China, wages share of GDP is below 40 per cent, having dropped more than ten percent between 2000 and 2007 (ILO figures put the wage share at 63.7 percent in the US and 56.7 percent in Australia). Pacific nations will face pressure from Chinese companies to make their labor regimes more flexible, as Julia Gillard discovered when Shen Heting called on her to scrap the English language test for migrants to Australia.

To make the best of future investments, Chinese or otherwise, PNG actors could heed the advice of John Momis — PNG’s former ambassador to China and now President of the Autonomous Region of Bougainville — and push for joint ventures. This will allow for real input from local partners and provide funding for the local state to deliver services, rather than expecting mining companies to become the state.

Dr Graeme Smith is a Postdoctoral Research Fellow at the China Research Centre, University of Technology Sydney, and a Visiting Fellow at the State, Society & Governance in Melanesia Centre at the College of Asia and the Pacific, Australian National University.

1. North Korea’s mining prospects
2. Indian mining ban will cripple economy
3. Chinese investment in Mongolia: An uneasy courtship between Goliath and David

Grand Chief Sir Michael Somare has been a member of the Papua New Guinea (PNG) National Parliament since 1968, and for 18 of his 43 years in Parliament he has been chief minister/prime minister, as head of a coalition government.

In the country’s most recent general election, held under a recently introduced limited preferential voting system in 2007, Somare was re-elected to his East Sepik Provincial seat, gaining 38 per cent of first preferences and enough second and third preferences to carry him over the line, albeit only after the final elimination. As leader of the party with the greatest number of MPs (the National Alliance, with 27 of the 109 seats in the National Parliament) he was returned as prime minister by a vote of 86 to 21; he leads a coalition of initially 14 parties.

Under an Organic Law on Political Parties and Candidates (OLIPPAC), introduced in 2001 primarily to prevent constant ‘party hopping’ by MPs, shifts in party coalitions, and recurrent votes of no confidence in the government of the day, a similarly substantial parliamentary majority assisted Somare in becoming the first prime minister since independence in 1975 to survive a full term (5 years) in office — even though the OLIPPAC did not succeed in preventing party splits and attempted votes of no confidence during the 2002–2007 Parliament. Despite a Supreme Court decision in July 2010, which has ruled that the anti-defection provisions of the OLIPPAC are unconstitutional, the Somare government of 2007 seems likely to survive a full parliamentary term. Elections are due in mid-2012 and governments are protected against votes of no confidence in the final twelve months of a parliamentary term.

As in the 2002–2007 Parliament, the present Somare government has been able to use its majority to fend off challenges by controlling parliamentary procedures and adjourning Parliament. Such tactics may have resulted in greater political stability, but they have also generated widespread complaints of ‘executive dominance’ of Parliament, and a good deal of blogging directed against Somare personally. Somare has also come under criticism over his attempts to block, and later suppress the report of, a Defence Board of Enquiry into the so-called Moti affair (in which the Solomon Islands Attorney-General, being sought by the Australian Federal Police, was removed from Port Moresby to Solomon Islands in a clandestine operation which violated several domestic and international laws). The recent charges against the prime minister, relating to his failure to submit financial returns required under the country’s Leadership Code, were pursued against this background — though Somare made light of his resultant two-week suspension from Parliament.

There are also concerns about Somare’s health following complications after heart surgery in Singapore. Somare has taken indefinite medical leave from his prime ministerial duties and there is speculation that he may not return to his parliamentary duties.

His absence highlights questions about post-Somare leadership in PNG. Under the Somare governments of 2002–2007 and 2007–present there have been frequent changes of deputy prime minister (due in part to circumstances within the coalition) but no apparent attempt to groom a successor to Somare. Indeed when respected Finance Minister Bart Philemon attempted to raise the issue of leadership within the National Alliance in 2007 he was dumped by the party and is now in opposition. When Somare stepped down in December 2010 to face the leadership tribunal, his place was taken not by the Deputy Prime Minister, Don Polye, but by another highlands MP, Sam Abal. Abal is an able politician and representative of a new generation of PNG politicians, but there is no clear indication of whether Abal, or someone else, might succeed Somare if he were to step down before 2012 or decides not to recontest in 2012 (which now seems very likely). It is often suggested that Sir Michael would like to see his son, Arthur Somare, the member for Angoram Open, succeed him, but Arthur Somare is currently facing the Leadership Tribunal. And, whatever the outcome of that hearing, it is most unlikely in PNG’s regionally-sensitive and competitive political climate that MPs or the public would accept another Sepik, let alone a second generation Somare, as Prime Minister.

Meanwhile, having faced economic crisis a decade ago, PNG is anticipating a new prosperity based primarily on liquefied natural gas (LNG) — due to commence production in 2014 and forecast to double the country’s GDP — but also on other mining and petroleum developments and good commodity prices for agricultural exports.

These developments will call for careful management if the prospective benefits are to be secured and distributed equitably. To date the management of returns from major development projects has been generally poor and service delivery in many areas of government has fallen behind policy targets. If the bonanza anticipated by landowners in the vicinity of big resource projects does not materialise, we can expect to see growing unrest.

Already, it seems, PNG is sliding into election mode, with the formation of new political parties being announced and prospective candidates lining themselves up. What happens over the next 12 to 18 months is likely to have profound implications for the country’s medium- to long-term future.

Ronald J. May is Emeritus Fellow of the State, Society & Governance in Melanesia Program, Australian National University. He has had a distinguished career including former positions as Senior Economist with the Reserve Bank of Australia, Field Director of the ANU’s New Guinea Research Unit, and foundation Director of what is now the National Research Institute (NRI) in Papua New Guinea.

1. When the Grand Chief is away: Papua New Guinea’s big-man politics
2. Papua New Guinea’s elusive stability
3. Indonesian politics: prospects for the coming presidential election

Towards the end of 2010, the PNG government approved a National Informal Economy Policy. The rationale for this policy was presented in a recent Pacific Economic Bulletin.

It was adopted amid concern that the benefits of increasing economic activity in the resource-extraction sector — the ‘commanding heights’ of the PNG economy — will not flow efficiently or equitably to the grassroots population. A better functioning, informal economy is seen as necessary to increase the efficiency of linkages between mineral enclaves and the broader population.

Among PNG’s neighbour states in Southeast Asia the informal economy is taken for granted. It is even regarded (rightly or wrongly) as an embarrassing indicator of backwardness, whose progressive elimination should be a policy objective. So it might seem odd that in PNG the ‘informal sector’ should now be subject to official encouragement.

Monetised informal economic activity is thought to need facilitation and support for several reasons. These include the relatively limited extent of such activity in PNG to date, together with the opportunities it presents to the poor. This situation reflects the continuing importance in PNG of a large non-monetised subsistence agricultural sector. An informal economy inadequate in scale, scope and value represents a gap (a kind of ‘missing middle’) between the subsistence economy and the formal small and medium-sized enterprise (SME) and corporate sectors.

A genuinely entrepreneurial class of PNG citizens in the middle and upper reaches of the economy has been slow to emerge (leaving aside the politically well-connected and other rent-seekers). This tardiness is at least partly due to the limited historical experience of ‘micro’-scale market economic activity in PNG, upon which budding indigenous entrepreneurs might build. Desultory government efforts to stimulate locally-owned and operated SMEs, conducted while ignoring or even repressing urban informal economic activity and largely neglecting the rural informal economy, have proved disappointing. Such a situation has political implications; for example, it underlies popular resentment of the activities of ‘new’ Asian retail enterprise, seen in widespread civil disturbances in recent years.

PNG is no stranger to the enclave model of resource extraction; successive mineral projects since the 1970s have confronted the immediate problem of satisfying local landowners, while governments have grappled with the larger issue of how to secure positive ‘spread’ effects through the whole economy. The huge new ExxonMobil LNG project, coming on-stream from 2014, promises to have major macroeconomic impact. Real GDP could rise by 25 per cent at its peak, while the share of government revenues attributable directly to mining activities could rise very quickly, from 21 per cent of domestic revenue in 2010 to as high as 50 per cent by 2018. Grassroots populations might be expected to benefit from government spending, including transfer payments, resulting from a prudently-managed revenue surge. In addition, were government to succeed in stimulating broadly-based domestic productive activity beyond the mineral enclave this would multiply the benefits of resource extraction. Such a flow-on cannot be taken for granted in PNG under present conditions.

A poor supply-side response to high commodity prices has been noted in previous episodes, with the potential for growth constrained by factors including crime, expensive and unreliable utilities, deficiencies in transportation infrastructure and public services, regulatory barriers, skill shortages, and land tenure issues. The need to avoid economic activity becoming ‘siloed’ in just a few sectors is widely understood. What may have been forgotten is that the supply response of the informal economy also needs to be improved, and that these constraints apply as much to it as to the formal sector. Microeconomic reform directed to reducing the costs of business and investment for the informal economy is necessary, so that it may contribute to the ‘localisation’ of production and consumption by supplying a growing proportion of the consumption baskets of low-income people and urban-salaried workers.

The relative ‘underdevelopment’ of the informal economy in PNG (especially when compared with neighbouring countries in monsoon Asia) is a complex phenomenon. The elements of an explanation may be found in aspects of traditional culture and technology, including the absence of monetised trade and exchange in PNG’s many isolated traditional societies. The historically recent introduction of external colonial and economic influence to the island of New Guinea may have been another factor. To varying degrees, mutatis mutandis, the experience of a number of small states in the Pacific, especially in island Melanesia, has been similar. To that extent, any successful efforts at reform in PNG may prove to have some wider usefulness.

John D. Conroy is a Visiting Fellow in the Crawford school of Economics and Government.

1. Managing the boom in mineral revenue in Papua New Guinea
2. Papua New Guinea: from economic boom to gloom?
3. Trust accounts and the management of Papua New Guinea’s commodity boom

Optimism continues to run high about PNG’s development prospects.

The last eight years have seen sustained growth across the PNG economy – the first time since independence. It is also the first time that real per capita incomes have begun to increase after a 30 year period of stagnation. Formal sector employment across all industries is now at record levels.

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.

1. India: sustaining high growth needs new reform momentum
2. On the brink of success – Papua New Guinea’s economic revival
3. The long and rocky road to global recovery