PNG economic survey 2015-16

Rohan Fox, Stephen Howes, Nelson Nema, Win Nicholas and Manoj Pandey

UPNG SBPP Division of Economics &ANU Crawford School Development Policy Centre

1

Introduction

Joint project of Division of Economics, Schoolof Business and Public Policy, UPNG andDevelopment Policy Centre, Crawford Schoolof Public Policy, ANU

Provides a survey of key economicdevelopments

Focus this year on economic growth,macroeconomic developments and structuralpolicy response

2

Economic Growth

3

-6-4

-20

24

68

1012

14

Rea

l gro

wth

rat

e (

%)

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

p

2017

p

2018

p

Year

Real GDP Growth Rate_all Real GDP Growth Rate_non-mining

p: projected

Source: NSO/Treasury/BPNG

All sectors and non-mining sectors: 1994-2018

Real GDP Growth Rates (%)

4

PNG’s growth slowdown

-4-2

02

46

81

0%

2008q1 2008q3 2009q1 2009q3 2010q1 2010q3 2011q1 2011q3 2012q1 2012q3 2013q1 2013q3 2014q1 2014q3 2015q1 2015q3 2016q1

Year (quarter)

Employment Growth Lowess Curve

Source: QEB Statistical Tables, BPNG

2008q1:2016q1

Formal sector employment growth (quarterly, year on year)

5

Employment growth negative since 2014 Q4

-30

-20

-10

010

2030

% a

nnu

al c

han

ge

45

67

89

1011

12

Val

ue (

in K

ina

Bill

ion

)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Year

Import value for goods % annual change in import value of goods

Source: QEB Statistical Tables, BPNG

Value and % annual change: 2002-2015

Goods import in Papua New Guinea

6

Imports down below 2007 levels

510

1520

2530

35

%

8010

012

014

016

018

020

0

Num

bers

(in

000

s)

2007 2008 2009 2010 2011 2012 2013 2014 2015Year

Number of visitors arrival

% Annual change in number of visitor arrivals

Source: PNG Tourism Promotions Authority (PNG-TPA)

Numbers and % annual change: 2007- 2015

Visitor Arrivals in Papua New Guinea

7

Visitor arrivals still growing, but slowly

Some indicators point to a recession

Sharp decline in tax revenue (see fiscalsection)

25% drop in coastal shipping over last year(Business Advantage, Oct. 2016)

PNG Business Council report drops in sales of35% in the first six months of 2016.

8

Growth summary

Overall, the indicators suggest a sharp slowdown in domestic economic activity.

Even if GDP growth is still positive, manyindicators are suggestive of an economicrecession in PNG.

A key challenge for the government istherefore how to stimulate the economythrough its macroeconomic tools which is thesubject of the next section.

9

Fiscal Developments

10

Expenditure has outpaced revenue, but both are falling; revenue is back

at 2006 levels

11

Source: Treasury

6

8

10

12

14

16

18

K b

illio

n (

20

15

pri

ces)

Revenue Expenditure

Economy-wide taxes have fallen; resource taxes have disappeared

12

Source: Treasury

0

2

4

6

8

10

12

Mining and petroleumtaxes

Economy-wide taxes Non-tax revenue (incl.grants)

K b

illio

ns

(20

15

pri

ces)

2006 2014 2016

Increased spending in salaries, interest and political commitments have squeezed

discretionary spending

13

0

1

2

3

4

5

6

7

8

Salaries Interest Educationsubsidy

MP funds Aid-fundedprojects

Discretionaryexpenditure

K m

illio

n (

20

15

pri

ces)

2006 2014 2016Discretionary spending = total spending minus salaries minus interest minus political commitments minus aid.

Discretionary spending = amount available for core government operations (running hospitals, universities; building major roads)

Harsh cuts to critical services

14

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Economic &agriculture

Education Health Transport &infrastructure

Law & Order Ruraldevelopment

(incl. PSIP)

Interestpayments

KIN

A B

ILLI

ON

2011 2012 2013 2014 2015

Source: BPNG and Treasury

Deficit/revenue ratios reached an all-time high near the end of the boom

-15%-10%

-5%0%5%

10%15%20%25%30%35%40% Deficit/revenue

As a result, debt/revenue is now back at pre-boom levels

0%

50%

100%

150%

200%

250%

300%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Debt/revenue

A gloomy revenue outlook

17

1000

1100

1200

1300

1400

1500

1600

1700

1800

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

Kin

a (2

01

5 p

rice

s)

Revenue per capita

Note: 2017 onwards projections from 2017 budget

Fiscal policy reflections

Government has been hit by a massive fiscal shock with theend of the boom.

Expenditure cuts and cash-flow problems due to: significant fall in tax collections

limited borrowing options

need to finance “boom legacy” expenditures (higher salary andinterest bill, and new policy commitments).

To avoid further cuts in health, education and infrastructure,government needs to: continue to borrow

stimulate the economy

reprioritize expenditures through cuts in constituency spending andsalary restraint.

18

Exchange Rate

19

Recent modest nominal depreciationTWI AUD & USD

20Source: BPNG

Exchange rate has not depreciated against the US dollar since May 2016

21

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55

1/1/08 5/15/09 9/27/10 2/9/12 6/23/13 11/5/14 3/19/16

Kin

a/U

SD

Inflation at around 6%

22

0

1

2

3

4

5

6

7

%

Source: BPNG

High Real exchange rate

Source: World Bank (2016)

23

24

Foreign exchange reserves are falling

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

USD

bill

ion

s

25Source: BPNG

Over-valued exchange rate, foreign exchange rationing

Foreign exchange rationing

Overvalued currency leads to excess marketdemand

To cater, BPNG needs to provide foreigncurrency to the market but not enoughreserves available. Result: forex rationing

Wait list is as high as 1 billion USD

Imports are compressed

Business deferring investment in lack of forex

26

Kina depreciation modest by international comparisons

Country%Δ exchange rate 1

June 2014 – 1 June 2016 Natural resource rents

as % of GDP

Mozambique -45.8 13.6

Brazil -37.3 5

Zambia -34.8 16.1

South Africa -32.5 7.6

Mexico -30.5 6.3

Norway -28.3 9.1

Madagascar -26.6 10.9

Uganda -24 11.3

PNG (interbank rate) -23.5 29.6

Australia -22 7.1

Ghana -21.9 21.1

Chile -20.5 16.2

Peru -18 8.7

Indonesia -14.5 6.3

Mongolia -9.2 22.1

PNG (market rate) -8.7 29.6

Solomon Islands -8.7 4127

Source: World Bank

Lessons from cross-country research

Oil exporters with more flexible exchange rate regimes have a smaller GDP and government spending shock

when oil prices fall

Source: Koh (2015) “Oil prices shocks and macroeconomic adjustments in oil-exporting countries” International Economics and Economic Policy

28

Lesson from international experience

Several oil-exporting economies have movedto more flexible exchange rates in response tocommodity price falls

Examples include Azerbaijan, Colombia,Kazakhstan, Malaysia, Nigeria and Venezuela.

PNG has done the opposite.

Needs to stimulate growth through moreflexible exchange rate

29

Structural policy

30

New Select Policy initiatives

SME Policy initiatives

Land Policy initiatives

Agricultural Import Policy initiatives

31

1. SME Policy initiatives

32

Goals Current2030

TargetChanges

in 15 years

Number of SMEs (in 000s) 49.5 500 10.1 times

Employment Creation (in mn) 0.3 2.0 6.9 times

Ownership of the formal Economy 10% 70% 60% point

% Contribution to GDP 6% 50% 44% point

Per Capita GDP (K’000) 2.0 9.6 4.8 times

Unemployment 84% 49% -35% point

Below the Poverty Line 40% 30% -10% point

Unbanked 86% 40% -46% point

1. SME Policy initiatives

Some restricted provisions: e.g.,

Foreign ownership of businesses in several areas(e.g. trade stores, tourism) to be restricted.

Imposition of export taxes for all Agriculturecommodities that are currently being exported intheir raw form to encourage downstreamprocessing and imposition of complete ban onthe exports of round logs by 2020.

33

2. Land Policy initiatives

34

Key objectives of the Proposed Land (Amendment)Act 2013 (draft) are

a. To improve land administration system

b. To improve land dispute settlement system process

c. To develop a framework for maximizing thedevelopment potential of land held under customarytenure

2. Land Policy initiatives

35

Proposed amendment is restrictive in nature forforeign ownership because it has provisions to

Impose ban on foreign ownership and leasing ofland

Existing foreign leases have to be given up within30 years

3. Agricultural Import Policy initiatives

Ban on Vegetable Agricultural imports:Introduced last year, then lifted again,reintroduced in early 2016 and lifted again.

Discussions on proposed Rice Import Quotas(under 2015 proposed National Rice ImportQuota System)

36

Commentary on the new policies

37

Some of the new policy proposals are sensible, but allare protectionist in nature, limiting trade andinvestment.

Limiting trade will increase domestic output, but pushup higher prices.

Limiting foreign investment will reduce output.

Unclear if policies will be implemented, but theannouncement effect may further scare off foreigninvestment, already deterred by foreign exchangerationing.

Conclusions

38

Conclusions

Economy is in crisis in the face of economicslowdown and fiscal deficit with severe governmentexpenditure cuts—even in essential services.

On fiscal measures, the government needs tostimulate the economy. However, PNG lacksborrowing capacity and cannot wait until nextresource project and commodity prices to pick up.

On structural policy measures, objective is right.However, it is very costly and can push up priceswhile scaring-off foreign investments that PNGneeds.

39

Conclusions

The real exchange rate is high for now. Ratherthan introducing protectionist measures, it wouldbe better to allow further currency depreciation.

That would make local businesses morecompetitive, and would help all the businessesengaged in export or import substitution.

This would have an immediate impact, and wouldnot scare off foreign investors.

40

Thank you!

41