2018 PNG Economic Survey

Rohan Fox (ANU), Stephen Howes (ANU), Nelson Atip Nema (UPNG), Dek Sum and Bao Nguyen (UPNG and ANU)

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Introduction

• The fifth in our series of annual economic surveys.

• A joint ANU-UPNG project providing independent, expert economic analysis.

• Based on interviews as well as our own research.

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Key messages

• Focus on the non-resource economy: where nearly all PNGianswork.

• The non-resource economy has not been doing well, with sluggish and even negative growth.

• This is resulting in a loss of jobs and poor service delivery.

• The main drag on growth is the shortage of foreign exchange.

• To stimulate growth, which needs to be the government’s top priority, it needs to depreciate the exchange rate, which is the only way to address foreign exchange shortages.

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Structure

• Introduction

• Section 2 – Economic growth

• Section 3 – Fiscal trends and macro policy

• Section 4 – Private sector policies and perspectives

• Conclusion

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Economic growth

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New NSO data suggests non-resource recession in 2015

Table 1 Estimates of GDP, resource GDP and non-resource GDP real growth for 2015

GDP growth Resource GDP growth Non-resource GDP growth

Value Source Value Source Value Source

2017 estimate 10.5% Treasury 48.3% Treasury 0.7% Treasury

2018 estimate 5.3% NSO 48.3% Treasury -5.9% NSO & Treasury combined

Source: NSO (2018) and Treasury (2017)

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Formal sector employment has fallen every year since 2013

Formal sector employment (March 2002=1)

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Economy-wide taxes stabilized in 2017

Economy-wide taxes, 2014-2017 (adjusted for inflation)

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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There was some growth in imports in 2017 after a massive contraction

Exports and imports of goods and services

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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But private sector credit growth was negative in 2017

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Growth summary and outlook

• In 2015, the non-resource economy contracted by 5.9%.

• Likely that 2016 another year of negative non-resource growth.

• Non-resource growth performance in 2017 and this year still unclear.

• Mild boost this year from APEC, but businesses are not very positive short-term.

• Government itself is projecting growth only at 2.5-3.5% in the next few years, barely above population growth.

• Longer-term, business confidence rests on new resource projects, but there is considerable uncertainty as to timing.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Fiscal & macro

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Credit downgrades

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

• Credit agencies rate the sovereign credit of countries based on their risk perception

• S&P downgraded PNG in April from B+ to B

• Moody’s did the same downgrade to PNG (B1 to B2) two years earlier, and this year downgraded its outlook from stable to negative.

• These downgrades reflect PNG’s ongoing fiscal and macro difficulties.

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Government revenue

Government revenue, adjusted for inflation

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Resource revenue is very low

• At lowest level since 1992.

• New projects are not paying taxes due to accelerated depreciation and/or tax holidays (PNG LNG, Ramu Nico)

• Old projects not paying much tax either. Why?• Lower profitability in the case of Ok Tedi.

• Unclear in the case of Lihir

• There is a case for re-examining the resource revenue regime prior to the approval of new projects.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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In addition to low revenue, need to reduce large deficits also constraining expenditure

Government revenue minus expenditure

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Debt is at record levels

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Increasing debt is driving up interest payments

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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All of these factors make for a bleak expenditure outlook.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Inflation is heading down.

Inflation in selected Pacific Island countries (%)

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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The exchange rate has been stable for the last two years.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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But the real exchange rate is at a record high.

real exchange rate index and terms of trade

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Foreign exchange reserves are depleted, but now stable due to foreign exchange rationing.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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The large current account surplus is matched by a large capital account deficit.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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The capital account deficit reflects profit repatriation.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Fiscal/macro summary

• The fixed nominal exchange rate is preventing the adjustment of the economy to the end of the boom, and forcing reliance on foreign exchange rationing.

• Weak revenue. smaller deficits, and higher interest means declining funds for service delivery.

• Progress on deficit reduction, but mounting arrears.

• Credit downgrades reflect perception of increased risk.

• All of these problems require faster economic growth, which only the private sector can provide – the next section.

Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Private sector policies and perspectives

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The two-decade-long Tariff Reduction Program has been abandoned.

pre-1999

1999-00

2001-2

2003-5 2006 2011 2012 2015 2018

Intermediate 30 30 25 20 15 15 12.5 10 10

Protective 49 40 35 30 25 25 20 15 10

Prohibitive 55-100 55 50 45 40 40 35 30 25

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

2018 tariff developments

• Some 600 pre-legislated tariff reductions were abandoned.

• In addition, another 250 tariff lines increased.

• On average, tariff increases moderate (about 7% on average), but some exceptions:• From 0% to 25% for milk

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Selective tariff increases

Old New

Clothes Stockings, socks 15% 20%

Cotton or woollen clothes 15% 20%

Household and consumer items

Toilet paper 15% 20%

Tablecloths 10% 20%

Baths, sinks, washbasins 10% 25%

Detergents 10%-15% 20%-25%

Glue 10% 20%

Soap 15% 20%

Shampoo 10% 20%

Nail polish 10% 20%

Food

Ice cream 15% 20%

Milk 0% 25%

Cocoa products 10% 15%

Meat 10%-15% 12.5%-20%

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Commentary on 2018 tariff increases

• Past protectionist efforts have not succeded (Ramu Sugar; HallaCement).

• Inconsistent with APEC.

• New system more complex (6 rates rather than 3).

• Result may be more lobbying.

• Import-competing industries do need assistance, but they would equally benefit from an exchange rate depreciation.

• Tariff increases do not help exporters

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Tuna canning

• Last year, PNG announced that all tuna caught in PNG waters would need to be processed in PNG.

• Processors don’t want to do this, despite offer of rebate, because PNG much more expensive (e.g. minimum wage 50% higher than in Philippines.)

• Recently, one of the six tuna processors closed down resulting in the loss of 800 jobs.

• Tariff increases will not help tuna processing, but exchange rate depreciation will.

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Private sector surveys in PNG

• INA has undertaken four five-yearly surveys of PNG businesses since 2002

• Since 2012, Business Advantage has undertaken 7 annual surveys of PNG businesses.

• What does business think?

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

PNG business surprised by recent economic performance

Index of business performance against expectations (calculated from BA surveys)

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Foreign exchange has been business’s top worry for the last three years

Top four impediments facing business according to the BA surveys

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

The INA survey gives the same message over a longer period

Top three constraints

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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Law and order Corruption Telecoms

2007

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Law and order Corruption Transport

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Foreign exchange access Corruption Exchange rates

2017

Conclusion

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Top priority has to be a boost to non-resource GDP per capita

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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non-resource GDP per capita resource GDP per capita

Top priority has to be a boost to non-resource GDP per capita

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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non-resource GDP per capita

Need to get employment growth happening again.

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Conclusion: diagnosis

• Focus on the non-resource economy: where nearly all PNGianswork.

• The non-resource economy has not been doing well, with negative growth in 2015 and probably 2016 and at best sluggish growth since.

• This is resulting in a loss of jobs (negative job growth every year since 2013) and poor service delivery.

• The main drag on growth is the shortage of foreign exchange: that’s what our analysis says and what business says.

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Conclusion: remedy

• To stimulate growth, the government needs to depreciate the exchange rate, since this is the only way to address foreign exchange shortages.

• Not a new or popular idea, but if there was an alternative, it would have worked by now.

• Not a panacea and will have costs, but at this stage there is no alternative, and it will bring many benefits, especially to rural areas, where most PNGians live.

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Introduction – Growth – Fiscal/macro – Private sector – Conclusion

Postscript

“The main impediment to private sector development is macroeconomic policies. The main obstacle to business activity and investment are difficulties in obtaining foreign exchange. [We] recommend that the Kina be allowed to depreciate to eliminate the current over-valuation of the currency, end the FX shortage, and promote external competitiveness. ”

IMF 2017, PNG Article IV

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Tenkyu tru!

Paper available soon from devpolicy.anu.edu.au or devpolicy.org

Email: rohan.fox@anu.edu.au

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