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

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.

8

Fiscal Developments

9

Expenditure has outpaced revenue

10

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Kin

a b

illio

ns

(20

15

pri

ces)

Revenue - FBO GFS1986 Revised Revenue - GFS2012

Revenue - Projections 2015 Budget Expenditure - FBO GFS1986

Revised Expenditure - GFS2012 Expenditure - Projections 2015 Budget

Source: Treasury

Both mineral and economy-wide taxes have fallen

11

0

1

2

3

4

5

6

7

8

9

10

Mining and petroleum taxes Other taxes Non-tax revenue

Kin

a b

illio

ns

(20

15

pri

ces)

2014 2015 budget 2015 actuals

Unanticipated

Expected due to fall in commodity prices

Source: Treasury

Harsh cuts to critical services, reprioritization, 2013 vs 2015

12

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

(2

01

5 P

RIC

ES)

2011 2012 2013 2014 2015

Due to deficits

Constituency funds switch

Source: BPNG and Treasury

Fiscal deficits are very large

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

2000 2005 2010 2015 2020

% o

f G

DP

GFS1986 GFS2012 Projections13

Source: Treasury

Debt is rising and borrowing difficult

14

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% G

DP

Debt/GDP - actuals Revised FRA limitSource: Treasury

Fiscal Policy Reflections

Cash flow problem due to (i) limited domesticappetite for further lending to the governmentand (ii) significant reduction in tax collections

Expenditure cut in health and education not asolution

Government needs to stimulate economy andexamine the scope for tax increases to boostrevenue, and reprioritize expenditures throughcuts in the constituency spending

15

Exchange Rate

16

Recent modest nominal depreciationTWI AUD & USD

17Source: BPNG

Inflation remains at about 6%

18

0

1

2

3

4

5

6

7

%

Source: BPNG

Real exchange rate at a record high

Source: World Bank (2016)

19

60

70

80

90

100

110

120

130

140

1990 1995 2000 2005 2010 2015

(In

dex

; 20

10

=10

0)

Real Effective Exchange Rate

Modest depreciation + higher inflation as compared to trading partners

Foreign exchange reserves are falling

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

USD

bill

ion

s

20Source: 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

21

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 4122

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

23

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

24

Structural policy

25

New policy initiatives

Ban on vegetable agricultural imports Introduced last year, then lifted again, now reintroduced.

Also further discussions of rice import quotas

SME policyGoals of policy to increase employment, income per

capita, SME contribution to GDP, local ownership

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

Land policyBan of foreign ownership and leasing of land

Existing foreign leases have to be given up within 30 years

26

Commentary on the new policies

All protectionist in nature, limiting trade andinvestment.

Limiting trade will increase domestic output, butpush up higher prices.

Limiting foreign investment will reduce output.

Unclear if policies will be implemented, but theannouncement effect may further scare offforeign investment, already deterred by foreignexchange rationing.

27

Conclusion

28

Conclusion

In the face of economic slowdown and severegovernment expenditure cuts, the governmentneeds to stimulate the economy, but lacksborrowing capacity.

The real exchange rate is at a record high. Ratherthan introducing protectionist measures, wouldbe better to allow further currency depreciation.

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

29

Thank you!

30