1. Update on the PNG Economy
2016 National CIMC Development Forum
Update on the PNG Economy
Tuesday, 18 October 2016
Good Morning, first I would like to thank the right honourable Charles Abel, minister for national planning and monitoring for inviting me to speak today and to the CIMC and Mrs Wallis Yakam for organising the forum,
and to Mr. David Toua (President PNG Business Council) for chairing the session today,
Dairi Vele
Secretary
Department of Treasury

2. Outline Economic Update Fiscal Update 2017 Budget Parameters
Global and Domestic Economy
Commodity Prices Update
Fiscal Update
Fiscal Performance
2016 Supplementary Budget
2017 Budget Parameters
Going Forward
I shall be speaking for around 15 minutes on the Update on the State of the PNG Economy.
I shall start by giving an high level update on the macroeconomic parameters and performance, as well as on the fiscal front. I’ll then move on to the brief detail update on the state of the economic and fiscal situation. I will finish with highlighting some of the major challenges faced in the process of budget implementation.

3. Macroeconomic Performance
Strong & Sustained Economic Growth (7.5% on average)
Steady growth in Employment (7% on average)
Inflation at Manageable Levels (below 6%)
Improvement in PNG’s Trade Balance
Strong & Sustained Economic Growth
Among the highest in the Pacific and the World (2014=13.3%, 2015=11.8%)
Oil & gas sector recorded historic growth rates driven by PNG LNG project
Sustained and broad-based growth across all sectors of the Economy – (7.5% on average real growth).
Steady growth in Employment
Employment grew steadily over this period (2012 – 2016) on average 7%.
Inflation at Manageable Levels
Inflation averaged around 6.6% due to depreciation of PNG Kina against US dollar and price pressure on domestic goods and services
Improvement in PNG’s Trade Balance
Current Account balance moving into surplus position reflecting PNGLNG exports.
Sufficient level of Foreign Reserves
International reserves at end June 2016 was K5,153.1 (US$1,664.5) million sufficient for 10.6 months of total and 17.0 months of non-mineral covers.
Increased Foreign Direct Investments
Early completion of the PNGLNG project demonstrates Gov’ts commitments and capability of delivering world class project.
Large-scale pipeline projects include the Wafi-Golpu, the Frieda River and the second LNG project.
All these demonstrates Investors’ Confidence in PNG.

4. State of the Economy
- Global recovery to be more gradual than October 2016 WEO forecast.
- Sustained growth in domestic economy though lower than previous forecasts.
- Inflation slightly picking up but at manageable levels.
World Economy
The 2016 October World Economic Outlook (WEO) Update projected Global growth at 3.1% in 2016, and 3.4% in 2017 maintained for both years compared to earlier projections in the July WEO of 2016.
Maintaining the 2016 global economic outlook similar to the July WEO reflects a more subdued outlook for advanced economies following the June UK vote in favour of leaving the European Union (Brexit) and weaker-than-expected growth in the United States of America (USA).
In 2017, the global economy is projected to recover, growing at 3.4 per cent driven entirely on account of developments in EMDEs. This reflects two factors: the gradual normalization of macroeconomic conditions in several countries experiencing deep recessions and the increasing weight of fast-growing countries in this group in the world economy.
Over the medium term, the global growth is projected to gradually increase to 3.8 per cent of the forecast horizon driven mainly by the EMDEs. The waning of the downward pressures of activity in countries in recession in 2016 such as Brazil, Nigeria and Russia is expected to more than make up for the steady slowdown in growth in China. These countries are growing below their potential are forecast to gradually return to trend. It also reflects the increasing weight in the world economy of large emerging market economies, such as China and India that are growing well above the world average.
Domestic Economy
The PNG economy is expected to revert to trend growth of 2.2 per cent after absorbing the full impact of the first LNG production in 2014 and 2015 respectively. The major drivers of this growth include the agriculture sector which is expected to see some improvements in 2016.
However, activities in the other non-mining sectors, especially the manufacturing sector, the wholesale & retail trade sector and the construction sector have moderated and are estimated to be lower than expected while there are mixed developments in the mining sector.
Increased production in some mines has offset the setbacks in Ok Tedi, Porgera and Ramu Nico
In 2017, growth is projected to recover slightly but not as strong as 2015 and the past eight (8) years. This is because activities supporting growth such as higher commodity prices and construction of the LNG gas project have come off in addition to LNG production reaching its full capacity and commodity prices trending at low levels.
However, the economy will continue to be supported by the traditional drivers such as the agriculture forestry and fishery and the mining sector with Ok Tedi expected to ramp up production to full-year in 2017.
The economy in 2017 will be supported by the anticipated pick up in the global economy, National Elections related activites and the preparations for the APEC 2018.
Over the medium term, the economy is projected to maintain similar growth trend as 2017, driven by the traditional drivers of the economy.
Inflation
Outlook for inflation remains moderate with 6% in 2015, however in 2016 inflation is expected to pick up slightly to 6.6%. The outlook for the medium term is expected to be within manageable levels.
- Headline inflation 2015 outcome is 6.0%; 2016 estimation is 6.6%
Key contributing factors to the pick up in inflation are;
- the ongoing weaker Kina exchange rate and the back-log of import demand due to shortages of foreign exchange as well as high prices of domestic goods and services in particular high rental prices and higher prices of seasonal items like betel-nut and vegetables. All these have offset the deflating effects of low commodity prices, and the reduction of government stimulus spending in the economy in 2016.
Source of all Charts and Data, Department of Treasury

5. Commodity Price Developments
Most Commodity prices remain below expectations
Copper Prices
Gold Prices
Oil Prices
Agricultural commodities Price Index
Developments in the global economy continue to suppress commodity prices.
Commodity prices of PNG’s key export commodities have traded lower than the 2016 Budget estimates except gold price. The year-to-date average prices from 04 January to 14 October 2016 were as follows:
Copper US$4,729 per ounce or -8.2% lower than Budget.
Gold US$1,261 per ounce or 9.0% higher than Budget.
Oil US$42 per barrel and -22.2% lower than Budget.

6. 2016 Supplementary Budget
Revenue affected by external factors, depressed commodity prices, China’s moderating growth, Brexit etc.
Expenditure Adjustments via Supplementary Budget – expenditure-saving measures, cuts to non- essential expenses,
Focus on essential services and Government’s priorities
Revenue-raising measures also adopted.
Fiscal performances since remains well within fiscal anchors – Debt ratios below 30% Debt to GDP ratio.

7. Fiscal Performance

8. 2017 Budget Parameters Low Government Revenue Diversify Revenue Base
Focus on Tax Reforms & Compliance
Restrict Tax exemptions and special arrangements
Managing Government Expenditure
DSIP/PSIP
Debt Servicing & Salaries
Fixed Commitments
Health, Education, Infrastructure, Law & Order
Reducing release or Warrants
Avoid Exceeding TAF limit
Ensure Efficiency and Quality of Spending
3. Managing Government Debt
Maintaining Debt at prudent levels.
Return to Balanced Budget by 2020.
The challenge faced in 2016 is managing Government Expenditure in light of low Government revenues to ensure that key Government expenditure are funded and macroeconomic stability is maintained.

9. Going Forward… Reform and Broad-based Growth Agenda must continue.
Fiscal restraint will be required across the next four years.
Government revenues were already projected to be flat across the forward years. Declining oil prices will further reduce these projections.
Even more important to recognize and focus on the Priority Expenditures for the National Government including reining in debt program until we improve implementation.
Unlikely to be any capacity for increased spending.
Ongoing pressures on operational costs and servicing of debt will severely limit space for new non-essential project spending.
Source of all Charts and Data, Department of Treasury

10. End of Presentation Thank you

11. POCKET SLIDES
Source of all Charts and Data, Department of Treasury

12. Contribution by Sectors
Growth in 2016 driven by the Agriculture, Forestry and Fishery sector
To achieve a Broad-Based Growth and Diversified & Sustained Economy.
Source of all Charts and Data, Department of Treasury

13. Figures in Kina (millions) Variation from Original Budget
2016 Supplementary Budget
Figures in Kina (millions)
2015 Final Budget Outcome
2016 Original
2016
Sup. Budget
Variation from Original Budget
Total Revenue & Grants
10,963.5
12,650.1
11,722.1
Total Expenditure & Net Lending
13,496.1
14,762.6
13,834.6
-928.0
Budget Balance
2,532.6
-2,112.5
-0.0
% of GDP
-5.0
-3.8
0.0
Debt as % of GDP
35.2%
35.8%
28.9%
Compared Supplementary Budget – Budget Deficit remains at K2,112.5
Reflects lower Total Expenditure & Net Lending being offset by lower Total Revenue and Grants
Compared to 2016 Budget – Deficit as a % of GDP remains at 3.8%
Compared to 2016 Budget – Debt to GDP ratio decreased from % to 28.9% of GDP
This slide provides the 2016 Budget Update.
The Government anticipated a Total revenue and shortfall of K2.1billion in mid-2016 due to falling commodity prices and impact of the foreign exchange market issue on private businesses. Mining and Petroleum Tax shortfall was K41.1 million Kina, and Total Revenue and Grants turned out to be K1,886.0billion or 14.9per cent less than the Budget. In response the Government took prudent steps in passing a Supplementary Budget of K13.8billion to account for the revenue shortfalls. The Supplementary Budget comprised of a K928million expenditure cut and K958million revenue raising measures.
2016 Fiscal Position
Overall the fiscal position of the Government is a prudent deficit 3.8% of GDP, which is unchanged compared to the Original Budget deficit.
Full information available in the 2016 MYEFO report and Supplementary Budget report, on the Treasury Website.
Source of all Charts and Data, Department of Treasury

14. Revenue Performance
Continue to support IRC & PNG Customs to ensure Immediate Revenue Raising.
State Entities to pay Dividends
Source of all Charts and Data, Department of Treasury

15. Macroeconomic Parameters
2015
2016 Budget
2016 MYEFO
Economic Growth
Total Real GDP
11.8
4.3
2.2
Non-mining GDP
2.0
3.4
2.6
Inflation
Average on Average
6.0
5.7
6.6
Commodity Prices
Gold (US$/ounce)
1,160
1,157
1,234
Copper (US$/ton
5,502
5,149
4,714
Oil (US$/barrel) 49 54 43
Source of all Charts and Data, Department of Treasury

16. 2017 Budget Overview Government Expenditures Government Revenues
Ensure Efficiency and Quality of Spending
Improve Implementation
Reprioritize Spending to priority areas including maintenance of key infrastructures.
Government Revenues
Declining revenues will require much greater focus on tax reforms and compliance;
Diversifying the revenue base is critical; and
Restrict tax exemptions and special arrangements.