1. 2018 PNG Economic Survey
Rohan Fox (ANU), Stephen Howes (ANU), Nelson Atip Nema (UPNG), Dek Sum and Bao Nguyen (UPNG and ANU)

2. 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.

3. Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Key messages
Focus on the non-resource economy: where nearly all PNGians work.
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.

4. 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

5. Economic growth

6. New NSO data suggests non-resource recession in 2015
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
New NSO data suggests non-resource recession in 2015

7. Formal sector employment has fallen every year since 2013
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Formal sector employment has fallen every year since 2013
Formal sector employment (March 2002=1)

8. Economy-wide taxes stabilized in 2017
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Economy-wide taxes stabilized in 2017
Economy-wide taxes, (adjusted for inflation)

9. There was some growth in imports in 2017 after a massive contraction
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
There was some growth in imports in 2017 after a massive contraction
Exports and imports of goods and services

10. But private sector credit growth was negative in 2017
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
But private sector credit growth was negative in 2017

11. Growth summary and outlook
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
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 % 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.

12. Fiscal & macro

13. Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Credit downgrades
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.

14. Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Government revenue
Government revenue, adjusted for inflation

15. Resource revenue is very low
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
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.

16. Introduction – Growth – Fiscal/macro – Private sector – Conclusion
In addition to low revenue, need to reduce large deficits also constraining expenditure
Government revenue minus expenditure

17. Debt is at record levels
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Debt is at record levels

18. Increasing debt is driving up interest payments
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Increasing debt is driving up interest payments

19. All of these factors make for a bleak expenditure outlook.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
All of these factors make for a bleak expenditure outlook.

20. Inflation is heading down.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Inflation is heading down.
Inflation in selected Pacific Island countries (%)

21. The exchange rate has been stable for the last two years.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
The exchange rate has been stable for the last two years.

22. But the real exchange rate is at a record high.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
But the real exchange rate is at a record high.
real exchange rate index and terms of trade

23. Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Foreign exchange reserves are depleted, but now stable due to foreign exchange rationing.

24. Introduction – Growth – Fiscal/macro – Private sector – Conclusion
The large current account surplus is matched by a large capital account deficit.

25. The capital account deficit reflects profit repatriation.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
The capital account deficit reflects profit repatriation.

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

27. Private sector policies and perspectives

28. The two-decade-long Tariff Reduction Program has been abandoned.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
The two-decade-long Tariff Reduction Program has been abandoned.

29. 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

30. Selective tariff increases
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Selective tariff increases

31. Commentary on 2018 tariff increases
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Commentary on 2018 tariff increases
Past protectionist efforts have not succeded (Ramu Sugar; Halla Cement).
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

32. 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.

33. Private sector surveys in PNG
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?

34. PNG business surprised by recent economic performance
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
PNG business surprised by recent economic performance
Index of business performance against expectations
(calculated from BA surveys)

35. 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

36. The INA survey gives the same message over a longer period
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
The INA survey gives the same message over a longer period
Top three constraints

37. Conclusion

38. Top priority has to be a boost to non-resource GDP per capita
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Top priority has to be a boost to non-resource GDP per capita

39. Top priority has to be a boost to non-resource GDP per capita
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Top priority has to be a boost to non-resource GDP per capita

40. Need to get employment growth happening again.
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Need to get employment growth happening again.

41. Conclusion: diagnosis
Introduction – Growth – Fiscal/macro – Private sector – Conclusion
Conclusion: diagnosis
Focus on the non-resource economy: where nearly all PNGians work.
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.

42. 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.

43. 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

44. Paper available soon from devpolicy.anu.edu.au or devpolicy.org
Tenkyu tru!
Paper available soon from devpolicy.anu.edu.au or devpolicy.org