1. PNG survey of developments, 2014-15 Michael Cornish, Rohan Fox, Stephen Howes, Win Nicholas, Albert Prabhakar and Ani Rova UPNG SBA Division of Economics & ANU Crawford School Development Policy Centre. 1

2. Structure Introduction, context and recent growth performance – Stephen Howes Macroeconomic and fiscal – Ani Rova Human development and structural reform, and conclusion – Win Nicholas 2

3. Growth in commodity prices 2000-2020 (2000=100) Commodity prices have fallen since 2011 3

4. Japanese LNG contract prices (USD/bmmbtu) LNG prices are also falling 4

5. GDP and GDP per capita (2012 prices) Strong economic growth since 2005 5

6. Growth in 2014 and 2015 GDP growth 2015 estimates have shifted down over time: – 20% to 15% to 11% GDP growth 2014 estimates have shifted up over time – 6% to 8% to 13% This is due to LNG production being brought forward: 2-year growth unchanged (at constant prices). 6

7. Little growth in agricultural commodity production Agricultural commodity production (volumes, 2001=100) 7

8. Annual tourist arrivals (by plane) to PNG Tourist arrivals no longer increasing 8

9. ANZ Q1 2105 business survey Sales in Q1 2015 compared to – Q4 2014: net 47% down – Q1 2014: net 37% down Sales in Q2 2015 compared to – Q1 2015: net 5% up – Q2 2014: net 30% down 9

10. Formal sector employment growth (quarterly, year on year) Employment growth is now negative 10

11. Kina vs $US: June 2010 to June 2015 The exchange rate 11

12. Fifteen most resource-dependent economies with floating exchange rates, and PNG Country %Δ exchange rate 1 Jun 2014-30 Jun 2015 Natural resource rents as % of GDP Largest export categories as % of GDP Brazil-40.156.5Iron ore, oil Madagascar-33.379.8Textiles, cloves Ghana-32.8817.8Gold, oil Uganda-28.5413Coffee, oil Norway-27.2610.9Oil, LPG Mexico-21.917.7Automobiles, electronics Australia-21.777.2Iron ore, coal Mozambique-21.3714Aluminium, coal S Africa-15.896.8Gold, coal Chile-15.7216Copper, sulphates Peru-13.829.7Gold, copper Indonesia-14.406.6Coal, LPG, oil Zambia-8.5419.4Copper, corn Solomon Islands-7.2133.3Timber, gold Mongolia-7.2028Coal, copper PNG3.5531.6LNG, gold 12

13. Foreign Exchange Reserves (millions $US) Falling foreign exchange reserves 13

14. Inflation 2012-2015 (quarterly, year on year) Inflation may have peaked 14

15. Fiscal surpluses and deficits in PNG (% GDP) 2000 to 2014 The fiscal balance: from surplus to deficit 15

16. Expenditure has increased very rapidly in recent years, whereas revenue is flat PNG government revenue and expenditure (K billion, 2014 prices) 16

17. Why such a difficult fiscal position? Increased interest costs from high borrowing Low LNG and other commodity prices have depressed revenue. Funds taken off-budget (e.g. Oil Search loan) Other mining projects doing badly. Non-mining revenue down due to economic slowdown 17

18. PNG government revenue and expenditure as per the 2015 budget (K billion, 2014 prices) A new fiscal strategy is needed 18

19. Debt/GDP ratio Government debt is now on the increase 19

20. Human development challenges Poverty: 40% in 2010 – Unchanged from 1996 Human Development Index: PNG 157 th out of 187 (2013) Gender Inequality Index: PNG: 134 th out of 148 (2012) 20

21. Free education and free health Free education – Government payments have reached schools – Enrolments have increased – Schools have been over-compensated for the abolition of fees Free health – Government payments reach fewer than half of the health clinics. – 83% of health clinics rely on user fees. 21

22. Gender equality: areas of progress More women in the workforce – proportion of female primary school teachers has increased from 27 to 55% over the last decade. New Family Protection Act Increasing number of programs – to make markets safer for women. – to support women who have been victims of domestic violence 22

23. Real exchange rate appreciation means the economy is becoming more costly 23

24. Road funding has increased, but is at risk 24

25. Conclusion Macro and fiscal reforms needed to reduce short-term risks – New fiscal strategy, including sensible multi-year expenditure cuts – Exchange rate depreciation. Long-term challenges – Structural and public sector reform to boost spending effectiveness and SOE performance, and strengthen infrastructure. 25

26. Thank you 26