Papua New Guinea Economic Briefing The challenge of

www.worldbank.org/png

The World Bank Group in Papua New Guinea

Papua New Guinea Economic Briefing

The challenge of turning the last days of the boom into

lasting improvements in living standards

Tim Bulman Country Economist

The World Bank in Papua New Guinea

Jonathon Kirkby Senior Investment Policy Officer, Investment Climate The International Finance Corporation in Papua New Guinea

December 19, 2012 Business Council of PNG, Port Moresby


2

What we’ll be talking about



1. PNG has enjoyed a transformational decade

► But the driving forces are approaching exhaustion…

► and PNG’s human development needs—and business opportunities—

remain enormous

2. The government is looking to broaden and extend this boom

► But these efforts bring risks, as PNG’s own history shows

► …and the resource-intensive type of growth PNG is experiencing brings

special challenges

3. So the focus needs to be on doing things smarter:

► Improving the effectiveness of spending

► Making the business climate more supportive of Papua New Guinean

businesses


What we’ll be talking about

The link to the global story

We’ll be drawing on two just-launched World Bank Group publications:

Doing Business, 2013 East Asia & Pacific Economic Update

www.doingbusiness.org www.worldbank.org/eapupdate

PNG’s transformational decade



Where we were 10 years ago…

Sliding incomes, low & volatile growth A deteriorating fiscal position

(annual growth and GDP per capita, 100 in 1975) (percent of GDP)

Sources:, Treasury., IMF, World Bank staff calculations




Stagnant employment ….and fast-rising prices

(formal employment, indexed 100 in to 1992) (year-on-year growth)

Sources:, NSO, BPNG., World Bank staff calculations




…after all, in 2002, commodity-reliant economies were doomed to incomes falling

forever

(formal employment, indexed 100 in to 1992)

Sources:, World Bank DEC

0

50

100

150

200

250

300

350

1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008

Korea War

Oil crises

Agriculture

Energy

Base metals



…and then something changed…



PNG has enjoyed a series of positive external shocks

0

50

100

150

200

250

300

350

1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008

Recent boom

Korea War

Oil crises

Agriculture

Energy

(real price indices, deflated by manufacturing prices, 2000=100)

Base metals

Source: World Bank DECPG

Sources:, World Bank DEC



Sources: PNG Treasury, BPNG, World Bank staff calculations

Stronger and less volatile output growth

…driven by the non-resource sectors

…and the rest is history…stronger and ‘better quality’ growth

…driving a surge in formal employment

opportunities

0

20

40

60

80

100

120

-8

-4

0

4

8

12

16

20

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Non-mineral GDP growth

Ok Tedi BCL

closes

Missima

Porgera

GDPgrowth

Real GDP per capita(index, RHS)

% Index

Kutubuoil

Lihir

Gobeoil

LNGapproved



Sources: PNG Treasury, IMF, NSO, World Bank staff calculations

Improved public finances

(budget balance and public debt, percent of GDP

not including contingent and off-balance-sheet

liabilities, currently near 20% of GDP)

…and far healthier government finances

…and slower price growth

(year-on-year inflation)



While a lot of the talk of armageddon right now is a bit over-hyped…

12

It is likely that the end is near for PNG’s transformational decade


The last days of the boom

Growth in the region has slowed – although by less than expected

► Growth has slowed globally

► But our region remains relatively

resilient

► And the slowdown has been

less than expected



PNG’s enjoyed a series of positive external shocks

Sources: BPNG and World Bank

The last days of the boom …but this is lowering PNG’s export prices, amplified by the stronger Kina

…and weaker international commodity prices

(PNG’s export prices, in PGK terms)

The strength of the Kina

(PGK per USD and real effective exchange rate)

► …are dragging incomes and spending power…




Sources: BPNG and World Bank

The last days of the boom …especially effecting cash crop farmers

► The incomes of cash crop farmers are particularly sensitive to movements in prices,

as farmers cut production when prices fall

► Especially copra and coffee farmers, and especially more recently

(year-on-year change in prices and sales)




Sources: Treasury and World Bank staff calculations

The last days of the boom GDP growth is set to slow markedly

► Together, these factors suggest markedly slower growth over the coming years

► especially excluding the impact of PNG-LNG on the headline GDP statistics

(year-on-year output growth and contributions)


The last days of the boom

PNG’s expected slowdown contrasts with acceleration expected elsewhere

Broadening and extending the boom



* Deflated with the GDP deflator

Sources: Treasury, IMF and World Bank staff calculations

► After several years of strong growth, the 2013 budget targets a new,

short-term impulse to take per-capita spending to its highest ever

(real spending and revenues per person, constant 2012 Kina*)

Using public spending to inject new demand into the economy

-500

-400

-300

-200

-100

0

100

200

300

400

0

200

400

600

800

1000

1200

1400

1600

1800

2003 2005 2007 2009 2011 2013f 2015f 2017f

Balance (RHS)

Expenditure (LHS)

Revenues (LHS)

PGK PGK



Searching to overcome the weaknesses in current systems

► 87% increase in transfers to local and district governments, to K 1.5 billion

► Transferring spending from national authorities to local agencies

► 50% increased allocations to development enablers, including fee subsidies

Spending the budget over the course of the year:

Recurrent Development

0

13

25

38

50

63

75

0

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011 2012

Quarterly spending (PGK m; LHS)

% of full-year spending spent in quarter (%; RHS)

%PGKm

0

13

25

38

50

63

75

0

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011 2012

Quarterly spending (PGKm; LHS)

% of full-year spendingspent in quarter (%; RHS)

%PGKm

Sources: PNG Treasury, BPNG, World Bank staff calculations



Source: World Bank Country Policy & Institutional Assessment, 2011, in World Development Indicators

Assessment of how well a country’s policies and institutions

transform resources into sustainable economic development,

across four dimensions

(higher scores indicate better performance)

Great scope to improve the effectiveness of public institutions at providing

decentralized services and social protection



Sources: PNG Treasury, IMF, World Bank staff calculations and projections

Some reversal of the recent improvements in

public finances

(public debt and its drivers, percent of GDP

not including contingent and off-balance-sheet

liabilities, currently near 20% of GDP)

But there are risks that the past decade’s gains in public finances are unwound

…and risk of difficulty unwinding new

expenditure risks maintaining larger

deficits and debt

0

10

20

30

40

50

60

70

80

2002 2004 2006 2008 2010 2012 2014 2016

Primary deficit

Real GDP growth

Real interest rate

Real exchange rate

Other*

Residual

%%

Existing MTDSceiling

-500

-400

-300

-200

-100

0

100

200

300

400

0

200

400

600

800

1000

1200

1400

1600

1800

2003 2005 2007 2009 2011 2013f 2015f 2017f

Balance (RHS)

Balance, alternative spending scenario (RHS)

Expenditure (LHS)

Alternative spending scenario* (LHS)

Revenues (LHS)

PGK PGK


The deeper challenges of resource-heavy growth

Why deliver quality services when incentives are weak?

The thesis of Why nations fail (Acemoglu & Robinson, 2012):

► This is a primer of the risks with concentrated, extractive-sector

driven growth (NOT where PNG is today…)

► Economies dominated by a few extractive economic sectors

tend to have more extractive political institutions

► These rarely encourage innovation to be rewarded,

and growth to become sustained and broadly-based

► The incentives for policy makers to provide quality public services

are weak

► Few citizens pay taxes, and so weaker incentive to demand public services

► A small elite can do better under an extractive status quo than the more inclusive

alternative

► While PNG’s recent boom is notable for the breath of growth across sectors, much

has been linked to a few, narrow investments, or the reforms of the early 2000s

► Risks are likely to be greater when sectors become more capital- or low-skill-

labor intensive – these are less inclusive


25


Resources are important for PNG, but we should not over-state the reliance

Source: WDI

1/ Includes Oil and Gas but excludes Oil and Gas Manufacturing

Average 2005-2009 Mining and Quarrying1 as percentage of

GDP in countries with a share higher than 1%

26.7

0

20

40

60

80

Eq

ua

toria

l Gu

ine

aC

on

go

, R

ep

.A

zerb

aija

nA

ng

ola

Lib

ya

Ga

bo

nTr

inid

ad

an

d T

ob

ag

oSa

ud

i A

rab

iaB

ots

wa

na

Alg

eria

Ch

ad

Pa

pu

a N

ew

Gu

ine

aM

on

go

liaN

ige

ria

Un

ite

d A

rab

Em

ira

tes

Gu

ine

aC

hile

Ka

zakh

sta

nIra

n, Is

lam

ic R

ep

.Su

da

nM

ala

ysi

aEg

yp

t, A

rab

Re

p.

Syria

n A

rab

Re

pu

blic

Co

ng

o,

De

m. R

ep

.B

oliv

iaN

am

ibia

Ind

on

esi

aP

eru

Su

rin

am

eV

ietn

am

Gu

ya

na

Me

xic

oSo

uth

Afr

ica

Lao

PD

RC

olo

mb

iaLe

soth

oV

en

ezu

ela

, R

BC

am

ero

on

Au

stra

liaM

ali

Arg

en

tin

aJo

rda

nTh

aila

nd

Ch

ina

Za

mb

iaC

ote

d'Iv

oire

Mo

roc

co

Ma

urita

nia

Gh

an

aB

run

ei D

aru

ssa

lam

Cu

ba

Jam

aic

aA

ntig

ua

an

d…

Ph

ilip

pin

es

Tog

oM

ala

wi

Turk

ey

Mo

zam

biq

ue

Mo

nte

ne

gro

Nic

ara

gu

a

Percent of Total GDP


26


What’s the cross-country evidence?

Source: World Bank, The Changing Wealth of Nations

Total Natural Resources Rents

Average 2005-2009

44.6

0

20

40

60

80

100

120

140

160

Turk

me

nis

tan

Ira

qU

zbe

kis

tan

Co

ng

o,

Re

p.

Eq

ua

toria

l Gu

ine

aA

zerb

aija

nLi

bya

Sa

ud

i Ara

bia

An

go

laTr

inid

ad

an

d T

ob

ag

oG

ab

on

Om

an

Ch

ad

Pa

pu

a N

ew

Gu

ine

aQ

ata

rIra

n,

Isla

mic

Re

p.

Alg

eria

Ka

zakh

sta

nN

ige

ria

Ba

hra

inU

nite

d A

rab

Em

ira

tes

Bo

livia

Ye

me

n, R

ep

.V

en

ezu

ela

, R

BR

uss

ian

Fe

de

ratio

nM

au

rita

nia

Co

ng

o,

De

m. R

ep

.Syria

n A

rab

Re

pu

blic

Ec

ua

do

rSu

da

nEg

yp

t, A

rab

Re

p.

Za

mb

iaC

hile

No

rwa

yM

ala

ysi

aM

on

go

liaLi

be

ria

Vie

tna

mG

uin

ea

So

lom

on

Isl

an

ds

Bu

run

di

Ca

me

roo

nB

hu

tan

Mo

zam

biq

ue

Ind

on

esi

aA

rge

ntin

aP

eru

Co

te d

'Ivo

ire

Me

xic

o

Percent of Total GDP


27



Source: WGI World Bank, WTO WDI, Wealth of Nations

R² = 0.1031

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

0 20 40 60 80 100

Co

ntr

ol o

f Co

rru

pti

on

Sco

re(T

he

hig

her

, th

e b

ette

r)

Natural Resources Rents (Percent of Total GDP)

The quality of all the different dimensions of governance is negatively correlated

with the importance of natural resources

Control of Corruption

R² = 0.1119

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0 20 40 60 80 100

Reg

ula

toty

Qu

alit

y S

core

(Th

e h

igh

er, t

he

bet

ter)


Regulatory Quality


28

Source: WGI World Bank, WTO WDI, Wealth of Nations

Rule of Law Voice and Accountability

R² = 0.1119

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0 20 40 60 80 100

Ru

le o

f Law

Sco

re(T

he

hig

her

, th

e b

ette

r)


R² = 0.2547

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

0 20 40 60 80 100

Vo

ice

and

Acc

ou

nta

bili

ty S

core

(Th

e h

igh

er, t

he

bet

ter)


The quality of all the different dimensions of governance is negatively correlated with

natural resources



Turning the boom into sustained improvements in living standards

by doing things smarter


Great scope to raise living standards by changing how things are done

Strategic regulatory reforms can be the best support for PNG businesses

While PNG ranks relatively well on a few indicators, in most areas regulation is holding PNG

businesses back

(ranking of PNG, out of 185 countries)

Starting a

business

Dealing

with

construct’n

permits

Getting

electricity

Registering

property

Getting

credit

Protecting

investors

Paying

taxes

Trading

across

borders

Enforcing

contracts

Resolving

insolvency

91 159 23 88 83 49 106 120 166 125

Note: Describes conditions for businesses in the capital city of each country.

Source: 2013 Doing Business Survey

► Small and medium enterprises are the largest source of employment and incomes across the

world

► Closing markets to competition and providing subsidies is not a long-term solution to

encouraging locally owned businesses in PNG.

► Rather than working to reduce competition, policy makers’ efforts would more

effectively bring sustained improvements in living standards by working to improve -

owned businesses ability to compete.

► The kinds of reform that will reduce costs for PNG businesses and increase their

competitiveness are not expensive, and they are not difficult.

► Some key reforms are already underway

► Business-enabling reforms provide an environment that will increase the impact of the

government’s wider reforms, and help PNG-owned businesses to can make the most of the

spin-off opportunities presented by large investment projects



Source: World Development Indicators

(Services as a share of GDP, and per capita income)

Eg, services lag generally in East Asia/Pacific, but even more so in PNG


32


Source: Fraser Institute 2010-2011 Mining Survey

How much of a deterrent for investment is the degree of uncertainty regarding

the administration, interpretation and enforcement of regulations? (Percent of respondents)

Best Investment

Climate Worst Investment

Climate

0%

20%

40%

60%

80%

100%

Vene

zu

ela

Wis

consin

Zim

ba

bw

eE

cu

ado

rB

oliv

iaD

RC

(Co

ngo

)C

alif

orn

iaH

ondu

ras

Gua

tem

ala

Washin

gto

nR

ussia

Kyrg

ysta

nC

olo

rad

oC

hin

aM

onta

na

NW

TB

ulg

aria

Ma

dag

asca

rG

uin

ea

(Cona

kry

)S

outh

Afr

ica

Kazakhsta

nM

ongo

liaIn

dia

Nig

er

Phili

ppin

es

Ne

w M

exic

oS

outh

Dakota

Indon

esia

Vie

tnam

Min

nesota

Vic

tori

aN

ew

Zeala

nd

Ro

man

iaA

rgentina

British

Colu

mb

iaN

ew

So

uth

Wa

les

Mic

hig

an

Que

ensla

nd

Zam

bia

Tasm

ania

Arizona

Nu

navut

Ta

nza

nia

Pana

ma

Idaho

Gha

na

Onta

rio

No

rth

ern

Te

rritory

Papu

a N

ew

Guin

ea

Wyo

min

gP

eru

Me

xic

oM

anitoba

Weste

rn A

ustr

alia

Co

lom

bia

Ma

liA

laska

No

va

Scotia

Spain

Alb

ert

aU

tah

Bra

zil

Yukon

South

Austr

alia

Na

mib

iaQ

ue

bec

Ne

va

da

Nfld./

Lab

rador

Irela

nd

Turk

ey

No

rwa

yN

ew

Bru

nsw

ick

Saska

tch

ew

an

Fin

land

Gre

en

lan

dB

ots

wan

aB

urk

ina

Faso

Sw

ede

nC

hile

Would not invest due to this factorStrong deterrent to investment

Ranks 31 out of 79 investment's destinations

PNG already seems to design and implement regulations well in the mining sector


33


How much of a deterrent for investment is the degree

of regulatory duplication and inconsistencies? (Percent of respondents)

Best Investment

Climate Worst Investment

Climate


0%

20%

40%

60%

80%

100%

Vene

zu

ela

Wis

consin

Boliv

iaC

alif

orn

iaH

ondu

ras

Gua

tem

ala

Zim

ba

bw

eD

RC

(Co

ngo

)W

ashin

gto

nE

cu

ado

rC

olo

rad

oK

yrg

ysta

nN

WT

Min

nesota

Mo

nta

na

Ch

ina

Ru

ssia

Nu

navut

British

Colu

mb

iaIn

don

esia

Ma

dag

asca

rS

outh

Afr

ica

Ne

w M

exic

oK

azakhsta

nV

ietn

am

Guin

ea

(Cona

kry

)In

dia

Idaho

Arg

entina

Vic

tori

aP

hili

ppin

es

Ne

w Z

eala

nd

Mic

hig

an

Arizona

Bulg

aria

Mo

ngo

liaS

outh

Dakota

Ne

w S

outh

Wa

les

Pana

ma

Onta

rio

Wyo

min

gZ

am

bia

Ala

ska

Que

ensla

nd

Peru

Tan

za

nia

Ro

man

iaN

iger

South

Austr

alia

Uta

hM

exic

oB

razil

No

rth

ern

Te

rritory

Fin

land

Ma

nitoba

No

rwa

yY

ukon

Turk

ey

Spain

Tasm

ania

No

va

Scotia

Co

lom

bia

Irela

nd

Papu

a N

ew

Guin

ea

Alb

ert

aQ

ue

bec

Ne

w B

runsw

ick

Gha

na

Ne

va

da

Weste

rn A

ustr

alia

Na

mib

iaN

fld./

Lab

rador

Saska

tch

ew

an

Ma

liG

reen

lan

dC

hile

Burk

ina

Faso

Sw

ede

nB

ots

wan

a

Would not invest due to this factorStrong deterrent to investment

Ranks 16 out of 79 investment's destinations



34


How much of a deterrent for investment is the tax regime? (Percent of respondents)

Best Investment Climate

Worst Investment Climate


0.0

0.2

0.4

0.6

0.8

1.0

Vene

zu

ela

Boliv

iaZ

imba

bw

eE

cu

ado

rD

RC

(Co

ngo

)K

yrg

ysta

nR

ussia

Ho

ndu

ras

Ca

liforn

iaW

ashin

gto

nK

azakhsta

nW

isconsin

South

Afr

ica

Phili

ppin

es

Gua

tem

ala

Guin

ea

(Cona

kry

)M

ongo

liaB

ulg

aria

Que

ensla

nd

Weste

rn A

ustr

alia

Ne

w S

outh

Wa

les

Tan

za

nia

India

Arg

entina

Ma

dag

asca

rT

asm

ania

Co

lora

do

Vic

tori

aN

ort

hern

Te

rritory

Gre

en

lan

dM

onta

na

Min

nesota

Zam

bia

South

Austr

alia

Ch

ina

Indon

esia

Ro

man

iaN

ew

Me

xic

oN

iger

Sw

ede

nW

yo

min

gM

exic

oG

ha

na

British

Colu

mb

iaN

orw

ay

Turk

ey

Vie

tnam

Pana

ma

Ne

va

da

Nu

navut

Que

bec

Spain

Na

mib

iaN

WT

Onta

rio

Bra

zil

Co

lom

bia

Papu

a N

ew

Guin

ea

Arizona

Uta

hIr

ela

nd

Idaho

Yukon

Peru

Alb

ert

aS

aska

tch

ew

an

Ne

w Z

eala

nd

South

Dakota

Ma

liN

fld./

Lab

rador

Ma

nitoba

Ne

w B

runsw

ick

Fin

land

Mic

hig

an

Ch

ileB

urk

ina

Faso

No

va

Scotia

Ala

ska

Bots

wan

a

Would not invest due to this factor

Strong deterrent to investment

Ranks 22 out of 79 investment destinations



35



1. PNG has enjoyed a transformational decade – but the drivers are coming to an

end

2. The government is looking to extend this boom and spread the benefits more

widely

► But the delivery mechanisms are imperfect…

► and attention must be paid to overall fiscal sustainability if PNG is to avoid

the experience of the 1990s

► Many countries have found large resource sectors make it harder to do what

the government is trying to do – providing better public services to more

Papua New Guineans

3. So the focus needs to be on doing things smarter:

► Making the business climate more supportive of Papua New Guinean

businesses, especially those outside the resource sector

► More supportive regulation can help businesses more than protecting

established players and reducing competition

► Good regulatory reforms make the government’s other reforms and

opportunities more effective

► PNG has shown it can make key reforms and make do this in some key areas

www.worldbank.org/png


Papua New Guinea Economic Briefing



Tim Bulman Country Economist

The World Bank in Papua New Guinea

Jonathon Kirkby Senior Investment Policy Officer, Investment Climate The International Finance Corporation in Papua New Guinea

December 19, 2012 XXXX, Port Moresby

Documents

Papua New Guinea Economic Briefing The challenge of