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PAPUA NEW GUINEA SERVICES SECTOR ANALYSIS
1. Overview of the Papuan New Guinean Economy
Papua New Guinea (PNG) i s r ichly endowed with natural resources, but exploitat ion has been hampered by rugged ter ra in, land tenure issues, and high cost of developing infrast ructure. The economy has a smal l formal sector , focused mainly on the export of those natural resources , and an informal sector , employing the major i ty of the populat ion. Agriculture provides a subsistence l ivel ihood for 85% of the people. A consort ium led by a major American oi l company i s construct ing a l iquefied natural gas (LNG) product ion faci l i ty that could begin export ing in 2014. As the largest investment project in the country 's h i story, i t has the potent ial to double GDP in the near-term and t r iple Papua New Guinea's export revenue .
The t rends of GDP and GDP per capita for the last 11 years are shown in Figure 1 and 2:
Figure 1: PNG GDP Trend 2000-2011
Source: Wor ld Bank, Databank
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200020022004200620082010
GDP trend
GDP (constant2000 US$)
Papua New Guinea Snapshot
Capital: Port Moresby
Population: 7.013.829 (WB 2011)
Currency: Kina papuana
GDP (constant 2000 US$): 5,563,353,346 (WB 2011)
GDP per capita: $2373 at PPP (WB 2011)
GDP Growth: 9% (WB 2011)
External Debt: 101% of GNI (WB 2011)
Ease of Doing Business: 104/185 (WB 2012)
Corruption Index: 150/176 (TI, 2012)
The difficulties that PNG economy was facing at the beginning of the decade 2000 are reflected in the negative annual % GDP growth (-2.4 in 2000, -0.1 in 2001). From 2003 the GDP has started to grow steadily reaching an annual % growth of 8 in 2010 and 9 in 2011. The economic problems in the early 2000 were due to both internal and external factors such as the outbreak of civil war in Bougainville and the Asian financial crisis. Recovery started in 2003 thanks to the increase of price of the exported commodities, prudent monetary policy and improved fiscal policies.
Figure 2: PNG GDP per capita Trend 2000-2011
Source: Wor ld Bank, Databank
Labelling PNG as ‘chronically poor’ is a new departure because it was long assumed that the state, even if dysfunctional, was at least developmental. That is, the nation’s capacity to turn profits from agriculture and natural resources into per capita growth was assumed, as was the effectiveness of its larger national development project. But now it is recognised that even as national GDP climbs (mostly a result of increases in resource revenue since 2003) underdevelopment at the national level and poverty at the local level deepen. Indeed, the UN recently classified PNG as a Least Developed Country (LDC), a label the government abhors though it is quite accurate1. Concerns about the so-called Dutch Disease are rising against the new LNG project. ‘Dutch Disease’, or the ‘resource curse’, refers to an economic condition where a mineral boom leads to an appreciation of the real exchange rate, which in turn depresses output in the tradable sector. Numerous chal lenges st i l l face PNG, including providing physical secur i ty for foreign investors , regaining investor confidence, restor ing integr i ty to state inst i tut ions, promoting economic eff ic iency by pr ivat iz ing moribund state inst i tut ions, and maintaining good relat ions with Aust ral ia, i t s former colonial ruler . Other socio-cultural chal lenges could upend the economy including chronic law and order and land tenure issues. The global f inancial cr i s i s had l i t t le impact because of cont inued foreign demand for PNG's commodit ies.
2. Role of Services in the Papua New Guinean Economy
The evolution of the weight of the Services Sector in terms of value added (% GDP) in the PNG economy, with respect to the primary and secondary sectors, is shown in Figure 3.
F igure 3: PNG Services Sector evolut ion, 2000-2011
1 Cammack D., Chronic Poverty in Papua New Guinea, Chronic Poverty Research Centre, Background Paper to the Chronic Poverty Report 2008-09
0
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2000 2002 2004 2006 2008 2010
GDP per capita trend
GDP per capita,PPP (constant2005 international$)
0102030405060
PNG Economy Sectors-Trend
Industry,value added(% of GDP)Agriculture,value added(% of GDP)Services, etc.,value added(% of GDP)
The GDP per capita followed the same trend of the GDP moving from -5 % annual growth in 2000 to + 6.5 % in 2011. The GDP per capita is still very low today and despite vast natural and mineral wealth, Papua New Guinea is a very poor country and poverty impacts on the daily lives of almost all of the population. Poverty is exacerbated by among other things; extreme rural isolation; high rates of crime and violence; a burgeoning HIV/AIDS epidemic and recent political turmoil.
The unsatisfactory performance of Services is further analysed with Figure 4 showing the annual % growth of Services Value Added. The high volatility that characterized the Services Sector in the first 10 years of 2000 seemed to have stopped in 2009 to settle at a 3% annual growth.
Figure 4: Services Sector % Annual Growth
Source: Wor ld Bank, Databank
In 2011 the value added as a % of GDP of the Services Sector in PNG didn’t even reach 20% (see Figure 5) much lower than the average for the Least Developed Countries that in 2011 was 48.4%. Among the reasons to explain the difficult raise of the Services Sector in the country the weak institutional framework, the “Dutch disease” and lack of FDI play, certainly, an important role. It is believed that the Services that could grow more easily in the country and on which it would worthier to invest are the ones related to the exploitation of natural resources such as logistics and transports. Also tourism can be an important driver for the country’s economic growth but its development is at stake because of the unstable political situation. Figure 7, showing the main exported Services, helps understand which are the main Services Sub-Sectors and the most likely to develop thanks to technical assistance.
Figure 5: PNG Economy Breakdown by sectors Figure 6: Employment by sector, 2000
Source: Wor ld Bank, Databank
Figure 7: Services Sector Breakdown, 2011
Source: Wor ld Map, I TC
-15
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Services, value added (annual % growth)
Services, etc., valueadded (annual %growth)
45%
36%
19%
PNG Economy Breakdown, 2011 Industry, valueadded (% of GDP)Agriculture, valueadded (% of GDP)Services, etc., valueadded (% of GDP)
Except the residual category of Government services covering government service transactions (including those of international organizations), the principal exported services are transportation, financial services and construction services. Financial Services are likely to increase given that in 2011 and 2012, the National Parliament passed legislation that created an offshore Sovereign Wealth Fund (SWF) to manage all mineral revenue and put into practice stable public finance management.
3. The role of Foreign Direct Investment
Figure 8: PNG FDI Trend, 2000-2011
Source: Wor ld Bank, Databank
After reaching a peak in 2009 (probably due to investments in natural resources exploitation), FDI inflows decreased substantially; the net inflow as % of GDP in 2011 was -2.4. Explanations for these sizable fluctuations have to be sought in the country’s institutional framework and in the degree of openness of the economy. In general East Asia and the Pacific has more restrictions on foreign equity ownership in all sectors than any other region. At the same time, the region displays the greatest intraregional variance, with less populous economies being more open. For example, Singapore and the Solomon Islands have few restrictions, while China and Indonesia impose foreign equity limits in many service sectors. Papua New Guinea restrictions are tight making it very complicated to start a new business or to hold foreign currency bank account; PNG, in particular, has not ratified the ICSID Convention for Settlement of Investment Disputes and the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. Papua New Guinea’s economy continues to be “mostly un-free”. Although it has been expanding due to high commodity prices and a construction boom, the prospects for long-term broad-based economic development are constrained by an inefficient legal system and lingering corruption that undercut the rule of law. Much-needed private-sector development is also held back by regulatory deficiencies and the lack of institutionalized open-market policies.
Figure 9 gives an idea of the lack of freedom Papua New Guinean economy suffers from, problem shared with other neighboring economies such as Vanuatu and Solomon Islands.
Source: 2013 Index of Economic F reedom
-4E+08
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Foreign directinvestment, netinflows (BoP, currentUS$)
4. Trade in Services and Trading Partners
The share of Trade in Services for Papua New Guinea is in line with the average for the LDCs, in 2011: 32.35%. In the World Bank Indicator, Trade in Services, both imports and exports are included. A closer look to Papua New Guinea Balance of Payments, in particular for the Services Sector, shows the difficulties that the country is facing in exporting services. The debits exceed the credits for all the 11 years concerned (see Figure 10). Figure 10: PNG Services Account 2000-2011
Source: Bank of Papua New Guinea
The main PNG trade partners (for goods and services) for 2011 are l i sted in f igure 11
Figure 11: PNG Trade Partners, 2011
Source: EC T rade S tat i s t ics
5. Regional Integration
Like other countr ies, PNG has also stepped up pol icy processes, in part icular t rade pol icy, to measure up and take advantage of the merits of regional integrat ion agreements and global i zat ion.
TABLE 8.7 SERVICES ACCOUNT (a) (b)
(K' million)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Service Credits 699.5 962.4 629.6 829.5 655.2 938.5 965.1 1,067.7 979.6 510.8 1,850.4 1,006.3
Transportation 36.2 79.6 20.9 59.5 67.4 96.8 66.3 86.0 70.1 38.1 140.3 83.5
Travel (excluding transportation) 17.1 14.9 8.5 13.1 13.9 7.5 11.9 12.4 5.8 3.3 10.5 5.2
Education 2.8 2.4 2.3 1.2 4.8 3.8 1.2 2.3 1.4 2.5 7.2 6.3
Insurance 9.1 9.7 7.6 21.1 28.7 40.3 5.9 31.7 14.1 14.7 14.8 11.3
Other Financial Services 0.0 0.0 0.0 22.2 19.1 7.8 9.0 26.3 24.1 17.8 55.3 38.5
Computer and Information Services 0.0 0.0 0.0 0.4 0.7 2.9 5.8 2.3 0.4 0.8 5.7 0.7
Communications services 0.0 0.0 0.0 1.5 12.8 17.6 22.6 37.5 11.1 5.4 3.0 1.7
Other Business Services 390.7 616.4 346.7 125.6 112.0 159.9 150.7 105.4 136.6 96.2 455.7 320.8
Cultural & Rec. Services 0.0 0.0 0.0 0.0 0.5 1.2 1.6 0.7 0.6 0.1 1.0 1.0
Government, n.i.e. 0.0 0.0 0.0 49.1 71.5 52.7 54.8 116.3 137.2 69.7 174.1 89.0
Construction Services 0.0 0.0 0.0 343.3 90.6 47.5 52.1 24.2 8.2 111.2 293.7 34.4
Refining and Smelting 0.0 0.0 0.0 0.4 0.0 0.2 4.4 0.0 20.8 39.1 0.0 0.0
Other Service Receipts 243.6 239.4 243.6 192.1 233.2 500.3 578.8 622.6 549.2 111.9 689.1 413.9
Service Debits -2,147.2 -2,234.1 -2,367.4 -3,091.3 -3,215.4 -3,620.7 -4,519.3 -5,408.8 -4,673.7 -4,736.1 -14,526.0 -7,029.7
Transportation 500.2 648.6 654.3 810.7 872.7 864.5 1,082.9 1,355.5 1,394.5 1,220.1 3,143.3 1,538.0
Travel (excluding transportation) 112.5 100.7 92.0 55.7 66.5 56.1 47.9 61.7 78.0 80.3 223.0 113.0
Education 27.2 28.5 33.0 129.1 162.9 116.3 134.1 126.1 133.3 231.3 481.5 268.5
Insurance 62.0 98.4 149.8 229.9 210.0 200.4 206.0 234.2 272.8 251.2 487.5 238.9
Other Financial srvices 0.0 0.0 0.0 57.0 146.3 165.5 213.0 690.8 563.3 441.4 979.0 271.1
Computer and Information Services 0.0 0.0 0.0 36.9 46.7 36.4 38.1 44.5 30.6 41.6 76.9 45.9
Communication services 0.0 0.0 0.0 15.2 35.7 23.8 39.8 59.6 62.1 45.2 203.9 94.5
Other Business Services 694.3 818.9 957.7 690.7 581.4 548.0 864.0 978.9 959.1 1,175.1 3,153.6 1,359.7
Cultural & Rec. Services 0.0 0.0 0.0 0.0 0.6 0.4 0.2 0.4 1.6 1.0 2.8 1.0
Government services n.i.e. 0.0 0.0 0.0 18.9 93.8 50.1 36.6 43.9 69.9 41.7 120.4 66.5
Construction Services 0.0 0.0 0.0 142.1 122.1 181.0 169.8 164.0 145.8 342.4 4,245.2 2,406.7
Refining and Smelting 0.0 0.0 0.0 289.0 209.0 419.5 599.2 403.9 217.6 267.1 464.9 182.8
Other Service Payments 751.0 539.0 480.6 616.1 667.7 958.7 1,087.7 1,245.3 745.1 597.7 944.0 443.1
PNG must keep on playing an act ive part in helping to shape—and in turn display respect for—developing global inst i tut ions and agreements in areas such as market l iberal i zat ion, promoting sustainable use of the natural envi ronment and human r ights .
Over the years PNG has announced bold foreign pol icy in i t iat ives such “Looked North” and “Work the Pacif ic” or gave pr ior i ty to “Reinforcing Core Relat ionships” and make sure that such bold commitments produce real tangible results . Thi s i s encompassing stance that PNG has also embraced in relat ionships pertaining to economic cooperat ion. In part icular , and more recent ly, PNG plays a more leading and prominent role in arrangements of pol i t ical and economic cooperat ion the in the Paci f ic region.
One such very important in i t iat ive is the Paci f ic Plan for Strengthening Regional Cooperat ion and Integration of 2004 with the fol lowing pr ior i ty goals—economic growth, sustainable development , good governance and securi ty. Speci f ical ly, st rengthening regional cooperat ion and integrat ion should result in : increasing the levels of sustainable returns to the Pacif ic , ensur ing the successful implementat ion of regional cooperat ion at nat ional levels , meet ing common responsibi l i t ies and providing services cost-effect ively and developing partnerships with neighbors and beyond.
PNG’s t rade relat ion with Austral ia, i t s major t rading partner , i s canvassed by the South Paci f ic Regional Trade and Economic Co-operat ion (SPARTECA) and with the other Paci f ic States by The Paci f ic Is lands Countr ies Agreement (PICTA) and Pacif ic Agreement on Closer Economic Relations (PACER). PACER i s inclusive of Aust ral ia and New Zealand whereas the former i s purely Pacif ic I s land States.
PNG has observer status on ASEAN .
6. Ins t i tut ional Framework
PNG Department of Commerce and Industry
The Department of Commerce and Industry was enacted to guide Papua New Guinea to maximize i t s potent ia l in commerce and industry for achieving sustainable growth, employment creat ion and income earning opportunit ies through increased part icipat ion in the global t rade and investment process.
The Department has the fol lowing funct ional responsibi l i t ies within the confines of the Miss ion Statement ;
• Plan, research, formulate and co-ordinate pol icies and programs relevant to the development of t rade, industry, commerce and investment that wi l l guide PNG to divers i fy i t s economic base and tap into new markets for i t s local products
• Review and int roduce appropriate pol icy opt ions for the faci l i tat ion of t rade, investment and industry development , including rural sector development
• Ensure that Government pol icies and programs tasked to the respect ive implementat ion agencies (IPA, SBDC, ICDC, NISIT) within the Minist ry are implemented
• Formulate and monitor appropriate pol icies to ass i st in mobi l i s ing local landowner groups to ful ly part ic ipate in spin-off act iv i t ies and related large commercial and industr ial projects
• Play a leading role in the coordinat ion and approval processes of major downstream processing and other industr ial projects
• Faci l i tate the expans ion of a st rong industr ial base through an integrated manufactur ing and market ing process
• Provide business and industry extension and support services to rural communit ies & industr ies
• Pursue pol icy opt ions with other l ine agencies to improve PNG's t rade advantage through internat ional establ ishments in the l ikes of the As ia Pacif ic Economic
Corporat ion, World Trade Organisat ion, ACPEU-Relat ion and other mult i lateral and bi lateral t rading arrangements
PNG Chamber of Commerce and Industry (PNGCCI)
Papua New Guinea Chamber of Commerce and Industry (PNGCCI) is a non-stock, non-profit, and non-government organization that plays an important role as representative, voice of the business communities in the country, by providing a unified approach to Government and other associations
Its objectives:
• To serve as the voice of PNG business and be an independent forum for the development of a consensus among the business community on matters of national concern
• To initiate, submit recommendations and assist in the formulation, development, implementation and evaluation of plans, policies, programs, and all other activities that will promote the interest of private business.
• To enhance the country's role and status in the community of nations • To establish and maintain linkages with global organizations representing agriculture. commerce
and industry • To act as primary liaison and channel of communication between business and government on
matters and issues of interest to both Contacts: Papua New Guinea Chamber of Commerce and Industry Lot 4, Section 139 Matorogo Street Express Freight Management Compound, Scratchley Road, Badili P.O. Box 1621, Port Moresby Papua New Guinea Tel. no. (+675) 321 3057/321 0966 Fax no. (+675) 321 7145 Email: [email protected]
