PNG Update: a quick overview of recent developments

Stephen Howes

Development Policy Centre

Australian National University

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Topics

1. Resource dependency 2. Growth and savings 3. The SWF saga 4. Oil Search loan 5. Ok Tedi 6. The surge in development spending 7. District Authorities 8. Free education and free health 9. Exchange rate policy and appreciation 10. The crisis of economics in PNG

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PNG is one of the world’s most resource-dependent economies: in the top 10

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Congo, Rep. Iraq EquatorialGuinea

Mauritania Saudi Arabia Angola Gabon Azerbaijan Mongolia PNG

Resource rents as a % of GDP, 2011

Average value of resource rents for 144 countries: 7.1%. Value for PNG: 29.9%. Source: World Databank 3

Soon to be in the top 3 or 4

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Congo, Rep. Iraq Equatorial Guinea Mauritania Saudi Arabia Angola Gabon Azerbaijan Mongolia PNG

The impact of LNG in 2015

Resource rents as a % of GDP, 2011

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Good recent growth performance

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-5

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Annual real GDP growth rate

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Based on the resources boom

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Resource-related sectors

Construction

Minerals and energy

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But the more resource-dependent the economy, the worse growth is as a welfare indicator

• GDP doesn’t include the depletion (depreciation) of natural resources.

• For a resource-rich economy, economic growth can simply represent a running down of the natural asset base • Cf a pensioner consuming their superannuation funds.

• What will happen when the funds/resources run out?

• A key challenge for a resource dependent economy is to replace natural resources by physical assets and human capital.

• If this happens, the economic growth will be sustainable, and the economy will become less resource-dependent.

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Genuine savings needed as a supplementary indicator • We can measure the sustainability of a resource-dependent economy

by examining its genuine savings National savings (investments in physical capital)

+ Investment in human capital (education)

- Resource depletion.

- How does PNG fare on this indicator?

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PNG’s genuine savings are often negative.

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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% o

f G

NI

Year Net savings & education Natural capital depletion

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And will likely become more negative

• Resource depletion to rise rapidly with LNG

• Investment up but so are deficits

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Sovereign Wealth Fund

• Adopted at end of 2011 as Organic Law (constitutional amendment)

• But did not follow correct procedure, so legislation is not binding.

• Since then, no progress on implementation

• No submission of revised bill.

• Oil Search loan uses LNG dividends intended for SWF, thus calling into question the entire SWF endeavour.

• PM has recently recommitted to SWF, but what sort of SWF?

• The model now being backed links the SWF to the Kumul Trust, and the financing of SOE and resource projects.

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Oil Search loan

• PNG has borrowed 3 billion Kina to buy a 10.1% share in Oil Search.

• This is the sort of thing a SWF might do.

• But there are questions around: • Legality and constitutionality

• Expense

• Conflicts of interest

• Lack of transparency

• Pre-emption of SWF

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Ok Tedi nationalization and SDP dispute

• OK Tedi was majority-owned by SDP, a Singapore-registered trust.

• But PNG Government took control, without compensation

• PNG Government also trying to take control of SDP’s other assets (USD$1.4 billion long-term trust fund).

• As a result all of SDP projects have come to a halt.

• Ok Tedi profitability and tax revenue have declined sharply.

• It is unlikely that the Government will get control of the trust fund. It therefore needs to find a compromise.

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Fiscal policy: PNG has massive government presence in economy (for a poor country)

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0 10000 20000 30000 40000 50000 60000 70000

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Government expenditure as a % of GDP v GDP per capita

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Surge in development spending

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

K b

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Development spending

Excl supplementary budgets and trust funds Supplementary budgets and trust funds

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The development budget is a bigger share of the budget than ever

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Ratio of development to total spending

Excl supplementary budgets and trust funds Supplementary budgets and trust funds

Note: Years where there is no red line are ones where there were no supplementary or trust fund allocations

The share of development spending in PNG is very large by international standards

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Malaysia SolomonIslands

Kenya Tanzania India Rwanda PNG

Ratio of development to total budget expenditure

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High level of development spending sounds good, but … • Heavy reliance on deficit financing.

• Squeezing of recurrent spending.

• Often low quality of spend: no capacity to spend so much development budget.

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High fiscal deficits

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-2%

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Deficit/GDP (%)

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There is no LNG revenue surge on the way

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Bill

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Revenue (million kina, 2012 prices) Revenue/GDP

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Squeezing of service delivery funds

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Since 1999, adjusting for inflation, recurrent budget has grown on average at 3.5% a year, but development budget on average at 9.9% a year.

In 2014, no increases, e.g, for school education, or road maintenance.

Lack of capacity to spend the development budget

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2012 2013 budget 2013 actuals 2014 budget

K b

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aid funded

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national

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District Authorities

• Late November 2013, District Authorities Bill passed.

• All public servants in the district, including police, teachers and health workers will come under the District Authority, whose CEO will be the District Administrator. The Chair will be the Open MP.

• Will replace the JDPBPC, but have a much broader influence.

• “District Authorities may help Open MPs to consolidate influence and power across their electorate, pursuing these political objectives may ultimately conflict with the goal of improving broad-based service delivery for the whole district.” (Colin Wiltshire)

• Also potential to pit Districts against Provinces resulting in bureaucratic waste.

• Source: http://devpolicy.org/without-fear-or-favour-oneills-district-authorities-to-build-capacity-and-consolidate-mp-powers-in-png-20140113/

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Free education and free health

• Free education has resulted in much higher enrolments, but at cost to quality.

• Free health threatens to undermine health service, since user frees are often the most important cash source, especially for government-run health centres.

• Most health centres don’t have banks, don’t have management boards, and need small amounts of cash during the year.

• Source: PEPE project https://devpolicy.crawford.anu.edu.au/png-budget-project

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Recent exchange rate appreciation

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USD/PGK

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On the 4th of June, by 16%

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When the BPNG Governor announced new bands

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The real import of which was to close the widening gap between the official and market rate

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Resulting in a de facto peg

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Problems and solutions

• Problems • No trading in the interbank market to allow official (interbank) exchange rate

to change.

• High exchange rate above market-clearing level may lead to rationing – or running down of FX reserves.

• Problem will not go away with LNG shipment.

• Solutions • Not a problem to introduce bands

• But need to get the inter-bank market operating.

• Or have BPNG auction dollars to banks to set a flexible market-clearing rate.

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The crisis of economics in PNG

• Economics is only taught in one university in PNG • That university (UPNG) has no economics lecturers • Demand for economists on the increase • Issues around retention relate to pay and quality as well as numbers. • UPNG, NRI and Treasury the losers. • UPNG making progress: wireless, PNG Update, some hiring, financial

workout, council restructuring, financial and quality audit, construction. • Some way to go: e.g. website, a lot more hiring. • Government and donors can’t afford to wait. Those with an interest in

economy policy in PNG need to support an urgent solution: fund expat economics lecturers to work at UPNG.

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Some academic salary comparisons: international

02000400060008000

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Monthly salary (USD, 2005 PPP)

Entry Top

0500

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Professorial salaries relative to GDP per capita (%)

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Some salary comparisons: domestic

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Comparable grades (using the university scales)

UPNG PS SA SOE

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“Successful countries owe a lot to an environment in which all ideas, good and bad, are exposed to review and vigorous debate.”

The Growth Commission, 2008.

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Thank you

www.devpolicy.org

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