Policy in Papua New Guinea: recent shocks, new directions

Transcription

1 Policy in Papua New Guinea: recent shocks, new directions Keynote Address, CPA PNG Conference, Lae, August Martin Davies Associate Professor Washington and Lee University Visiting Associate Prof, University of Papua New Guinea Visiting Fellow Australian National University

2 Outline Economic shocks over the past 5 years Recent economic history PNG Policy framework and objectives PNG s policy responses Foreign exchange market Adjustments to policy

3 PNG Economy small open resource-rich developing economy GDP/capital USD 2,700 (low-middle income) Independent, inflation targeting central bank setting interest rates to control inflation, then growth exchange rate: adjustable peg vs managed float capital mobility is low inflows or outflows don t respond to interest rate differentials (BPNG, IMF) marginal propensity to import is high government: private consumers?

4 PNG Economy: shocks last 5 years Demand Side Investment boom (LNG) then contraction ( then ) Fiscal expansion ( ) offset I spending ahead of LNG receipts Exports boom (2014) Revaluation (and then subsequent stepwise devaluation) (mid 2014) Terms of trade shock (oil/gas price fall) (late 2014) Fiscal contraction ( ) Forex control (rationing) (mid-2014) Supply side Oil price fall (2014) Increase in minimum wage (2014) Forex controls (2015)

5 Growth: real GDP and non-resource GDP Figure from Fox, Howes, Nema, Schröder (2017)

6 Figure from Fox, Howes, Nema, Schröder (2017)

7 Tax Revenue falling Evidence of recession Figure from Fox, Howes, Nema, Schröder (2017)

8 Government Borrowing: G - T Figure from Fox, Howes, Nema, Schröder (2017)

9 Government Debt (in nominal terms) Increasing debt Figure from Fox, Howes, Nema, Schröder (2017)

10 Macro Policy in PNG In an open economy, policy has two goals internal balance: producing at full employment (Y = Y f ) over-employment (Y > Y f ): increase in inflation underemployment (Y < Y f ): decrease in inflation external balance: current account is near zero: CA = 0 is large current account deficit: foreign investors question ability to repay debt. Is CA deficit bad? large current account surplus: protectionist / political pressure by foreign governments (e.g. 1980s Japan; China in the 2000s). default means redistribution to foreign country External balance can also mean balance of payments equilibrium (i.e. CA + FA = 0) Two instruments: exchange rate (E) expenditure switching Fiscal policy (G) expenditure changing

11 Internal Balance Internal balance: Y=Y f : Y f = C + I + G + EX(e) - IM aggregate expenditure = full employment output consumption (C) + investment (I) + gov t spending (G) + exports (EX) imports (IM) = Y f exchange rate = e (units of domestic currency per unit of foreign currency) Devaluation e our goods cheaper to foreigners export (EX) Increase in gov t spending: G Y > Y f (output is above its full employment level) To restore internal balance: revaluation ( e) our goods more expensive to foreigners exports (EX) Y returns to Y f

12 Expenditure switching,e Internal Balance Exchange rate, e Internal balance: Y = Y f IB Expenditure changing, G G

13 External Balance External balance (CA = 0): CA = Exports Import = EX(e) IM(Y) = 0 G increases aggregate expenditure income (Y) imports (IM) decreasing the current account ( CA) To restore external balance: devaluation e our goods cheaper to foreigners exports (EX)

14 External Balance Exchange rate, e External balance: CA = 0 EB G

15 Macroeconomic Goals Exchange rate, e EB (CA=0) 1 IB (Y=Y f ) G

16 Zones of Economic Discomfort Exchange Rate, e EB (CA = 0) IB (Y = Y f )

17 PNG: : LNG Investment boom ( I) e overemployment: Y > Y f current acc surplus: CA > 0 EB underemployment: Y < Y f current acc surplus:ca > 0 A. overemployment: Y > Y f current acc deficit: CA < 0 underemployment: Y < Y f current acc deficit: CA < 0 IB G 17

18 PNG: : LNG Investment boom ( I) e Y > Y f CA > 0 EB 1 (CA=0) Y < Y f CA > 0 A. Y > Y f CA < 0 Y < Y f CA < 0 IB 1 (Y=Y f ) G 18

19 PNG: : end of Investment boom ( I) e Y > Y f CA > 0 EB 1 (CA=0) Y < Y f CA > 0 A. Y > Y f CA < 0 Y < Y f CA < 0 IB 1 (Y=Y f ) IB 2 (Y=Y f ) G 19

20 PNG: 2014: increase in gov t spending ( G) e Y > Y f CA > 0 EB 1 (CA=0) Y < Y f CA > 0 A.. B Y = Y f CA < 0 Y > Y f CA < 0 IB 2 (Y=Y f ) IB 1 (Y=Y f ) G 20

21 PNG: 2014: export boom ( EX) e EB 1 (CA=0) EB 2 (CA=0) Y < Y f CA > 0 A. Y = Y f CA > 0. B Y > Y f CA < 0 IB 2 (Y=Y f ) Y < Y f CA < 0 IB 1 (Y=Y f ) G 21

22 PNG: mid-2014: revaluation ( e by 17%) e Y > Y f CA > 0 EB 1 (CA=0) EB 2 (CA=0) Y < Y f CA > 0 A... B C Y > Y f CA < 0 IB 2 (Y=Y f ) Y < Y f CA < 0 IB 1 (Y=Y f ) G 22

23 PNG: : fiscal contraction ( G) e Y > Y f CA > 0 EB 1 (CA=0) EB 2 (CA=0) Y < Y f CA > 0. D A... B C Y > Y f CA < 0 IB 2 (Y=Y f ) Y < Y f CA < 0 IB 1 (Y=Y f ) G 23

24 PNG: devaluation ( e) completing the square e Y > Y f CA > 0 EB 1 (CA=0) EB 2 (CA=0) Y < Y f CA > 0. D A... B C Y > Y f CA < 0 IB 2 (Y=Y f ) Y < Y f CA < 0 IB 1 (Y=Y f ) G 24

25 Forex Market: Balance of Payments what exactly is going on? BOP = Current Account + Financial Account = (Exports Imports) + (Capital Inflows Capital Outflows) = (Export + Capital Inflow) (Imports + Capital Outflows) BOP 2014 = - K861 mn BOP 2015 = - K753 mn Stock of excess kina (pent up demand for USD) BOP 2016 =Current Account (16.65 bn) + Financial Account ( bn) = K31 mn BOP 2017=Current Account (13.03 bn) + Financial Account ( bn) = K 1.36 bn (proj).

26 PNG: Market for Foreign Exchange (rationing e S FC Exports + Capital Inflows e * = 1 = A. Balance of payments deficit = Excess demand for forex / Excess supply of Kina - K861 mn (2014) - K753 mn (2015) D FC Imports + Capital Outflows S * D * Foreign Currency (USD)_

27 PNG: Market for Foreign Exchange: Current Balance of payments surplus = Excess supply of forex / Excess demand for Kina (K1.3 bn proj 2017) e S FC Exports + Capital Inflows Excess demand for forex / Excess supply of Kina e * = 1 = D FC D * FC D FC + RESIDUAL STOCK OF DEMAND for USD D * S * D * + RESIDUAL STOCK OF DEMAND Foreign Currency (USD)

28 So where is the foreign exchange? Exports: GDP vs GNP: not owned by PNG fops partners aren t spending it in PNG LNG partners: priority on debt repayment Tax receipts: accelerated depreciation: reduces tax payments Imports: big increase in G government high mpi: of every Kina spent, toea on imports gov t finance via bond sales raised in Kina (domestic market) sell bonds to foreigners

29 Micro-level consequences FX has become number 1 issue for PNG businesses (Fox and Schroder) Processing time of FX-orders: Currently 8-16 weeks Invoices outstanding now days vs d credit lines Firms with foreign parent or subsidiary have a big advantage to those that done MNEs cannot repatriate profits Administrative burden of FX-crisis increases costs Inflation.

30 Macro consequences of FX restrictions Exchange rate overvaluation => resource misallocation lower output and productivity growth, and investment. Businesses difficulty sourcing intermediate and capital goods from overseas imports have collapsed to historically low levels.

31 Figure from Fox, Howes, Nema, Schröder (2017)

32 National Income Accounting GDP = C + I + G + EX IM forex restrictions reduce imports M GDP (growth strategy) BUT PNG is a developing country: no substitutes for inputs two effects Investment (I) Y (direct) demand side supply side Y falls Production is constrained by inability to source key overseas inputs

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34 Inflation: Why is it increasing Stepwise devaluation => pushing up import prices Excess liquidity (possible) banking system is awash with reserves Excess Kina being held in banks FX rationing Reduces competition firms without foreign subsidiary reduce output vs firms with foreign subsidiary Excess demand Increases supply costs

35 Terms of Trade Figure from Fox, Howes, Nema, Schröder (2017)

36 Fiscal Situation deficit = Government Spending (G) - Tax (T) debt (B) to gdp (Y) ratio: d = B/Y circa 33% of GDP debt = sum of deficits over all time Debt dynamics: B grows at r Y grows at g with zero deficit: debt to GDP (d) grows at (r - g) if g > r then debt/gdp is decreasing the Troika forgot this! MAGIC NUMBER: r - g

37 Figure from Fox, Howes, Nema, Schröder (2017)