Papua New Guinea Budget 2019 Building a Broader Based Economy Budget Alert

Transcription

1 Papua New Guinea Budget 2019 Building a Broader Based Economy Budget Alert

2 Other es reform 2018 Deloitte PNG 2 2

3 The key themes to the 2019 Budget are: Restructuring Government debt - borrowing smarter Focusing on revenue collection, including: Continued implementation of the medium term revenue strategy for tax reform and strengthening the IRC - taxing smarter Continued enforcement of Public Monies Management Regularisation (PMMR) Act 2017 to sweep revenue into the Consolidated Revenue Fund Diversification of the economy through policies encouraging Small to Medium Enterprises, agriculture projects and tourism Maintaining expenditure discipline and continued focus on supporting priority s Clearing the foreign exchange imbalance in the coming months through use of improved foreign currency receipts and external deb Other es reform 2018 Deloitte PNG 3 3

4 Key Indicators The 2019 GDP growth rate is forecast at 4.0%, with inflation easing to around 5.4% GDP growth is forecast at 0.3%. The 2018 fiscal deficit (estimated at K1,897.2 million) is lower than anticipated, forecast at a debt to GDP ratio of 30.9%. This ratio is expected to reduce to 30.8% in The 2019 current account surplus is expected to be K21,062.5 million, or 23.8% of GDP, which is a 4.3% decline from the 2018 estimate. Expenditure 2019 Budget Expenditure envelope has increased by 5.5% on the expected 2018 outturns due to increased revenue forecasts (e.g. 50% minimum dividend policy rate for State Owned Enterprises). Key Government expenditure will focus on Tuition Fee Free Education, Free Primary Health Care, key national infrastructure projects, the Provincial and District Services Improvement Program, Agriculture, Tourism and Small to Medium Enterprises (SMEs). To curb rising public payroll costs, which were significantly over budget, a major overhaul of Government payroll processes will be undertaken in an effort to keep personnel emoluments to 6% of GDP. Other es reform 2018 Deloitte PNG 4 4

5 Fiscal Reforms Its been a relatively quiet year for fiscal reforms given the changes of the past two years. Most notable is a reduction to personal income tax to assist low earners, and removal of zero rating for resource companies Significant tax reforms still lie ahead as part of the medium term revenue strategy, which the Government remains committed to. Other es reform 2018 Deloitte PNG 5 5

6 Other es reform 2018 Deloitte PNG 6 6

7 Key facts and Table 1: Key macroeconomic indicators (Source: Department of Treasury) growth 2017 Actual 2018 Proj 2019 Proj 2020 Proj 2021 Proj 2022 Proj Total real GDP (%) Non-Mining Real GDP (%) Inflation Average on Average (%) Dec on Dec (%) Real Exchange Rate Index (2007 = 100) Interest rate Kina Rate Facility (KFR) Inscribed Stock (3 year yield) Mineral Prices Gold (US$/oz) 1,258 1,261 1,218 1,255 1,257 1,343 Other es reform Copper (US$/tonne) 6,166 6,476 6,200 6,270 6,220 6,318 Oil (Kutubu Crude: US$/barrel) Nickel (US$/tonne) 10,415 11,190 9,556 10,648 10,648 12, Deloitte PNG 7 7

8 Key facts and Table 2: Overall Budget balance (Source: Department of Treasury) 2018 Budget 2019 Budget Revenue 12, , Expenditure 14, , Net deficit -1, , % of GDP Government debt (Km) 25, ,322.2 Government debt (% GDP) 32.20% 30.8% Continuous emphasis will be placed on revenue collection through increasing compliance efforts, new revenue, and non-tax revenues. An increase of 12.1% is predicted in the total revenue and grants for This additional revenue is to be used to fund the Government s priority and infrastructure and social program but importantly to reduce arrears, complete on-going projects and fund expenditure savings initiatives. Other es reform 2018 Deloitte PNG 8 8

9 Other es reform Snapshots 2018 Deloitte PNG 9 9

10 2019 Budget Underpinnings Key Metrics 2019 Growth forecast at 4%: the Growth Drivers Growth will be realised from recovery of Oil & Gas and from new resource project developments, which will also drive non-mining economy. Continuing uncertainty over reforms to the resource, and the early stages of resource agreement negotiations means some challenges remain ahead for this economic driver. Diversification of the PNG economy with: Expected growth in Rice, Sugar, Oil Palm, Cocoa, Coffee and Livestock Growth of Small to Medium Enterprises (SME). Significant resources to be put into this including: training; the unveiling of Credit Guarantee Corporation to facilitate lending to the ; and opening of industrial parks. A focus on growing Tourism. Encouraging investment through joint public / private initiatives. Supplementing regional infrastructure development with projects funded by infrastructure tax credits. Other es reform 2018 Deloitte PNG 10 10

11 2019 Highlights 31.9 % 32.2 % 30.8 % Debt (% of GDP) 2017 Debt (% of GDP) 2018 Debt (% of GDP) 2019 Other es -2.4% -2.5% -2.1% reform Deficit (% of GDP) 2017 Deficit (% of GDP) 2018 Deficit (% of GDP) Deloitte PNG 11 11

12 2019 Highlights Chart 1: Estimated commodity prices (Source: Department of Treasury) Copper (US$/ton) Oil (US$/barrell) Gold (US$/oz) LNG (US$/tcf) 2018 Deloitte PNG 12 Other es reform 12

13 2019 Budget Funding Highlights Smarter Borrowing 2018 has seen improvements to and significant achievements in the funding position, which will benefit 2019 and beyond: Public Monies Management Regularisation (PMMR) Act 2017 resulted in the significant transfers into the Consolidated Revenue Fund. This is expected to continue into year sovereign bond issue raised USD 500m, with interest set at 8.375%. This was oversubscribed sevenfold. The bond issue coincided with increased awareness of PNG through APEC, and is expected to facilitate further borrowing at better rates. Loans from ADB, the World Bank (each USD 300m over 3 years) and a Commercial Bank loan (USD 300m in 2019 for Budget support, interest rate expected around 6.5%). These will be used for: Debt restructuring, with reduction in less favourable short-term debt; and Clearing backlog of foreign currency calls. A debt to GDP ratio of 30.9% is forecast for 2018, down to 30.8% for This is on track to meet the target ratio capping of 30% by For State Owned Enterprises, a 50% minimum dividend policy rate to be introduced. Other es reform 2018 Deloitte PNG 13 13

14 2019 Highlights Chart 2: Where does PNG s revenue come from? (Source: Department of Treasury) Revenue revenue Other Revenue Grants 7% 18% 75% Other es reform 2019 revenue is projected to be PGK14,266.8 million, principally funded from tax revenues and based on an improved economic outlook. The 2019 budget marks the second year of implementing the Medium Term Revenue Strategy (MTRS) and the revenue target remains on track with a number of tax reforms articulated in 2019 revenue plan. More public entity trust accounts will be swept into the Consolidated Revenue Fund (CRF) in the 2019 Budget which is expected to generate K750.6 million Deloitte PNG 14 14

15 2019 Highlights Table 3: revenue by source (Source: Department of Treasury) Revenue (Kina million) Actuals Budget Revised Budget Income (PIT) 3, , ,949.5 Company (CIT) 1, , , ,556.3 Mining and Petroleum es (MPT) Withholding and Other Income es , , , ,188.8 Stamp Duties Excise Duty Import Excise Bookmakers' and Gaming Machine Turnover Other es on Goods and Services Import Duty Export Grand Total 9, , , , saw a decrease in PIT collections due to expected compliance activities that did not materialize. It was also noted taxpayers used credits to offset PIT liabilities. As a result in 2019 the administration of credit offsets against PIT liabilities will be halted. In 2019 CIT revenue is expected to accelerate with the establishment of the Large Payers Office (LTO). The abolishment of double deduction for training levy is expected to generate K151 million in MPT performed strongly in 2018 with the global commodity price increases and revamping of additional profits taxes revenue projections have taken this into consideration. expected to increase in 2019 with the removal of zero rating status for resource companies and projected higher economic growth Deloitte PNG 15 Other es reform 15

16 2019 Highlights Chart 3: Other revenue by source (Source: Department of Treasury) Grand Total Transfers, not elsewhere classified Fines, Penalties and Forfeits Sales of Goods and Services Property income 2019 budget 2018 Revised 2018 Budget 2017 Actual Actual 2018 Budget 2018 Revised 2019 budget Grand Total , , , Transfers, not elsewhere classified , Fines, Penalties and Forfeits Sales of Goods and Services Property income , , , Other es reform In 2019 other revenue is projected to increase by 5%. A total of K1.205 billion is expected in dividends from various entities including an K800 million from Kumul Petroleum Deloitte PNG 16 16

17 2019 Budget Other points to note Key Government Priorities Priority s Health and education Law and order Nation building infrastructure Support for the development of SMEs Advancing financial inclusion through financial literacy programs Adopting digital services and spreading mobile banking capabilities. Spending power Inflation forecast for 2019 down to 5.4%, from a 2018 forecast of 5.6%. On a real wage basis, minimum wages declined by 5.4% in line with inflation. The minimum hourly rate of K3.50 (K per week) remains. Formal employment expected to increase strongly in the second half of 2018 (with manufacturing anticipating 15% employment growth in 2018). This trend forecast to continue into Other es reform 2018 Deloitte PNG 17 17

18 2019 Highlights Chart 4: Where does PNG s expenditure go? (Source: Department of Treasury) Expenditure 2018 (Kina,Mn) Provinces 3,925 3, (Kina,Mn) Expenditure as a % of total budget 2019 Community and Culture 1% Utilities 4% Administration 3, ,065 Debt Services 1, ,979.1 Transport 8% 5% Provinces 19% Health 1, ,553.1 Education 1, ,378.2 Law and Justice 8% Law and Justice 1, ,298.1 Transport , Community and Culture Education 8% Health 10% Debt Services 12% Administration 25% Other es reform Utilities Provinces Administration Debt Services Heath Education Law and Justice Transport Community and Culture Utilities Expenditure efficiency strategies will also be supported by the implementation of Non-Financial Instructions (NFIs). Department of Treasury was to issue NFIs and all government funded agencies are expected to report on the implementation status by April Deloitte PNG 18 18

19 2019 Highlights Table 4: Funding by Donor (Source: Department of Treasury) Donor Grants Loans Total Percentage DFAT (Australia) % EU % UN % NZ % China % ADB % WB % JICA % Ceska / Erste % IFAD % Indian EXIM Other es reform EIB Grand Total , Deloitte PNG 19 19

20 2019 Budget Other points to note Saving for the Future Superannuation By the end of 2018, Government to have fully settled liability owed to Nambawan Super for public service members exiting between 2016 and Ongoing exit payments expected to be K10m a month. Reference was made to reforms allowing non-mandatory but voluntary contributions for noncitizens, the self employed, and informal. Sovereign Wealth Fund (SWF) SWF Board to be established in However, SWF will not be fully operational until fund balances have been built up (from resource receipts). No expected date specified. Other es reform 2018 Deloitte PNG 20 20

21 Others es Reform Other es 2018 Deloitte PNG 21 reform 21

22 Other es reform 2018 Deloitte PNG 22 22

23 Key Measures Loss carry forward period reduced: For and Primary Sector to 20 years (currently unlimited); and For other businesses from 20 years to 7 years. Non-Resident Insurer returns move to a monthly basis with payment 21 days after month end (currently annual). Technical adjustments made to Prescribed Contracts, Country by Country Reporting and Dividend Withholding payment regime. Loss carry forward rules substantially amended from 1 January 2019 with retrospective effect Other es reform 2018 Deloitte PNG 23 23

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25 Key Measures Zero rating for supplies to the resource companies removed from 1 January Offset of credits against Salary or Wages taxes no longer to be allowed. Zero rating changed to deal with perceived evasion by suppliers. Unless IRC refund process improves, these are likely to create significant cash flow difficulties for resource companies. Other es reform 2018 Deloitte PNG 25 25

26 Other es reform 2018 Deloitte PNG 26 26

27 Key Measures New Income Band Increased resident s tax free threshold from K10,000 to K12,500 Increasing the second tier tax band from K18,000 to K20,000 e Loss carry forward rules reduced from 20 to 7 years Educational rebate removed (25% X Expenditure to a maximum of K750) This measure gives back to individuals, with principal benefit aimed at the lower income earners. Other es reform 2018 Deloitte PNG 27 27

28 Key Measures Current rates and thresholds - Residents Proposed rates and thresholds -Resident able Income 1-10,000 0 Marginal tax rate able Income 1-12,500 Marginal tax rate 0 Cumulative benefit +K550 10,001 18, ,001 33, ,001 70, ,501 20, K710 20,001 33, ,001 70, Other es reform 70, , , , , , Deloitte PNG 28 28

29 Other Key es Changes Other es reform 2018 Deloitte PNG 29 29

30 Other key tax changes Key Measures IRC granted powers to prosecute IRC officers and other external offenders in respect of corrupt practices. Income Regulations amended to allow Commissioner General to make decisions on outstanding Research and Development claims without the input of other officials or experts. This is a welcome move aimed at relieving the current impasse. The regime ceased in Due date for Business Income tax has been moved to 21 st of the following months in line with other withholding taxes. However, no changes to salary or wages tax deadline announced. Administration Act (TAA) was gazetted in August However, the TAA remains subject to the provisions of the existing tax Acts. Other es reform 2018 Deloitte PNG 30 30

31 Other taxes Customs Duty Introduction of 25% duty rate on imported milk and cream products. Increase in import duties on meat and offal from K1.80 per Kg to K3.50 per Kg. Increase in import duties on fish products. Increase in duties on various wood products and furniture from 30% to 50%. Trump s? Measures to protect and encourage Local Industry, especially in the SME Sector Other es reform 2018 Deloitte PNG 31 31

32 Other taxes Excise Duty Adjustments to the indexation of alcohol and tobacco base rates and deferral of the increases for 18 months Removal of excise on items no longer considered luxury items (e.g. Television). Export duties levied on Sea Cucumber to preserve stocks (K15 per Kilo) Other es reform 2018 Deloitte PNG 32 32

33 Future Reforms Other es reform 2018 Deloitte PNG 33 33

34 Future Reforms What s on the Horizon The Budget papers specifically mention the following reforms: Introduction of a Capital Gains. Simplified SME tax Turnover less than K250,000, Cash basis taxation. Sugar - aimed at soft drinks. Minimum tax at 2% of revenues for loss making companies. Mobile Telecommunications Additional profits tax for Telecommunications operators. These areas are due for further discussion with stakeholders during the next year Other es reform 2018 Deloitte PNG 34 34

35 Future Reforms Other Medium Term Revenue Strategies still being considered rate increases If revenue is needed. tax rate decrease (excluding resource ). exemption of Charities and Aid Organizations. Superannuation reform. Act rewrite. taxation. MTRS is still the main thrust behind Government fiscal policy Other es reform 2018 Deloitte PNG 35 35

36 Sector Other es reform 2018 Deloitte PNG 36 36

37 Sector Reforms In 2019 the Government will embark on the following: Amending the Mining and Petroleum Acts. Policy for the State participation in resource projects and third party access to the Oil and Gas. Policy to guide the distribution of benefits to landowners and sub-national governments. Policy for domestic market obligations for Gas and Petroleum products. Introduction of policies and frameworks around ensuring national content. Policy being amended to better guide the Government on participating in resource projects Other es reform 2018 Deloitte PNG 37 37

38 Sector Parameters for future fiscal regime Revenue maximization minimum state share must be 50% in the early part of the project (without deterring investment). Cost and risk minimisation. Global competitiveness. Standardisation of fiscal terms (on a less concessional basis). Segmentation treating upstream and midstream taxation of projects separately. Other es reform The existing fiscal regime is considered reasonably concessional on global standards 2018 Deloitte PNG 38 38

39 Benjamin Lee Managing Partner Andrew Harris Partner and Business Services Declan Mordaunt Principal and Business Services Antonio Bernabe Principal and Business Services Sanchika Sutharshan Director and Business Services Other es reform 2018 Deloitte PNG 39 39

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