PNG economic survey

Transcription

1 PNG economic survey Rohan Fox, Stephen Howes, Nelson Nema, Win Nicholas and Manoj Pandey UPNG SBPP Division of Economics & ANU Crawford School Development Policy Centre 1

2 Introduction Joint project of Division of Economics, School of Business and Public Policy, UPNG and Development Policy Centre, Crawford School of Public Policy, ANU Provides a survey of key economic developments Focus this year on economic growth, macroeconomic developments and structural policy response 2

3 Economic Growth 3

4 PNG s growth slowdown Real GDP Growth Rates (%) All sectors and non-mining sectors: p 2017p 2018p Year Real GDP Growth Rate_all Real GDP Growth Rate_non-mining p: projected Source: NSO/Treasury/BPNG 4

5 Employment growth negative since 2014 Q4 Formal sector employment growth (quarterly, year on year) 2008q1:2016q % q1 2008q3 2009q1 2009q3 2010q1 2010q3 2011q1 2011q3 2012q1 2012q3 2013q1 2013q3 2014q1 2014q3 2015q1 2015q3 2016q1 Year (quarter) Employment Growth Lowess Curve Source: QEB Statistical Tables, BPNG 5

6 Imports down below 2007 levels Goods import in Papua New Guinea Value and % annual change: % annual change Year Import value for goods % annual change in import value of goods Source: QEB Statistical Tables, BPNG 6

7 Visitor arrivals still growing, but slowly Visitor Arrivals in Papua New Guinea Numbers and % annual change: % Year Number of visitors arrival % Annual change in number of visitor arrivals Source: PNG Tourism Promotions Authority (PNG-TPA) 7

8 Growth summary Overall, the indicators suggest a sharp slow down in domestic economic activity. Even if GDP growth is still positive, many indicators are suggestive of an economic recession in PNG. A key challenge for the government is therefore how to stimulate the economy through its macroeconomic tools which is the subject of the next section. 8

9 Fiscal Developments 9

10 Kina billions (2015 prices) Expenditure has outpaced revenue Source: Treasury Revenue - FBO GFS1986 Revenue - Projections 2015 Budget Revised Expenditure - GFS2012 Revised Revenue - GFS2012 Expenditure - FBO GFS1986 Expenditure - Projections 2015 Budget 10

11 Kina billions (2015 prices) 10 9 Both mineral and economy-wide taxes have fallen 8 7 Unanticipated Expected due to fall in commodity prices Mining and petroleum taxes Other taxes Non-tax revenue Source: Treasury budget 2015 actuals 11

12 KINA BILLION (2015 PRICES) Harsh cuts to critical services, reprioritization, 2013 vs Constituency funds switch Due to deficits Economic & agriculture Source: BPNG and Treasury Education Health Transport & infrastructure Law & Order Rural development (incl. PSIP) Interest payments 12

13 % of GDP Fiscal deficits are very large 4% 2% 0% % -4% -6% -8% -10% -12% Source: Treasury GFS1986 GFS2012 Projections 13

14 % GDP Debt is rising and borrowing difficult 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Treasury Debt/GDP - actuals Revised FRA limit 14

15 Fiscal Policy Reflections Cash flow problem due to (i) limited domestic appetite for further lending to the government and (ii) significant reduction in tax collections Expenditure cut in health and education not a solution Government needs to stimulate economy and examine the scope for tax increases to boost revenue, and reprioritize expenditures through cuts in the constituency spending 15

16 Exchange Rate 16

17 Recent modest nominal depreciation TWI AUD & USD Source: BPNG 17

18 % Inflation remains at about 6% Source: BPNG 18

19 (Index; 2010=100) Real exchange rate at a record high Real Effective Exchange Rate Modest depreciation + higher inflation as compared to trading partners Source: World Bank (2016) 19

20 USD billions Foreign exchange reserves are falling Over-valued exchange rate, foreign exchange rationing Source: BPNG 20

21 Foreign exchange rationing Overvalued currency leads to excess market demand To cater, BPNG needs to provide foreign currency to the market but not enough reserves available. Result: forex rationing Wait list is as high as 1 billion USD Imports are compressed Business deferring investment in lack of forex 21

22 Kina depreciation modest by Country international comparisons %Δ exchange rate 1 June June 2016 Natural resource rents as % of GDP Mozambique Brazil Zambia South Africa Mexico Norway Madagascar Uganda PNG (interbank rate) Australia Ghana Chile Peru Indonesia Mongolia PNG (market rate) Solomon Islands Source: World Bank 22

23 Source: Koh (2015) Oil prices shocks and macroeconomic adjustments in oilexporting countries International Economics and Economic 23 Policy Lessons from cross-country research Oil exporters with more flexible exchange rate regimes have a smaller GDP and government spending shock when oil prices fall

24 Lesson from international experience Several oil-exporting economies have moved to more flexible exchange rates in response to commodity price falls Examples include Azerbaijan, Colombia, Kazakhstan, Malaysia, Nigeria and Venezuela. PNG has done the opposite. Needs to stimulate growth through more flexible exchange rate 24

25 Structural policy 25

26 New policy initiatives Ban on vegetable agricultural imports Introduced last year, then lifted again, now reintroduced. Also further discussions of rice import quotas SME policy Goals of policy to increase employment, income per capita, SME contribution to GDP, local ownership Foreign ownership of businesses in several areas (e.g. trade stores, tourism) to be restricted. Land policy Ban of foreign ownership and leasing of land Existing foreign leases have to be given up within 30 years 26

27 Commentary on the new policies All protectionist in nature, limiting trade and investment. Limiting trade will increase domestic output, but push up higher prices. Limiting foreign investment will reduce output. Unclear if policies will be implemented, but the announcement effect may further scare off foreign investment, already deterred by foreign exchange rationing. 27

28 Conclusion 28

29 Conclusion In the face of economic slowdown and severe government expenditure cuts, the government needs to stimulate the economy, but lacks borrowing capacity. The real exchange rate is at a record high. Rather than introducing protectionist measures, would be better to allow further currency depreciation. This would have an immediate impact, and would not scare off foreign investors. 29

30 Thank you! 30