As the green shoots turn brown: The challenges to transforming today s boom into better living standards tomorrow Tim Bulman The World Bank 29 June, 2012
What we will be talking about PNG s recent economic boom Has transformed the economy in important ways and policy makers have handled the challenges well, at a macrolevel Big Rocks: Where are the risks, and where are the opportunities for pro-poor action and change? The risks around being a commodity-dependent economy And how this can make it harder to deliver quality services Rocks on the horizon in mid-2012 DISCUSSION: How can policy makers manage these risks?
The global commodity price boom Transforming PNG
350 300 The long perspective on commodity prices This is the 3 rd commodity boom since WWII Korea War (real price indices, deflated by manufacturing prices, 2000=100) Oil crises Recent boom 250 Agriculture 200 150 Base metals 100 50 Energy 0 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 Similarities: concern about food security and natural resource depletion. Difference: This boom is more broadly-based (energy, metals & agriculture), has lasted longer. Source: World Bank DECPG
The commodity price boom and PNG Supporting the macroeconomy 16 PNG s economy: the long view (annual growth and GDP per capita, 100 in 1975) ~USD 1500 PPP GDP per capita % 20 Real GDP per capita Index 120 (index, RHS) 100 12 8 4 GDP growth Non-mineral GDP growth 0 Ok Porgera Lihir LNG Tedi BCL -4 closes Misina Gobe approved Kutubu oil oil -8 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011e 80 60 40 20 0 Sources: Treasury, World Bank, IMF
The commodity price boom and PNG lifting sectors across the economy Recent growth driven by investment in future resource production Actual minerals and oil & gas output have been declining Real production growth (year-on-year percentage change) Sources: Treasury, NSO
The commodity price boom and PNG lifting sectors across the economy An investment boom funded by FDI raising output, including in sectors unrelated to natural resources Eg, 30,000 Digicel credit resellers Landowner companies connected to individual resources projects maturing into larger, sustainable businesses Eg, Transwonderland, Anitua (owner of National Catering Services), ipi %USD 2100 m 1800 1500 1200 900 600 300 0 Net foreign direct investment Composition (2012, Nominal GDP) Agriculture (30%) Mining (18%) Manufacturing (6.6%) Utilities (2.1%) Construction (16%) Trade (8.3%) Transport, Store, Comms (3.2%) Finance & Bus. Services (4.4%) Community & Social Serv. (8.4%) -300 2001 in Papua 2003 New Guinea 2005 2007 2009 2011 Sources: IMF, BPNG, Treasury
Policy amidst the booms
Policy in this boom Restraining inflation The strengthening Kina has been policy makers main inflation control tool Interest rates, minimum reserve requirements and central bank bill issuance have been less effective No surge in lending, as banks search for customers while the government built a considerable deposit base in commercial banks Banks lending (year-on-year growth) 48 % 42 36 30 Total* 24 18 12 6 0 The -6 World Bank Group in Papua 2005 New 2006 Guinea 2007 2008 2009 2010 2011 Mining Personal Trans. & Comms 0-2 Manufacturing -4 Agriculture -6 Real estate Commerce PGK 6 bn. 4 2 PGK/ 1.2 USD 1.0 0.8 0.6 0.4 0.2 0.0 1991 Kina exchange rates 1994 1997 2000 Government deposits and short-term paper issuance (PGK billions) -8 2006 2007 2008 2009 2010 2011 USD/PGK (LHS) Real EER (RHS) 2003 2006 2009 2012 BPNG (national) Commercial banks (subnational) Commercial banks (national) T-Bills CB Bills Index 150 140 130 120 110 100 90 80 Sources: BPNG, World Bank calculations
Policy through the booms More adept macro-management in recent years Much stronger growth in PNG s export prices, supporting public finances government spending slightly more restrained than revenue growth, allowing public debt to be cut (with occasional slippages) Index 220 % 12 Average export prices (2000=100) 190 160 130 2005-'11 1990-'96 Budget balance (% of GDP) 8 4 0-4 -8-12 1990-'96 2005-'11 100 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011-16 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011 Government consumption (constant 2010 kina) Real 3500 PGK m. 3000 2500 2000 1500 1000 2005-'11 1990-'96 Public debt (% of GDP) % 60 50 40 30 20 1990-'96 2005-'11 500 10 0 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011 0 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011 Sources: BPNG, Treasury, IMF, World Bank and staff calculations
Policy through the booms leading to better outcomes More prudent macroeconomic management leads to better outcomes: Slower growth in consumer prices (ie, stronger real wages), stronger employment growth 18 % Index 175 CPI Inflation (annual) 15 12 9 2005-'11 Employment (index) 150 125 2005-'11 USD / PGK 1.2 1.0 Exchange rate (PGK / USD and real effective exchange rate) 6 3 0 0.8 0.6 0.4 0.2 0.0 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011 1990-'96 2005-'11 1990 1991 1992 1993 1994 1995 1996 1990-'96 2005 2006 2007 2008 2009 2010 2011 Real minimum wage (2011 PGK per week) 100 75 2011 PGK 120 / wk 100 80 60 40 1990-'96 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011 2005-'11 1990-'96 1990 1991 1992 1993 1994 1995 1996 2005 2006 2007 2008 2009 2010 2011 Sources: BPNG, Treasury, IMF, World Bank and staff calculations
Policy in a commodity-reliant economy
1. Budgeting in a commodity-reliant economy Accurate commodity price forecasts and other impossibilities With the boom in prices, commodity prices have become more volatile Prices are much more volatile in the past half-decade than in the previous 30 years Implied price volatilities, global grains (annual,1990-2010) Source: FAO (2010), Food Outlook, November, In Price Volatility in Food and Agricultural Markets: Policy Responses
1. Budgeting in a commodity-reliant economy and how they can disrupt spending Forecasters tend to assume that prices will trend near whatever level they are at whenever they are making their forecasts But they don t This means forecasts tend to be too low when prices are rising.and too high as prices retreat For these sorts of prices, the wisdom of crowds may be as good a forecast as any crowds of commodity price forecasters, surveyed regularly Copper Crude oil Gold Sources:, Treasury, Consensus Forecasts inc, World Bank commodity prices and forecasts
1. Budgeting in a commodity-reliant economy and how they can disrupt spending BUT this is only true if the losses and costs from over-forecasting match those of under-forecasts For governments they DO NOT Where buffers are limited, under-forecasting can lead to spending reservations and disrupted programs or unsustainable deficits & debt Where fiscal discipline is poor, over-forecasting can lead to ill-planned poor-quality spending programs introduced late in the planning cycle Central government revenues Central government spending Sources:, Treasury., IMF, World Bank staff calculations
2. Policy-makers in a commodity-reliant economy Why deliver quality services when incentives are weak? The thesis of Why nations fail (Acemoglu & Robinson, 2012): Economies dominated by a few extractive economic sectors tend to have more extractive political institutions These rarely encourage innovation to be rewarded, and growth to become sustained and broadly-based The incentives for policy makers to provide quality public services are poor Few citizens pay taxes, and so weaker incentive to demand public services An elite can do better under an extractive status quo than the more inclusive alternative This is a primer of the risks with concentrated, extractive-sector driven growth (not where PNG is today ) While PNG s recent boom is notable for the breath of growth across sectors, much has been linked to narrow investments, or the reforms of a decade ago Risks are likely to be greater when sectors become more capital- or lowskill-labor intensive these are less inclusive
2. Policy-makers in a commodity-reliant economy Why deliver quality services when incentives are weak? Public spending on education (% govt. expenditure) Public spending on education 2008/9 or most as recent a share data available of total government spending (2009) World 2009 Pacific World 2008 30 Tanzania 25 Vanuatu 20 Micronesia Fiji 15 10 Tuvalu Timor Leste Kiribati Solomon Islands Papua New Guinea Tonga Marshall Islands Samoa 5 0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 GDP per capita PPP Source: World Bank staff calculations from publically available date
2. Policy-makers in a commodity-reliant economy Why deliver quality services when incentives are weak? 100 Literacy rates among youths, aged 15-24 (2009) 2009 or most recent data available Tonga Samoa Tuvalu Micronesia Marshall Islands Vanuatu Literacy rate, youth (% of people ages 15-24) R² = 0.4359 Palau 90 Solomon Islands 80 Angola 70 Papua New Guinea 60 50 Chad 40 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 GDP per capita PPP Source: World Bank staff calculations from publically available date
Big Rocks: Risks to the outlook and turning the passing boom into lasting gains in living standards
Big Rocks: The outlook This growth cycle has reached its peak Non-mineral growth likely to moderate into mid-decade, to a little below 5% PNG-LNG construction moves to completion Construction will subtract from aggregate GDP growth Weaker Kina prices for commodities will drag incomes Considerable pipeline of new resource and other projects Working through planning and appraisal, but not yet approved Big implications on the economy of which projects end up going ahead Temporary or lasting impact on jobs? Using already-exhausted or needing new infrastructure? Etc. Issues of generating jobs for the growing workforce gaining experience in the formal economy But: Innovations elsewhere in the economy support domestic demand Rising mobile phones penetration, and associated spin-offs, particularly mobile banking Inflation likely to remain strong New supply capacity is coming on-line, reducing price pressures But considerable ongoing structural change across the economy
Big Rocks: The risks External: commodity prices are weakening Commodity demand and prices are retreating from recent peaks The 25% appreciation in the Kina further subtracts from farmers and the government s Kina-denominated incomes Pre-committed FDI inflows may further reduce the effectiveness of swings in the Kina to offset volatile commodity prices Commodity prices are likely to weaken but remain more volatile tied to uncertainty around the global economic outlook Index 300 250 Food Metals Crude oil (RHS) USD 150 /bl 125 200 100 150 75 100 50 'Bad' European crisis 50 25 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 0 Source: World Bank DECPG
Big Rocks: The risks and this volatility tends to buffer PNG % 9 8 7 6 5 4 3 2 1 0 (Output volatility and non-output-related revenue volatility) Standard Deviation in Output (1996-2010) Standard Deviation in Revenue as % GDP (1996-2010) But: PNG s export destinations are diversified compared to most EAP countries In the long-term the Sovereign Wealth Fund can reduce the budget s exposure to this volatility Supporting planning and execution of spending But need considerable resource receipts to make it effective and build the buffers which till take some years Source: World Bank staff calculations
Big Rocks: The risks and PNG is vulnerable to this sort of crisis Dimension Indicator Low Vulnerability Moderate Vulnerability High Vulnerability Commodity exports/total exports <25% (25%-50%) >50% Exports/GDP <20% (20%-30%) >30 % External Remittances/GDP <2% (2%-8) >8% Reserves/Gross External Finance Requirements >1yr. (6months-1yr.) <1yr Current account balance/gdp >0 (0,-3) <-3 Fiscal Monetary & Exchange rate Financial Social Primary Fiscal Balance/GDP >1.5 % (1.5%, -1%) <-1% Debt/GDP <25% (25%-60%) >60% Gross Public Financing Needs/GDP <5% (5%-12%) >12% Mandatory spending/total <50% (50%-70%) >70% Commodity Revenue/total <10% (10%-20%) >20% Inflation <3.5% (3.5%-7%) >7% Inflation Expectations <3.5% (3.5%-7%) >7% Real Interest Rate >1.5% (0%-1.5%) <0% Exchange rate Flexibility Independent float Managed float Fixed Peg International Reserves/GDP >15% (10%-15%) <10% Share of foreign liabilities in total bank liabilities <10% (10%-25%) >25% Capital to Asset Ratio >8% (6%-8%) <6% NPL Ratio <3% (3%-6%) (>6% Loan to Deposit Ratio <70% (70%-100%) >100% Credit to GDP growth (0%-5%) (5%-10%) or (-5%,-10%) >10% or <-10% Povert Sensitivity low (1 % drop in growth <0.5 %-age point increase medium (1 % drop in growth (0.5-1) %age point increase high (1 % drop in growth >1 %age point increase Unemployment rate <7% (7%-10%) >10% Poverty Headcount $1.25/day <10% (10%-30%) >30% Gini Index <0.3 (0.3-0.5) >0.5 Safety nets Strong basis for response Moderate basis for response Weak basis for response
Big Rocks: The domestic risks Up-side potential too Resource-rich economies face even greater developmental challenges PNG has created a climate that attracts investment (But investment climates are fragile and outsiders are getting worried) and is developing institutions to ensure that its wealth supports a stable macro-economy Challenge is to avoid the resource curse : Ensure political leaders have the incentives to turn the nation s wealth into long-term, broad-based development Rather than developing institutions that allow this wealth to be turned into short-term private rents There are upside risks too: Realizing the pipeline of resource projects and integrated mega-projects Emergent Papua New Guinean businesses and growing reach of the cash economy accelerated by new mobile technologies These are the basis of PNG emerging as a middle-income country with a solid middle class
Papua New Guinea Economic Briefing Transforming today s boom into better living standards tomorrow Tim Bulman The World Bank 11 April, 2012
Technocrats versus politics The proposed SWF: pragmatic technocrats? Source: Treasury