PNG economic survey 2015-16 Rohan Fox, Stephen Howes, Nelson Nema, Win Nicholas and Manoj Pandey UPNG SBPP Division of Economics & ANU Crawford School Development Policy Centre 1
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
Economic Growth 3
PNG s growth slowdown Real GDP Growth Rates (%) All sectors and non-mining sectors: 1994-2018 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016p 2017p 2018p -6-4 -2 0 2 4 6 8 10 12 14 Year Real GDP Growth Rate_all Real GDP Growth Rate_non-mining p: projected Source: NSO/Treasury/BPNG 4
Employment growth negative since 2014 Q4 Formal sector employment growth (quarterly, year on year) 2008q1:2016q1-4 -2 % 0 2 4 6 8 10 2008q1 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
Imports down below 2007 levels Goods import in Papua New Guinea Value and % annual change: 2002-2015 4 5 6 7 8 9 10 11 12 % annual change -30-20 -10 0 10 20 30 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Import value for goods % annual change in import value of goods Source: QEB Statistical Tables, BPNG 6
Visitor arrivals still growing, but slowly Visitor Arrivals in Papua New Guinea Numbers and % annual change: 2007-2015 80 100 120 140 160 180 200 5 10 15 20 25 30 35 % 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Number of visitors arrival % Annual change in number of visitor arrivals Source: PNG Tourism Promotions Authority (PNG-TPA) 7
Some indicators point to a recession Sharp decline in tax revenue (see fiscal section) 25% drop in coastal shipping over last year (Business Advantage, Oct. 2016) PNG Business Council report drops in sales of 35% in the first six months of 2016. 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. 9
Fiscal Developments 10
K billion (2015 prices) Expenditure has outpaced revenue, but both are falling; revenue is back at 2006 levels 18 Revenue Expenditure 16 14 12 10 8 6 Source: Treasury 11
K billions (2015 prices) Economy-wide taxes have fallen; resource taxes have disappeared 12 10 8 6 4 2 0 Source: Treasury Mining and petroleum taxes Economy-wide taxes 2006 2014 2016 Non-tax revenue (incl. grants) 12
K million (2015 prices) Increased spending in salaries, interest and political commitments have squeezed 8 7 6 5 4 3 2 1 0 Discretionary spending = total spending minus salaries minus interest minus political commitments minus aid. discretionary spending Salaries Interest Education subsidy MP funds 2006 2014 2016 Aid-funded projects Discretionary expenditure Discretionary spending = amount available for core government operations (running hospitals, 13 universities; building major roads)
KINA BILLION Harsh cuts to critical services 4.5 4.0 2011 2012 2013 2014 2015 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Economic & agriculture Source: BPNG and Treasury Education Health Transport & infrastructure Law & Order Rural development (incl. PSIP) Interest payments 14
Deficit/revenue ratios reached an alltime high near the end of the boom 40% Deficit/revenue 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 As a result, debt/revenue is now back at pre-boom levels 300% Debt/revenue 250% 200% 150% 100% 50% 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Kina (2015 prices) A gloomy revenue outlook 1800 1700 1600 1500 1400 1300 1200 1100 1000 Revenue per capita Note: 2017 onwards projections from 2017 budget 17
Fiscal policy reflections Government has been hit by a massive fiscal shock with the end of the boom. Expenditure cuts and cash-flow problems due to: significant fall in tax collections limited borrowing options need to finance boom legacy expenditures (higher salary and interest bill, and new policy commitments). To avoid further cuts in health, education and infrastructure, government needs to: continue to borrow stimulate the economy reprioritize expenditures through cuts in constituency spending and salary restraint. 18
Exchange Rate 19
Recent modest nominal depreciation TWI AUD & USD Source: BPNG 20
Kina/USD Exchange rate has not depreciated against the US dollar since May 2016 0.55 0.5 0.45 0.4 0.35 0.3 0.25 0.2 1/1/08 5/15/09 9/27/10 2/9/12 6/23/13 11/5/14 3/19/16 21
% Inflation at around 6% 7 6 5 4 3 2 1 0 Source: BPNG 22
High Real exchange rate Source: World Bank (2016) 23
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USD billions Foreign exchange reserves are falling 4.5 4 3.5 Over-valued exchange rate, foreign exchange rationing 3 2.5 2 1.5 1 0.5 0 Source: BPNG 25
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 26
Kina depreciation modest by Country international comparisons %Δ exchange rate 1 June 2014 1 June 2016 Natural resource rents as % of GDP Mozambique -45.8 13.6 Brazil -37.3 5 Zambia -34.8 16.1 South Africa -32.5 7.6 Mexico -30.5 6.3 Norway -28.3 9.1 Madagascar -26.6 10.9 Uganda -24 11.3 PNG (interbank rate) -23.5 29.6 Australia -22 7.1 Ghana -21.9 21.1 Chile -20.5 16.2 Peru -18 8.7 Indonesia -14.5 6.3 Mongolia -9.2 22.1 PNG (market rate) -8.7 29.6 Solomon Islands -8.7 41 Source: World Bank 27
Source: Koh (2015) Oil prices shocks and macroeconomic adjustments in oilexporting countries International Economics and Economic 28 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
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 29
Structural policy 30
New Select Policy initiatives SME Policy initiatives Land Policy initiatives Agricultural Import Policy initiatives 31
Goals 1. SME Policy initiatives Current 2030 Target Changes in 15 years Number of SMEs (in 000s) 49.5 500 10.1 times Employment Creation (in mn) 0.3 2.0 6.9 times Ownership of the formal Economy 10% 70% 60% point % Contribution to GDP 6% 50% 44% point Per Capita GDP (K 000) 2.0 9.6 4.8 times Unemployment 84% 49% -35% point Below the Poverty Line 40% 30% -10% point Unbanked 86% 40% -46% point 32
1. SME Policy initiatives Some restricted provisions: e.g., Foreign ownership of businesses in several areas (e.g. trade stores, tourism) to be restricted. Imposition of export taxes for all Agriculture commodities that are currently being exported in their raw form to encourage downstream processing and imposition of complete ban on the exports of round logs by 2020. 33
2. Land Policy initiatives Key objectives of the Proposed Land (Amendment) Act 2013 (draft) are a. To improve land administration system b. To improve land dispute settlement system process c. To develop a framework for maximizing the development potential of land held under customary tenure 34
2. Land Policy initiatives Proposed amendment is restrictive in nature for foreign ownership because it has provisions to Impose ban on foreign ownership and leasing of land Existing foreign leases have to be given up within 30 years 35
3. Agricultural Import Policy initiatives Ban on Vegetable Agricultural imports: Introduced last year, then lifted again, reintroduced in early 2016 and lifted again. Discussions on proposed Rice Import Quotas (under 2015 proposed National Rice Import Quota System) 36
Commentary on the new policies Some of the new policy proposals are sensible, but all are 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. 37
Conclusions 38
Conclusions Economy is in crisis in the face of economic slowdown and fiscal deficit with severe government expenditure cuts even in essential services. On fiscal measures, the government needs to stimulate the economy. However, PNG lacks borrowing capacity and cannot wait until next resource project and commodity prices to pick up. On structural policy measures, objective is right. However, it is very costly and can push up prices while scaring-off foreign investments that PNG needs. 39
Conclusions The real exchange rate is high for now. Rather than introducing protectionist measures, it would be better to allow further currency depreciation. That would make local businesses more competitive, and would help all the businesses engaged in export or import substitution. This would have an immediate impact, and would not scare off foreign investors. 40
Thank you! 41