Presentation By Mr. Loi M. Bakani, CMG Governor at 32nd Australia-PNG Business Council Forum Cairns, 16 May 2016
Presentation
By
Mr. Loi M. Bakani, CMG Governor
32nd Australia-Papua New Guinea Business Council Forum
Cairns, 16 May 2016
The Papua New Guinea Economy
Thank you Master of Ceremony, Dignitaries, Professor Satish Chand, distinguished quests, ladies and gentlemen. I want to thank the organizers for inviting me to present the Papua New Guinea Economy to the Business Forum.
In recent years and months some commentators criticized the Government and Central Bank’s management of nation’s affairs. I decided to use this opportunity to present the facts, that in most instances are misrepresented by the critics.
I will start my presentation with the development in the most important and basic measure of economic performance-Gross Domestic Product (GDP). The new nominal GDP data released by the National Statistical Office (NSO) at end March 2016, showed that the size of the economy is much bigger than earlier estimated. We have a very long streak of GDP growth lasting for the last 14 years. In the last five years 2010 to 2015, Nominal GDP grew from K38.6 billion to K64.2 billion, a growth of 69% or on the average by 13.8% per annum. Per Capita Nominal GDP grew from K5,456 to K8,378, that is a growth of 54% or an average of 11% per annum.
Many might think that this growth have been inflation driven. Let us look at the Real GDP numbers. Based on the new GDP figures from NSO, we deduced that Real GDP grew from K17.3 billion to K27.1 billion, a growth of 59% or an average of 12% per annum. The per capita real GDP increased from K2,443 to K3,547, an increase by 45% or an average of 9% per annum.
The new GDP outcomes also refutes the claim of very high deficits to GDP ratios, which the commentators used in their statements that the Government and the Central Bank are driving the country into bankruptcy. The actual average deficit for the five years was 3.6%, and not the 4.9% as claimed by the critics. The earlier released budget deficits for 2014 and 2015 of 7.3% and 5.0% of GDP, respectively, are now revised to to 5.3% and 3.9% of GDP.
No deficit is justified if it is not used to fund priority areas. The Government of the day defined the priority areas as Health, Education, Law and Order, Infrastructure, Economic Sectors especially Agriculture and Rural Development for inclusive growth. If we add up the expenditure in those five priority areas as part of the total expenditure in the last five years, the actual expenditure varies from year to year, but the average was above 68% of total expenditure. This is a strategic turn around from past years and PNG stands to benefit from their social and economic returns in future.
The other claim flaged by critics was the breach of the Statutory Lending Limit in the Fiscal Responsibility Act, which is the Debt to GDP ratio of 35%. Based on our calculations using the new GDP figures released by NSO, the Debt to GDP ratios are now 25%, 27.2% and 28% for 2013, 2014 and 2015, respectively. The highest level was reached. There was never a breach of this statutory limit.
Of the total debt of K18 billion, K3.9 billion is External Debt, or 5.5% of 2015 GDP, and all others comprised of concessional loans from bi-lateral and multi-lateral donors, the Asian Development Bank (ADB), World Bank (WB), Japanese International Cooperation Agency (JICA) and Australian Government, with low interest rates and long grace periods on both interest and principal repayments. Papua New Guinea has a very low debt burden in general, and a negligible foreign currency debt burden. The domestic debt service burden in 2015 was K991 million and external debt service was K84 million. This comprised 7.3% and 0.6% of total expenditure, respectively.
The question is where did the commentators miss out? Where did they go wrong? It was well known and published that the National Statistical Office (NSO), is planning to publish the 2006-2013 GDP figures toward the end of March 2016. Instead of waiting for the publication, they were in a rush to use preliminary numbers published by the Department of Treasury, to criticize us.
The Government undertook positive actions over last 2 years to adjust to the changing market conditions by introducing two Supplementary Budgets in 2014 and 2015. In the 2014 Supplementary budget, the budget was adjusted to the sharp decline in commodity prices. In the 2015 Supplementary budget, it was adjusted to the collapse in the oil price and the El Nino drought. The El Nino drought closed down the Ok Tedi mine for seven months, the Porgera mine for a shorter period, and it also resulted in sharp reduction in agricultural production, for domestic consumption and exports and the cost of relief supplies to the drought affected areas.
Looking at the sectoral contribution to GDP in 2015, the year in which the PNG LNG project was in production for the whole year, shows that Oil, Gas and Mining contributed 26.7% and the traditional sectors make up 73.3%. In the traditional sectors, Agriculture contributed 16.7% and Construction at 12% are the largest ones. We can clearly state that we have a very diverse composition of GDP.
The message for Government and recent actions by it is clear towards increasing our efforts to grow the traditional sectors of the economy, mainly agriculture. There is great potential in the export markets for many agricultural products. We must invest in infrastructure to open the rural areas, to the domestic and international markets, and introduce advanced cultivation technologies. Recent project developments in some of the most remote areas, have shown that local farmers can adopt and operate those technologies very efficiently.
The next subject that the commentators were criticizing us is under the Central Bank control and management of the Balance of Payments and the Foreign Exchange Market.
The Balance of Payment went through a change in 2014. In the first four years 2010 to 2013 the Current Account recorded a deficit of K14.7 billion, mainly as an outcome of the construction of the PNG LNG project, all of it funded by capital inflows. In 2014 and 2015 the trend reversed, after the PNG LNG project construction was completed and in May 2014 it started exporting. For 2014 and 2015 the Current Account was in surplus of K19,086 million and the Capital Account was in a deficit of K20,882 million. This will continue for as long as the PNG LNG Project is using the Accelerated Depreciation Allowance, which exempts it from taxes on profits. At the present the domestic payments by the PNG LNG project are operating expenditures, royalties and development levies to landowners and Provincial Governments, paid on the Well Head value of the output, and dividends.
All mining and petroleum projects have a Development Agreement, which allows them to retain in their off shore accounts, sufficient amounts of foreign currency to serve their known off shore liabilities. The only payments expected on shore are, operating costs, tax liabilities, royalties, development levies, and dividends payments to domestic shareholders.
As of 2012, following the sharp decline in commodity prices, the foreign currency inflows were lower than the outflows. The excess in demand for foreign currency on the supply, resulted in the depreciation of the currency and a loss of foreign currency reserves.
The Kina exchange rate depreciated by 34.7% from April 2012 to May 2016, from US$0.4845 to US$0.3165 to the Kina. Despite the commentators views, the depreciation of such magnitude is a clear reflection of the supply and demand situation, and reaffirms the characteristics of a floating exchange rate regime. Some commentators argued that the kina should be freely floating to reach a market clearing rate. What is this rate? Given the fact that PNG is an import dependent country, the kina has depreciated significantly to date, and we know that the supply and demand responses to the depreciation of the kina are low, it is very difficult to know what exchange rate will clear the market.
From April 2012 to May 2016, the foreign currency reserves declined by more than US$2 billion to US$1.7 billion. Given the very low external debt for Government, this decline in reserves reflected the intervention by the Central Bank to support private sector FX demand. The Central Bank has to continously balance the foreign currency needs of Government, private sector demand and ensure it holds adequate level of reserves. The current level of reserves is sufficient for about 10 months of total and 15 months of non-mineral import covers.
At the present, there is a queue in the foreign currency market of not served orders. What are the prospects for improvements in the FX market? The resumption of Ok Tedi mine operations as of the 1st March 2016, with a monthly inflow of around US$40 to US$50 million, combined with Lihir’s increasing production and exports, will have a meaningful contribution to the reduction in the queue. There are positive signs of increased production of agriculture exports and foreign exchange inflows. Meanwhile, the Government and the Central Bank are seeking foreign currency facilities from offshore sources for budgetary financing and to support the foreign exchange market. In addition, the commencement of one of the major pipeline projects like the Penyang LNG by Exxonmobil will turn the situation around.
Finally, let me say that while there are issues and challenges we face in the short term, the medium to long term prospects and outlook for PNG economy are positive and strong. The Government is in control and managing and needs the support of private sector, donor partners, and commentators need to base their criticisms on facts, and not on hear say and social media. And I hope I have clarified some of the issues that have been subjects of recent misrepresented criticisms.
Thank you all and hope you enjoy the forum.