Press Statement by Governor Mr. Loi M Bakani on the misleading publications on the state of Papua New Guinea economy
Press Statement released on Wednesday, 26 August 2015
In recent weeks, there were several misleading, inaccurate and totally wrong, publications in both the formal and social media, on the state of the Papua New Guinea economy, and specifically on the state of the 2015 Budget, and the outlook for the year.
“The Mid Year Economic and Fiscal Outlook Report 2015” published by the Department of Treasury, highlighted several developments that require adjustments to the 2015 budget, and the fiscal operations of the National Government in 2015 and the years ahead, especially in 2016.
It is clear that:
1. As a result of the sharp decline of most commodity prices, especially oil and gas, copper, gold, cobalt, nickel and some agricultural exports, the expected revenue flows into the budget are on a sharp declining trend.
2. This has and will adversely impact on tax receipts from the resource sector and other sectors affected by it, foreign exchange inflows, the level of available foreign exchange in the market, the exchange rate movement and the expected level foreign exchange reserves.
3. The level of economic activity will also be adversely affected by the drought, including the temporary closure of the Ok Tedi mine, and lower production in the other operating mines. Loss of production, both for local consumption and export markets of the agricultural sector will also be adversely affected.
4. The PNG LNG project operations during the whole year of 2015 will result in an increase in real GDP, which is measured by the tonnes of exports and not in monetary terms. However, as a result of lower oil and gas prices, the expected income including royalties, taxes and dividends, will be substantially lower. The net effect being a reduction in the projected nominal GDP growth for 2015, from the 15.5% at the time the 2015 budget was framed, to around 11.0%.
The Economic and Fiscal Outlook 2015 Report summarized where we stand in mid 2015:
1. Government expenditure and revenue are below the budgeted level. Total revenue and grants was K4.43 billion, while total expenditure was K5.47 billion. This resulted in a deficit of K0.94 billion which is 1.8% of nominal GDP.
2. Based on the present estimates, GDP is expected to grow by 11.0% in 2015, and at the end of 2015 to be around K52.0 billion. Based on this, the maximum planned deficit as per the budget of 4.4% of GDP means that, it should not exceed K2.3 billion. Given the sharp shocks to the economy toward the end of 2014 and in 2015, the target deficit the Government is aiming for in the revised 2015 budget, to be presented to Parliament in the October/November session is a deficit not greater than the budgeted level. It will take all necessary measures in the remaining four months of the fiscal year, to see if this deficit can be lower than planned.
3. To maintain the level of debt within the Fiscal Responsibility Act of 35%, Government borrowing should not exceed K18.4 billion. This means that the midyear borrowing level of K17.2 billion or 33.5% of nominal GDP, it can increase its borrowing to the end of the year by around K1.2 billion.
4. The above major adjustments to the Government’s fiscal operations will have to be implemented immediately. The adjustments impact on both the revenue and expenditure plans, and they have to ensure that it stays within the parameters outlined in its budget framework.
5. The only protected areas from reductions in expenditure will be the appropriations to the priority areas of Health, Education, Law and Order, Economic Development especially Agriculture, and Critical Infrastructure. All other expenditure areas will be revisited and adjusted to the new realities that the country is facing.
6. With regards to the foreign exchange market, we established a clear understanding with the foreign exchange dealers, mainly the banks, in respect to the role of the official exchange rate set in the Interbank market, and the margins they can expect to have above and below it. It took some time but finally, trade in foreign currency returned to normal. We will discuss with the banks and decide on the actions required, to ease the demand pressures. I am confident that we can resolve the issues in the very near future, and return to a smooth and orderly operation of the foreign exchange market.
The level of foreign exchange reserves at US$2.0 billion are comfortable at 7 months of total imports, and 10 months of non-mining imports.
I am confident that the Government will make the necessary adjustments to the 2015 Budget, implement them and present them in a 2015 Supplementary Budget in the October/November session of Parliament for approval.
Loi M Bakani CMG
Bank of Papua New Guinea
Kina exchange rate (MIDRATE)