The Papua New Guinea economy is gradually stabilising as it adjusts to the impact of the PNG LNG project, according to the Bank of PNG’s latest Monetary Policy Statement. Real economic growth is predicted to be 2.8 per cent, the kina has been steady, and the 2016 balance of payments was in surplus. But there are financial stresses, as David James reports.

While PNG’s exports have risen, causing a current account surplus, money continues to flow out, causing a financial account deficit. Source: Bank of PNG

The Bank’s monetary statement paints a picture of an economy being buffeted by a single, large resource project: the PNG LNG project.

On the plus side, it reports the current account—which measures PNG’s balance of trade—is in surplus, largely because of LNG exports.

On the negative side, the statement says, the capital and financial account (which measures financial flows) is projected to be in a deficit of K11,669 million in 2017, due to outflows from ongoing debt servicing by the PNG LNG Project. The trend is expected to continue in 2018 and 2019. 

‘Developers of mining, gas and petroleum projects are allowed to have offshore foreign currency accounts, from which their offshore liabilities are paid and any surpluses are brought onshore for domestic expenditures,’ says the statement.

‘At the end of 2016, gross foreign exchange reserves were … sufficient for 7.2 months of total import cover.’

The Bank of PNG adds, however, that if ‘any of the major projects in the mining and LNG sectors advance to development stage over the coming two years, the capital and financial account will turn into surplus.’

Foreign exchange flows and Bank of PNG intervention Source: Bank of PNG

Reserves

At the end of 2016, gross foreign exchange reserves were US$1,678.2 (K5,257.5) million, which was sufficient for 7.2 months of total import cover.

‘The Bank continues to use its reserves to intervene heavily in the currency.’

This is expected to rise. ‘It is projected that the level of foreign exchange reserves will be US$2,106.6 (K6.617 billion) at the end of 2017,’ the statement says.

‘The increase in the level of reserves mainly reflects improved inflows from non-mineral export receipts, expected proceeds from external financing, and receipts for royalty and development levies associated with the PNG LNG Project, as well as concessional loan drawdowns from bilateral and multilateral sources.’

The Bank continues to use its reserves to intervene heavily in the level of the currency. It used US$425 million (K1.351 billion) for this purpose in 2016.

‘The financial imbalances may affect the ability of the government to fund its deficits.’

In 2016, the currency fell slightly against the greenback, from US$0.3325 to US$0.3150. It has only slightly weakened since then.

The Bank of PNG says the stability against the US dollar was due to an increase in foreign exchange inflows, mainly from mining and agriculture sectors.

The kina was similarly stable against the Australian dollar. The trade weighted index (TWI), which measures the prices of traded products, rose by 1.7 per cent in the three months to March 15.

Funding

Financial imbalances may affect the ability of the government to fund its deficits. The Bank projects that the 2017 Budget deficit will K1,876.5 million or 2.5 percent of nominal GDP.

‘Given the challenges in raising external financing, there could be a shift towards domestic sources.’

‘To finance the deficit, the Government intends to raise funds mostly from external sources, with K128.6 million from concessional and K54.4 million from commercial sources, and K1,500 million from other external financing. The balance of K193.5 million will be from domestic sources.’

The government is facing funding problems, however.

‘Given the challenges in raising external financing, there could be a shift towards domestic sources. However, this is also becoming difficult, given that major financiers may have already reached their limits on exposures to the Government.’

Growth

The statement says this year real GDP growth is expected to be 2.8 percent, ‘driven by expected increase in activity in the non-mineral sectors, full year production at Ok Tedi mine, and increased production at Lihir, Ramu and Porgera mines.’

‘Developing the non-mineral sector is critical to build a resilient economy that can help minimise the impacts of these shocks.’

The Bank points to a likely improvement in the international prices of some export commodities and an increase in foreign exchange inflows.

Consumer Price Index Source: Bank of PNG

Annual headline inflation was 6.6 percent in 2016, compared with 6.4 percent in 2015. This was ‘driven by price increase of some domestic items in the CPI basket.’

Inflation this year is expected to be about the same as the 2016 level.

‘PNG, as a small open economy, will continue to be exposed to external and domestic shocks,’ the statement says. ‘Developing the non-mineral sector is critical to build a resilient economy that can help minimise the impacts of these shocks.

‘Increasing the productive capacity of the economy should involve expanding the export sector, encouraging import substitution industries, and developing downstream processing activities.’