The 2016 Budget was an emergency one for Papua New Guinea. Adjusting to a 20% collapse in revenue caused by plummeting commodity prices and an economic slow-down, the government has implemented harsh expenditure cuts. The Lowy Institute’s Jonathan Pryke examines the budgetary impact of holding the APEC summit in Port Moresby in 2018.

In many ways, the 2016 Papua New Guinea Budget was the one PNG had to have.

The Lowy Institute’s Jonathan Pryke

While commentators, including myself, have questioned the severity and the way in which cuts have been made, all agree the government could not keep spending at the pace it has been given the collapse in revenue and rapid increases in public debt.

But will expenditure actually slow? And what is the true level of public debt in PNG?

We can shed some light on these questions by focusing on a specific, big-ticket item of expenditure: PNG’s hosting of the APEC leaders’ meeting in 2018.

Due to the degree of off-budget expenditure that is commonplace in PNG, it has been difficult up to this point to quantify the public cost of the APEC event, not to mention overall public debt. But, thanks to a recent consultation report from the IMF, we are a step closer to answering both of these questions.

The APEC meeting draws up to 10,000 delegates and media for more than 180 planned meetings. The security, logistics and accommodation demands of the event are daunting for any city.

The IMF report notes the government plans to spend K3 billion (roughly US$1billion or A$1.5 billion) over the next three years on APEC, equivalent to approximately 7% of all government expenditure over that period.

The PNG government did not take these challenges lightly, and quickly established a coordination authority to oversee the preparations for Port Moresby. Little was publicly heard from this authority in the following two years until CEO Christopher Hawkins revealed much more detail at the PNG Advantage Investment Summit in August 2015.

Hawkins stressed that the costs of new developments, such as the Paga Hill development (where the leaders’ meetings will be held), the accompanying ring road, the Star Mountain Hilton development, and another planned airport upgrade, would largely be absorbed by the private sector. He says this ‘won’t be the multibillion dollar APEC people are expecting’.

IMF costings

Reflecting this commitment the government has budgeted K80 million (roughly US$26 million) in expenditure for APEC in 2016, half of which will focus on security.

The IMF report notes the government plans to spend K3 billion (roughly US$1billion or A$1.5 billion) over the next three years on APEC, equivalent to approximately 7% of all government expenditure over that period.

To put that into perspective, health and education expenditure will total K3.5 billion and K3.7 billion respectively over the same period. If APEC does indeed cost the K3 billion forecast by the IMF, the PNG government will need to work hard to justify it, as core services are slashed. Close to half a billion kina still needs to be found to finance next year’s general election.

Benefits

Of course, expenditure of this scale will bring some benefits. The IMF notes that it will contribute to overall economic growth in the country, and employment in and around Port Moresby. The meeting itself may also promote tourism (though recent research from the ADB of major events held in the Pacific questions the validity of this claim) and investment in the country. New high-end infrastructure and hotels will also benefit the Moresby elite and expat community.

Whatever the final figure is for APEC, it will no doubt have to be largely financed by debt, another contentious issue in PNG.

Debt

But the budget only tells half the story when it comes to public expenditure in PNG. The balance sheets of SOEs, off-budget loans, and outstanding obligations to government superannuation funds should all be factored into overall public debt, regardless of how well they are collateralised.

That isn’t to say that APEC should be completely abandoned, but the government’s financial position obliges it to be as frugal and transparent as possible over the next three years.

Until recently much of the situation remained shrouded in mystery, but, thanks again to the IMF, we can draw a more comprehensive picture of the government’s debt profile, as shown in the table below.

PNG’s debt as a proportion of GDP

Source: IMF Article IV 

These numbers are still moderate relative to many other countries, but they are significantly higher than the figures used by the PNG government. And they are growing rapidly.

With official debt servicing already having more than trebled from 2012 to 2016, and now accounting for 10% of government expenditure, the government cannot afford any more extravagant expenditure.

That isn’t to say that APEC should be completely abandoned, but the government’s financial position obliges it to be as frugal and transparent as possible over the next three years.

This is an edited extract of an article by Jonathan Pryke, Research Fellow at the Lowy Institute, Sydney, Australia