In his latest Monetary Policy Statement, the Governor of the Bank of Papua New Guinea, Loi Bakani, forecasts GDP will decline by four per cent in 2020 but rebound slightly next year. He also expressed concerns about changes to the Central Banking Act.

Total and non-mineral GDP growth projected until 2022, when both seem to stabilise after COVID-19. Credit: Bank of PNG

In his September Monetary Policy statement released last week, Governor of the Bank of Papua New Guinea Loi Bakani projects PNG’s GDP will decline by around 4.0 per cent this year. His March growth forecast was a rise of 0.3 per cent.

‘The revision reflects the negative growth in PNG’s major trading partners, containment measures imposed by the Government which impacted businesses and Government operations and supply chains, and temporary scale-downs/shutdowns of major mining operations,’ he said.

‘The closure of Porgera Mine since April due to the expiry and non-renewal of the Special Mining Lease for the operator, Barrick (Niugini) Limited, also contributed to this negative growth.’

The central bank expects GDP growth to rebound to over two per cent in 2021.

‘Growth is projected to be positive in the medium term as economic activity recovers, businesses adjust to the “new normal” environment and [there is] restoration of full operations at the Porgera mine. If large, new resource projects in the pipeline come on stream, growth will be higher,’ said Bakani.

COVID impact on MSMEs

The central bank also conducted a Business Pulse Survey around the country to assess the impact of the COVID-19 containment measures on micro, small, and medium enterprises (MSME) sector in the first six months of 2020.

‘Over two-thirds of those surveyed have scaled down operations while the rest were temporarily closed and are expected to resume in the second half of the year. This was across all sectors of the economy, mainly in the construction, manufacturing, information and professional services.

‘MSMEs experienced disruptions in their supply chains and cash flow, lower demand, reduced workforce and increased arrears to service providers and on loans,’ said Bakani’s statement.

Printing money?

The twice-yearly statement says the proposal in the 2020 Supplementary Budget to increase cash advances to the Government potentially changes the role of the central bank.

Instead of managing inflation, the bank could be seen to be responsible for making advances to the government to help with its budgetary situation.

Bakani statement said the central bank ‘always must’ have the objective of price stability. He warned that the government may rely more heavily on central bank financing, ‘rather than focusing on revenue raising and expenditure control’, adding that the ‘printing of money … can adversely impact on effective monetary policy management.’

‘Growth is projected to be positive in the medium term as economic activity recovers, businesses adjust to the “new normal” environment.’

Bakani said the government should implement structural reforms, including those under the Staff Monitored Program with the IMF. He recommended ‘improving revenue generation and expenditure controls, as well as restructuring State Owned Enterprises to be more efficient, transparent and accountable, and contributing to Government revenue.’

Foreign exchange reserves

The budget deficit equates to 8.1 per cent of nominal GDP, according to the BAPNG. To finance this, the government plans to raise K4.26 billion from external sources, K1.92 billion domestically and to draw down cash balances of K445.6 million from trust accounts. This includes funds raised through the COVID Bond issuance and the IMF Rapid Credit Facility in the first half of the year.

Public debt continues to rise. According the monetary statement, it stood at K36.87 billion as of the end of June 2020, and ‘is projected to be K39.057 billion by year end, which is 48.0 per cent of GDP.’

Foreign exchange. Credit: Bank of PNG

On a more positive note, PNG recorded a balance of payments surplus of K43.5 million in the first half of 2020, compared to a deficit of K389.0 million in the corresponding period of 2019.

For the whole of 2020, the central bank projects a balance of payments deficit of K1.319 billion, pointing to government and private debt servicing and a build-up in offshore foreign currency account balances of mineral companies.

As at the end of August 2020, gross international reserves were US$2.14 (K7.33) billion, sufficient for 5.5 months of total and 9.1 months of non-mineral import covers.

‘It is projected that the level of reserves will be US$1.932.7 (K6.710.8) billion at the end of 2020 and further improve in the medium term,’ said the statement.