The March Monetary Policy Statement from the Bank of Papua New Guinea has urged the government to rethink the way it negotiates tax concessions and exemptions with new resources projects. Adopting a strong stance, it points to how previous agreements have been a factor in foreign exchange shortages and adverse trends in government finances.

PNG’s economy has surged but tax revenue has not. Source: Department of Treasury and BAPNG

The statement says that the ‘current policies in relation to the extractive industries give a lot of tax concessions to the project partners for the development of major projects in PNG.’

These tax concessions, it says, has resulted in less availability of foreign exchange and has not strengthened tax revenues.

PNG in 2018 had a large current account surplus, indicating greater trade and finance outflows than inflows. This would normally result in strong demand for the kina, but it ‘did not translate into sufficient increase in inflows to the foreign exchange market’.

A trade performance that normally would have meant foreign exchange was easy to obtain, did not have that effect because of exemptions and concessions to resources projects.

‘The situation in the foreign exchange markets is improving.’

‘If a significant portion, or all, of the export receipts were brought into the country, it would more than adequately cater for all the demand for foreign currency in the foreign exchange market,’ the Monetary Policy Statement (MPS) said.

‘This is not happening because most of the export earnings in foreign currency are held in offshore foreign currency accounts.’

Mineral GDP has risen, but tax from mining has fallen. Source: Department of Treasury and BAPNG

Backlog

The statement does note, however, that the situation in the foreign exchange markets is improving.

‘The outstanding backlog declined significantly from K1.739.3 billion in December 2017 to K445.4 million at the end of 2018, and to K320.1 million in February 2019.

‘The average time taken for the orders to be served has declined from 5 months to less than 3 months over the same period.’

But it says that the State Negotiation Team (SNT) should ‘push for the country’s national interest’ when negotiating with developers, pointing especially to the Papua LNG and Wafi-Golpu projects.

The Bank of PNG proposes:

1. The introduction of a Capital Gains Tax on real property including mining and petroleum licenses
2. Reform of the current Extractive industries fiscal regime
3. Review of tax incentives
4. Meeting of Domestic Market Obligations (DMOs) to secure gas for domestic uses
5. Third Party Access to allow development of other resources

The MPS points to ‘serious concerns’ about the ‘broad exemptions and concessions’ given to the PNG LNG Project.

‘In 2018 there was a budget deficit of 2.5 per cent of nominal GDP.’

The report said it ‘rendered the Central Bank ineffective in the enforcement of certain provisions of the Exchange Control Regulation, and consequently the PNG economy has missed out on foreign exchange inflows, tax receipts, and other matters of national interest.’

PNG is in the black on trade flows (current account) but in the red on financial flows (Capital and Financial account). Source: BAPNG

Budget deficit

In 2018, there was a budget deficit of K2.048 billion or 2.5 per cent of nominal GDP, according to the report, which expressed concerns about the level of public debt.

‘Over the last seven years, the budget deficits under the Government’s expansionary fiscal policy have been financed by increased borrowing, as revenue did not grow sufficiently to meet increased expenditures.

‘As a result, total public debt continued to increase in 2018 to K25.606 billion, or 31.1 per cent of GDP, and is planned to increase further in 2019.

‘The continued high budget deficits and debt level are a cause of concern for fiscal sustainability and its impact on macroeconomic stability.’

Annual headline inflation has declined from an average of 5.4 per cent in 2017 to an average of 4.5 per cent in 2018.

It is forecast to be 3.5-4 per cent for 2019.

The Bank said it expects to keep interest rates steady for the next six months.

The kina depreciated against the US dollar from US$0.3095 at the end of December 2017 to US$0.2965 in the March quarter, reflecting high import orders.

Against the Australian dollar, the kina appreciated from A$0.3967 at the end of December 2017 to A$0.4195 in the first quarter of 2019.

PNG’s Inflation forecasts Source: BAPNG