Papua New Guinea’s foreign exchange problems are a symptom of an overly narrow industry base, according to a new report by the Business Council of PNG. It says the new government also needs to look at widening the tax base and improving infrastructure.

The Business Council of PNG’s David Toua. Source: Business Council of PNG

‘Papua New Guinea has a long way to go if it is to reach its development goals,’ comments David Toua, President of the Council. ‘However, at the same time the land abounds in opportunities for future development.’

The report says the extractives sector directly accounts for 28 per cent of PNG’s GDP, followed by agriculture (23 per cent) and construction (17 per cent). The indirect effect of the extractives sector, it says, is even larger.

‘Extractives’ share of the economy is far greater than official GDP figures suggest.’

‘The share for construction does not consider the proportion of construction that is dependent on the extractives sector. Similarly, such statistics do not account for the proportion of other sectors—such as services and manufacturing—that are driven by extractives activity.

‘In other words, extractives’ share of the economy is far greater than official GDP figures suggest.’

Opportunities

The new Business Council of PNG report

The Business Council report, Development Priorities for 2017–22, released just as the new government is taking shape, says that agriculture presents the most immediate opportunity for broadening the industry base. It points to the fact that the majority of the population is already employed in the sector in some form.

‘The challenge will be converting largely informal, subsistence agriculture into formal, income-producing agriculture. Consideration of models such as New Britain Palm Oil Limited, which focus on the production of high quality and high value agricultural outputs to competitive international markets, will be key.

‘PNG’s banks have too much local currency and not enough options to loan it out.’

‘Tourism is the next sector with considerable opportunity. Although at present tourism in PNG is largely under-developed, much work is underway in converting this nascent industry into a significant economic actor.’

Foreign exchange

The Business Council report says the foreign exchange shortages raise the cost of imports and increase PNG’s vulnerability to external influences. It also reduces the attractiveness of the country to investors and heightens the risk of capital flight.

A related issue is an excess of liquidity in the banking sector. ‘PNG’s banks have too much local currency and not enough options to loan it out.

‘This has a number of implications for the smoothness of the country’s financial sector, one being that it reduces the ability of the Central Bank to conduct effective monetary policy. Another is the potential for inflationary effects; basically too much money circulating in the economy for too few goods.’

‘A narrow industry base means the economy has fewer avenues of foreign exchange flowing into the country.’

The report says, however, that the foreign exchange shortages and excess liquidity should be seen as symptoms of the heavy dependence on the extractives sector, rather than the cause of the country’s economic and financial problems.

‘Rather than considering forex shortages and excess liquidity in isolation, the business community calls on the incoming Government to focus on a predominant cause of both of these issues—a narrow industry base.

‘A narrow industry base means the economy has fewer avenues of foreign exchange flowing into the country, as well as fewer avenues for the nation’s financial sector to lend the capital it receives.

‘There is “inconsistent tax treatment” of different industry sectors.’

‘This is heightened by the fact that often inward currency flows from overseas export and investment of resources back into local assets are made in foreign currency, US dollars, rather than kina.

Initiatives

Lae Port. Ports are an essential element of PNG’s trade competitiveness.

The Business Council report identifies areas where it believes the new government should focus. One area is infrastructure.

‘Only 13 per cent of the country is electrified and 90 per cent of PNG citizens do not have access to the internet,’ the report says. ‘Only 40 per cent have access to an improved water source, and 19 per cent to improved sanitation.’

The report notes that the infrastructure around Lae port is ‘particularly lacking’. It points to the poor quality of the roads, and problems in the storage and warehousing facilities, ‘which limit the type of trade the Port is able to handle.’ A lack of connecting infrastructure also restricts the reach of imports and exports.

The report calls for a broadening of the tax base, including the introduction of a goods and service tax (GST).

‘PNG’s narrow and small tax base is a fundamental hindrance to many of its development goals,’ it says, adding that there is ‘inconsistent tax treatment’ of different industry sectors.