A report by the National Research Institute says Papua New Guinea’s government has to be cautious about how it raises debt to fund COVID-19 emergency spending. If the debt raised has high interest rates, the effects will last long after the virus has gone.

The treasurer, Ian Ling-Stuckey, is being warned about the potential debt trap of COVID-19 spending.

The report, COVID-19 and the PNG economy: Impacts of the K5.7 billion economic stimulus package on the 2020 National budget by Osborne Sanida, Director of the National Research Institute, warns against creating a long-term debt problem for the Papua New Guinea.

‘Given the loans for deficit financing, the repayment burden will be here after the COVID-19 pandemic has gone,’ he observes. ‘So it is important for the Government to manage the use of the loans wisely so that the deficit and debt levels do not get out of control going forward, and that government revenue is increased to address the growing debt burden.’

‘The international finance will of course need to be repaid with interest, which tax payers have to meet’

Sanida assesses six stimulus measures undertaken by the government. These are:

1. K2.5 billion in domestic finance (43.9 per cent of stimulus package) in COVID-19 Treasury bonds.
2. K1.5 billion (26.3 per cent) in ‘friendly foreign assistance’ comprising K1.26 billion from the International Monetary Fund (IMF), K0.17 billion from the Asian Development Bank (ADB), and K0.07 billion from the World Bank.
3. K600 million (10.5 per cent) relief for businesses and households in the form of a three-month loan repayment holiday.
4. K500 million (8.8 per cent) in superannuation measures, in the form of allowing members to access their savings during the economic downturn.
5. K600 million (10.5 per cent) extra budget support comprising K320 million for agriculture, business and households, and K280 million for health and security.
6. Supplementary Budget to find budget cuts and savings to address the increased deficit and financing options required.

Funding

The cost of COVID-19 may linger in PNG long after the virus has been banished.

Four of the six measures: 1, 2, 5 and 6, will directly affect the Budget, which has a new projected deficit of K7.2 billion. Sanida argues that ‘K1.5 billion in ‘friendly foreign financing’ is already available.

‘The international finance will of course need to be repaid with interest, which tax payers have to meet,’ he says.

The remaining deficit of K5.7 billion will be part-funded by a COVID-19 Treasury Bond issuance of K2.5 billion, but this comes with high interest costs of between 8-9.5 per cent.

‘The high interest rates is perhaps a key reason for the oversubscription of the bonds by investors in a short space of time,’ he adds. ‘The flipside of this is that tax payers (through the Government) will pay higher interest payments and increase in the total debt burden.’

The remaining deficit of K3.2 billion ‘has to be funded via more borrowing or reduced via cuts to expenditure and/or increases in total revenue,’ according to Sanida.

He outlines three scenarios that the government might choose:

• Borrowing more, which will increase the debt burden and interest repayments. (‘If borrowing, as much as possible, concessional sources must be preferred over commercial ones.’)
• Reducing the deficit through a Supplementary Budget.
• A combination of borrowing and cuts to expenses and ‘increases in revenue’.

Sanida points to the K320 million package for agriculture, business and households, and the K280 million for health and security (Measure 5) as an initiative that could, although increasing the deficit, potentially increase Government revenue through ‘increased taxes generated by the spending of the funds to stimulate economic and business activities.’

He also believes a Supplementary Budget ‘if crafted well’, could contribute to improving the budget outcomes indirectly by increasing revenues or cost efficiencies.