Papua New Guinea’s economy will recover modestly in 2021 and 2022, but financial stresses will persist, says the Asian Development Bank’s Asian Development Outlook for 2021. It also argues strongly for the reform of PNG’s  state-owned enterprises.

Credit: ABD via Flickr

The Asian Development Bank is forecasting a weak economic recovery for Papua New Guinea this year, with GDP growth forecast at 2.5 per cent in 2021 and 3.0 per cent in 2022, according to its Asian Development Outlook for 2021.

The ADB says that the ‘economic environment will remain challenging,’ however. After taking into account the effect of inflation, the economy is not forecast to return to 2019 levels until 2022.

‘Foreign exchange shortages are expected to persist because the ‘kina is over-valued, deterring foreign investment and foreign exchange inflows.’

‘A weak business and investment climate is likely to persist, given ongoing shortages of foreign exchange, a hard stance from the current government toward foreign investment, and the continuing COVID-19 pandemic,’ says the report.

The ADB predicts that inflation will persist, rising by 4.3 per cent in 2021 and 4.4 per cent in 2022, because the kina will continue to depreciate and there will be more quantitative easing from the Bank of Papua New Guinea, which will increase the country’s money supply.

Rising commodity prices

Prime Minister Marape and Treasurer Ian Ling-Stuckey met recently with ADB representatives in POM. Credit: Minister for Treasury

On a positive note, PNG is expected to continue to have a current account surplus this year because of rising commodity prices.

‘Exports contracted by about 18 per cent [in 2020], while imports contracted even more as businesses scaled back investment and trade orders under COVID-19.’ In 2022, the report says, imports will ‘pick up with improving economic conditions.’

The outlook is expecting mine and quarrying production to increase both this year and next, ‘as favourable international prices spur production’. PNG’s agriculture, forestry and fisheries sector is expected to grow by three  percent in 2021.

‘Transport and storage, hotels and accommodation, and construction should also rebound as conditions improve,’ says the report.

Capital expenditure in the economy is predicted to grow by 16.9 per cent this year, and by 9.7 per cent in 2022, providing a stimulus to the economy as business confidence returns.

However, foreign exchange shortages are expected to persist because the ‘kina is over-valued, deterring foreign investment and foreign exchange inflows’.

The ADB says the government’s budget deficits are large and anticipated to remain so. The Budget deficit is projected to be 7.3 per cent of GDP in 2021 and 5.3 per cent in 2022.

‘These wide deficits reflect the government’s strategy to stimulate the economy. The deficit is to be financed by a mix of external and domestic sources. Planned reforms, if implemented, will allow foreign investors to buy domestic securities.’

SOE reform

The outlook says that a sector urgently in need of reform is State-Owned Enterprises (SOEs), the performance of which, it describes as ‘poor’.

‘Given the important and often monopolistic roles that SOEs play in service delivery, their continued weak performance makes services expensive, inefficient, and low quality, and the economy less competitive. Poorly performing SOEs drag on the government’s fiscal position, and SOE debt is a contingent liability on the state.’

Consolidated SOE debt was K5.8 billion in March 2019, according to the ADB, of which K2.1 billion was commercial debt.

The ABD notes that the government has flagged its intention to reform the sector, saying that ‘progress is being made’, with efforts to strengthen legislative and regulatory frameworks, improve governance and transparency, and improve financial sustainability.

‘Continued progress must be sustained, however, if PNG is to show tangible benefits,’ says the report.

Tough 2020

Last year, Papua New Guinea’s economy contracted by 3.3 per cent after growing by 5.9 per cent in 2019, according to the Asian Development Bank’s latest report.

Mining and quarrying, which typically contributes about 12 per cent of GDP, contracted by an estimated 22 per cent, with the closure of Porgera gold mine having the largest impact.

The outlook says employment in minerals and petroleum contracted by 30 per cent in the first three quarters of 2020. Oil and gas production expanded but exploration and investment activities were significantly affected.

In the non-extractive sector, PNG’s economy contracted by more than one per cent in 2020. Construction and real estate, transport and storage, accommodation and food services, and manufacturing were all constrained by lockdowns and labour mobility challenges.’

Meanwhile, inflation accelerated to 4.9 per cent in 2020 because of supply constraints under COVID-19, currency depreciation and the central bank’s quantitative easing program. In particular, health care costs soared by 21.5 per cent in 2020.