The Governor of Bank of Papua New Guinea has forecast a recovery for the country’s economy of 2.5 per cent after the sharp contraction of 2020. But he says the national budget and PNG’s foreign exchange reserves will remain under pressure.

Real GDP growth 2015-2023 Source: BAPNG

In his latest Monetary Policy Statement, released last week, the Governor of the Bank of PNG Loi Bakani says PNG economy contracted by 3.0 per cent in 2020.

‘This was mainly due to the SOE (State of Emergency) measures,’ he said. ‘The sectors hardest hit were transportation, accommodation (hotels), food services and other services. The closure of the Porgera Gold Mine in April, 2020 also impacted adversely on economic activity.’

‘The impact of these high expenditures in 2020 on economic activity has not been evident.’

The Bank has projected a recovery in 2021, with the economy growing by ‘around 2.5 per cent.’ In his half-yearly statement, Bakani said he anticipates ‘higher activity in the Agriculture/Fisheries/Forestry and mineral sectors, as well as a general pickup for most other businesses.’

Budgetary pressures

The Bank of PNG’s Loi Bakani

For the eleven months to November 2020, PNG’s government had a fiscal (budgetary) deficit of K5.63 billion, more than double the deficit of K2.29 billion in the corresponding period of 2019.

To finance the deficit, the Government raised K4.01 billion in funding from domestic sources and K1.56 billion from external sources.

However, Bakani suggests any benefits from higher government spending have been limited.

‘The impact of these high expenditures in 2020 on economic activity has not been evident,’ he observes.

‘It is important for the Government to step up its revenue collection efforts, which includes the new revenue raising measures.’

The 2021 National Budget has a planned expenditure of K19.6 billion and revenue of K12.95 million. This will lead to an expected deficit of K6.61 billion, which equates with 7.3 per cent of GDP. To finance it, the Government plans to raise K4.61 billion from external sources and K2 billion domestically this year.

Bakani cautioned that the recent second wave of COVID-19 infections could have an impact on revenue raising, and could pose additional financing challenges.

‘It is important for the Government to step up its revenue collection efforts, which includes the new revenue raising measures. The Government is also cautioned to spend effectively on priority areas such as health and COVID-19 related expenses, education, law and order and settling arrears [money owed to business] to service providers and exercise control in its expenditure.’

Foreign exchange

Bakani also noted that PNG’s foreign currency reserves were in decline.

At the end of December 2020, PNG’s gross international currency reserves were K9.39 billion (US$2.7 billion), which was ‘sufficient for 8.7 months of total and 15.3 months of non-mineral import covers.’

‘The recent news about Porgera’s planned reopening later this year should mean the central bank’s BOP projections should improve.’

By 18 March this year, however, reserves had fallen by 11.5 per cent to K8.31 billion (US$2.4 billion) ‘due to the servicing of external Government debt and Central Bank interventions to support the foreign exchange market.’

His statement says the supply of foreign exchange to the domestic market in 2020 came mainly from the mining sector, while the demand for foreign currency was led by the retail sector. ‘This trend is expected to continue into 2021.’

Strong balance of payments

In contrast to PNG’s budgetary and foreign exchange pressures, Papua New Guinea’s external position remained strong. Its overall balance of payments (BOP) recorded a surplus of K1.55 billion in 2020 ‘driven by a surplus in the trade account due to export receipts.’

For 2021, however, the Bank of PNG projects the balance of payments will go into a deficit of K604.2 million, mainly because of ‘debt servicing by the partners in the PNG LNG Project.’

The Bank projects that, in the medium term, deficits in the overall BOP will continue but notes that this ‘outlook would change if the Porgera mine resumes production and the other projects in the pipeline, such as Papua LNG and Wafi-Golpu mine, come on stream, combined with higher than expected prices of major export commodities.’

The recent news about Porgera’s planned reopening later this year should mean the central bank’s BOP projections should improve.

Annual headline inflation was 5.1 per cent in the December quarter of 2020. For 2021, the Bank forecasts that annual headline inflation will be around 4.5 per cent.