Papua New Guinea’s government has announced the Budget deficit will balloon to more than K6 billion, the biggest in the nation’s history. Treasurer Ian Ling-Stuckey has announced a well-targeted stimulus, but the International Monetary Fund needs to come to the party.

Parliament during the Supplementary Budget presentation. Credit: RNZ

Last week, PNG’s Treasurer, Ian Ling-Stuckey, said that the country has ‘not had an economic crisis of such complexity or magnitude since World War 2’. He added the ‘best estimate’ is that the value of PNG’s exports will fall by at least 13 per cent.

‘As our exports were estimated to total K42 billion in 2020, this means the value of our exports are estimated to fall by over K5 billion. It means lower incomes for mineral companies, but also lower incomes for many of our rural households. It also means that there is over K5 billion less foreign exchange being earned.

‘These external impacts will also reduce our revenues, including our resource revenues. The K2 billion drop in revenue would add to our already record budget deficit of K4.6 billion.’

Ling-Stuckey said the ‘starting point’ is that the budget deficit could increase to K6.6 billion even before there is any new spending to respond to the COVID-19 crisis.

Stimulus package

The government will instigate a stimulus package in response to COVID-19. The package, Ling-Stuckey announced, is to be based on five principles:

• It will be a ‘PNG-owned and driven response’ and ‘designed to advance the Take Back PNG agenda’.
• It will be ‘broad and comprehensive’ covering households in both rural and urban areas and will cover businesses of all sizes, ‘not just the big end of town.’
• There will be a focus on ‘practical projects’ that build economic capacity. ‘Our Public Investment Program will be focused on projects ready to go. Procurement arrangements will be streamlined to allow early commencement of activities.’
• There will be an attempt to be responsible about debt management. ‘Most other countries have more budget room for manoeuvre,’ said Ling-Stuckey. ‘We will require sensible cutbacks in areas such as the census, international travel and meetings – and redirect funds to priority areas of health and security.’ The government will focus primarily on monetary policy options (lowering interest rates) as well as regulatory actions and working with the superannuation funds to potentially provide access to cash for members.
• It will draw on the ‘friendly foreign support’.

A report from consulting firm KPMG says the package is so far short on specific detail, which it notes ‘is not surprising’ given the incompleteness of the data.

‘This is good, cheap financing. Not over eight per cent interest costs for a Sovereign Bond, but one per cent.’

‘The measures seem sensible and targeted at the right sectors of the economy that will most require them,’ the KPMG report says. ‘The devil, as always, is in the detail.’

Multi-lateral agencies

The Managing Director of the IMF, Kristalina Georgieva, approved on 20 February a Staff-Monitored Program for PNG. Credit: IMF

To fund the budget deficit and the stimulus package, Ling-Stuckey said the government would be looking for financial assistance from multi-lateral agencies, especially the International Monetary Fund (IMF).

‘Our positive re-engagement with the international community led through the recent IMF Staff Monitored Program has opened doors,’ he said. ‘Our work with the IMF has already allowed us to apply for K630 million (US$182 million) last week in extremely concessional terms.

‘There is not a government in the world that is not wrestling with the fallout from this pandemic.’

‘This is good, cheap financing. Not over eight per cent interest costs for a Sovereign Bond, but one per cent. This dramatically lowers the interest costs of our borrowings. I have been informed that we can now apply for another K630 million from the IMF this year – a total of K1.26 billion in 2020.’

Raising concessional (low interest) finance from the IMF and other multi-lateral institutions has become more difficult, however. There are reports that the IMF may not have enough resources to respond to all the demands; 85 countries have approached the IMF for short-term emergency assistance in recent weeks, double the number in the immediate aftermath of the 2008 financial crisis. The IMF’s resources are US$1.3 trillion, unchanged from the end of 2012, with only half available for lending.

COVID-19 Bonds

Treasurer Ian Ling-Stuckey.

There will also be a K2.5 billion issuance of COVID-19 Treasury bonds to raise cash to fund urgent priorities:

• K600 million of support for loan repayment holidays for up to three months.
• K500 million in superannuation measures to be agreed in consultation with the super funds that ‘could include a package of activities to support ‘jobs, business and investment’.
• K500 million in additional spending for health, security and affected economic sectors.
• A supplementary budget is being prepared.

‘There is not a government in the world that is not wrestling with the fallout from this pandemic – and they are all doing it with an imperfect information set,’ the KPMG report says. ‘This is uncharted territory and it is a time to announce decisive action, which is precisely what the Treasurer has done.’