The Bank of Papua New Guinea is predicting that the the country’s economy will not go into recession this year and there will be a strong recovery next year. But it says that the COVID-19 pandemic has badly affected many key sectors.

The PNG economy will bounce back next year. Credit: BAI

The latest biannual Monetary Policy Statement from the Bank of Papua New Guinea, released this month, says that the COVID-19 containment measures pursued under PNG’s State of Emergency are already affecting key sectors such as trade, transport, tourism and hospitality, manufacturing and construction.

They are also adversely impacting domestic economic activity and growth but, contrary to recent predictions issued by ANZ, the statement suggests that PNG may escape a recession.

‘The Central Bank’s projections for 2020 take into account the impact of COVID-19 on key macroeconomic indicators,’ it says. ‘The Bank assumes that the spread and impact of COVID-19 will be contained in 2020, with minimal effect in the medium term (2021 to 2022).’

The Bank is forecasting real GDP growth for this year of about 0.3 per cent. But it warns that, ‘in a worse-case scenario if the impact of the COVID-19 pandemic is not effectively contained’, there might be negative growth.

It also points to the effect of a scaling down of business operations following the lockdown in March 2020 and the imposition of the nation-wide State of Emergency (SOE).

The statement says real GDP growth for 2019 ‘was consistent with the Government’s estimate of 5.0 per cent.’ This was mainly driven by a full year of production in the mining, and oil and gas sectors ‘following the recovery from the 2018 earthquake’.

Impact of the stimulus

The statement says that the 2020 National Budget will have a forecast deficit of K4.63 billion, which equates to 5.0 per cent of nominal GDP.

It says the government introduced its Economic Stimulus Plan because of a ‘sharp fall in PNG’s export receipts and slowdown in domestic business operations’. The major components of the plan consist of K1.5 billion in external financing mainly from the International Monetary Fund (IMF) and K2.5 billion from the COVID-19 bond, raised by the Treasury.

‘The Government intends to introduce a supplementary budget that will incorporate the effects of COVID-19 on Government revenue and expenditure, and the financing requirements.’

This will increase PNG’s debt levels and the Budget deficit.

‘Further increases in external and domestic debt financing relating to COVID-19 expenditures will contribute to a higher debt level. This will result in a higher deficit compared to the 2020 budget.

‘The Government intends to introduce a supplementary budget that will incorporate the effects of COVID-19 on Government revenue and expenditure, and the financing requirements.’

Balance of payments

PNG’s balance of payments is likely to deteriorate, from a surplus of K423 million in 2019 due to ‘higher LNG and gold export receipts’ to a deficit of K1.295 billion in 2020, driven by a ‘deficit in the capital and financial account’.

Gross foreign exchange reserves have decreased slightly from US$2.3 (K7,880.0) billion at December 2019 – sufficient for 5.4 months of total cover and 9.3 months of non-mineral import covers – to US$2.03 (K6.87) billion on 30 April.