Papua New Guinea’s Prime Minister James Marape straight after his election to office, described the PNG economy as ‘bleeding and struggling’. What can the Prime Minister and his team do to support a sustained recovery? The Australian National University’s Stephen Howes offers his suggestions.
Detail of Papua New Guinea’s National Parliament building. Image: David Kirkland
The incipient recovery underway in PNG in 2018 faltered and economic growth has once again slowed. I don’t think this conclusion is a surprise to many, including not to James Marape, who, straight after his election described the PNG economy as ‘bleeding and struggling’.
Indeed, the economy has been struggling for some time now. Formal sector employment has fallen every year since 2013, by 2018 by a cumulative 10 per cent. That’s very worrying news in a country with rapid population growth. Based on our 2019 PNG Survey and my 2019 PNG Update presentation, I offer five suggestions.
1. Fix governance
ANU’s Stephen Howes.
First, and indeed the reform being emphasised by the Marape administration, is to fix governance. No one can argue against the proposition that PNG, its people and economy would benefit from less corruption and stronger law and order.
2. Devalue the exchange rate
The kina was allowed to float up during the boom but has not been allowed to adjust afterwards. Whatever nominal depreciation there has been in recent years has just sufficed to compensate for PNG’s higher inflation. In real terms, the exchange rate is still at boom levels.
The contrast with Australia, as shown in the graph below, is instructive. In Australia too, the real exchange rate floated up during its boom, but there has been significant real depreciation since. Not so in PNG. Until there is, export and import sectors will struggle to be competitive, and forex rationing will remain a fact of business life.
The real effective exchange rate in Australia (blue) and PNG (red). Credit: Source World Development Indicators/Devpolicy
3. Revamping of fiscal policy
PNG has tried to bring down its borrowing. The graph below, however, shows the underlying fiscal reality that (adjusting for inflation) revenue has been flat since 2013 while salaries and interest payments have continued to grow. In this context, significant expenditure arrears have emerged.
To add to its fiscal woes, there are growing worries about the debt being carried by state-owned enterprises and guarantees provided by government in relation to them are starting to be called. The government missed its fiscal deficit target last year and doesn’t seem to be planning to hit it this year.
4. Encourage investment to promote employment
Now is not the time to restrict foreign investment. Rather, the focus should be on making the financial sector more competitive to drive down interest rates, and to improve infrastructure and governance to encourage all investors, national and foreign.
Salaries, interest and revenue in PNG. Credit: PNG Budget Database/Devpolicy
5. Prepare for the next resources boom
A lot can be learnt from the last one. A Sovereign Wealth Fund was legislated for during the last boom but has not yet been operationalised. It needs to be in place before the next boom starts.
Exchange rate policy during boom times also needs to be revisited. Given how difficult it has been to implement a real depreciation after the last boom, greater care should be taken to avoid a real appreciation during the next one. Or else the economy will be left even less competitive.
‘The new Prime Minister and Treasurer have a critical role to play, by explaining the difficulties the economy is in, and then outlining the difficult decisions that will need to follow.’
None of the reforms proposed will be easy. And in any case reform is not just a technical matter of coming up with the right policies. To succeed, economic reforms need strong political support, and a compelling narrative. This is where the new Prime Minister and Treasurer have a critical role to play, by explaining the difficulties the economy is in, and then outlining the difficult decisions that will need to follow.
The government should also look for external support. If Marape really believes that the economy is ‘bleeding and struggling’ then he should consider requesting the International Monetary Fund to provide the financing and the technical expertise PNG needs to support a successful economic recovery program.
This is an edited version of the story ‘PNG: some reform suggestions‘ first published in Devpolicy.
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Devaluing exchange rate when the country is trading at negative net Export with insufficient capital investment to stimulate Agriculture or sustainable primary industry may not ideally be timely. PNG is a net importer at this stage and devaluation of exchange would only increase our foreign outflows, denting deeper our international Investment Position in our Monetary Account.
Devaluation, hardly a new trick, does not help the rural population who are trapped in the countryside producing crops for which international prices are in free-fall (see the migration crisis.in coffee producing Central American countries). There are structural matters to be addressed which have been responsible for `trapping’ people in rural areas over many decades, including opposition to developing manufacturing and attacking urbanisation which go back to the advice of previous generations of ANU economists. (References available if required.) None of the reforms required do suit the out-dated ideas about free markets, trickle-down economics, privatisation at all costs, labour mobility etc.
Forget IMF and external expertise, Revisit the fiscal policy of the former government. Do an inventory on the Nation’s Infrastructure and assess the rule of law in terms of corruption, We have to be more self-reliant and sustainable especially in emerging markets. How about producing more of our own crops for the supermarkets and the government to do its job of negotiating viable markets for export?
More importantly, how about the government stepping up to protect our natural endowments such as galip nuts (ENB) Balsa wood, Tourism, and many others; you can add to this list…
There need to be competition in our market economy by outlawing monopolies; monopolies sometimes restrict output (just think about supermarkets in PNG).
I would also like to add, the government should have policies that encourage private ownership, innovation, and vigorous free and fair competition between producers of our quality commercial goods and resources.
We should be thinking about long-term innovative-sustainability and not short-term band-aids.
That’s a really good evaluation, greater success can come from such sustainable market improvements.
It’s not an infatuation with the IMF, but I think they are useful in a crisis. And why not when you need financing and expert advice? On currency devaluation, we’ve written a lot on this over the years. You might find of interest: https://www.devpolicy.org/private-sector-perspectives-png-economy-20180622/
Didn’t new PM James Marape recently say: `Eighty per cent of this country (are) still locked in the enclaves of rural entrapment. Those of us in cities are enjoying and yet they are stuck up there. They deserve to be lifted.’ Good to see meaasures being proposed to deal with this.Not!
All of these reforms will help the rural population, especially devaluation.
Disagree with point#4, that decision not for you to make.
None of them are decisions for me to make.
I am a bit skeptical with opinion #4. Though we need genuine investors to stimulate growth of our economy, those that are here to make profits that do not remain onshore to boost our reserves should not be welcomed, especially those in the reserve business activities. They contribute to severe shortage in our foreign currency that makes imports more expensive, creating inflation. Our government needs to tighten up our reserve business activities matrix to empower our own people to participate in the products of our economy.
Why is there an infatuation with the IMF as the only solution provider with a golden bullet?
What are their new record on this sales pitch apart from their historical records of blunders and abject failures?
The reasons given for currency devaluation are shallow at best and unconvincing. Care to clarify a little bit more?