Papua New Guinea relies heavily on a limited number of taxpayers. Paul Barker, Executive Director of industry-funded think tank, the Institute of National Affairs, considers the implications for government expenditure and PNG’s foreign exchange situation.
The Institute of National Affairs’ Paul Barker
A severe increase in PNG’s debt-to-GDP ratio, which more than doubled (51 per cent plus) in the decade to 2021 – to survive during COVID – has only highlighted the nation’s low level of tax revenue collection, relative to overall economic activity, and its disturbingly high reliance on a small cluster of companies.
While PNG may have successfully weathered COVID, dealing with a substantial drop in revenue – especially in light of additional expenditure – remains a lingering budgetary challenge for Treasurer Ian Ling-Stuckey.
To its credit, what the Government did in 2019, when the current Treasury team came in, is work with the International Monetary Fund to access funds at very concessional rates which made the details of that debt more transparent.
That meant shifting a lot of state-owned enterprise (SOE) debt and some of the other contingent liabilities into formal national debt.
‘Controlling costs… means avoiding the costly exercise of feeling the need to buy equity in all resource projects.’
Therefore, despite rising debt levels, the cost of servicing higher debt was initially kept steady. However, fast forward to 2022 and, with the inflation genie clearly out of the bottle, the increase of interest rates to control inflation is having an effect on the cost of debt servicing.
Broadening revenue
While energy prices impact individual economies differently, PNG, unlike most Pacific Island nations, has been a net winner (even if not for consumers and other energy dependent businesses). Its export earnings and foreign income are clearly benefitting from higher prices for its commodities, especially LNG and vegetable oils.
But, while LNG has arguably blessed the PNG economy, the trick now is to broaden the revenue base across more companies and well beyond the minuscule formal sector workforce, while also watching costs closely.
Upgrading expenditure on health services and education is arguably justified, but there’s a lot of wastage in the whole government system.
‘We need to get away from Forex being committed to government debt servicing.’
Controlling costs means rationalising the 1400 government institutions, many of which are duplicative and non-performing, and refocusing expenditure on the real priorities.
That means avoiding the costly exercise of feeling the need to buy equity in all resource projects, which also concentrates risks and increases, rather than decreases, exposure to market instability; (i.e. the opposite of what the Sovereign Wealth Fund is intended to do).
Frankly, the government has a lot of areas more worthy of expenditure. For example, basic utilities are all atrocious, with every business in PNG needing a backup power generator, apart from households that can afford them.
Forex dilemma
With Papua LNG ready to kick-off any time soon, business morale is improving. Yet key hurdles linger, not the least of which is the foreign exchange shortage, with the Central Bank implementing new forex controls in July 2022 to make life a little harder.
While some companies have abused their forex positions at the expense of others, shifts in the mechanisms of management of forex (and by implication the exchange rate) are clearly required.
Ultimately, we need to get away from forex being committed to government debt servicing and a few major importers. A few more months of strong LNG prices should help: the forex dilemma does little to encourage competitive players to enter PNG.
Paul Barker is Executive Director at PNG’s Institute of National Affairs.
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After over 40 years working off and on throughout PNG, I have seen firsthand why the problem for the PNG Govt. collecting revenue is far worse than ever. Corrupt practices entertained by companies big and small lead the charge. A former business partner casually stole the PNG Companies taxable profit by simply paying invoices for his Australian Company. He insisted we should be paying thousands of dollars to senior public servants and politicians as “introduction fees” and supporting “ghost jobs” for wontoks. He aims to collect commissions on multimillion kina imports from the buyer in PNG and substantial kickbacks from the supplier at the same time. These corrupt practices inevitably leave little for empowering the local workers with good training and pay.
To make matters worse many companies import workers from South America, Bangladesh, Pakistan, China etc. simply because of their failure even to attempt to hire and train local folk. I’ve worked with many of these imports in Telecommunications and very few are qualified or have fake qualifications. Sadly, just one of their airfares into the country would pay to train and fully equip a local worker. More oversight is required obviously and the many good people in PNG need to collectively muster the courage to oust the corrupt, the wicked, the lazy and the simply incompetent. PNG abounds with many fantastic people who deserve a fair go and the opportunity to prosper.
“While some companies have abused their forex positions at the expense of others” – this right here needs a major reform. “Those some companies'” operating license conditions must be investigated and corrected through a policy re-alignment in the next parliament sitting. We cannot afford to tolerate abuses anymore.