Presenting the latest World Bank economic update for Papua New Guinea, PNG country economist Ilyas Sarsenov says its government has responded well to the challenges of COVID-19 but hard choices lie ahead.

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The World Bank expects Papua New Guinea’s economy to contract this year, Sarsenov said during a Business Advantage PNG online business briefing last week.

‘Overall, we expect that the real GDP growth will decline by about four percentage points to a negative area this year,’ he said.

The bank’s ‘low case’ forecast for the economy of about minus two per cent for 2020 ‘will prevail because of domestic factors, especially disputes around licence expansion for Porgera gold mine’, Sarsenov added.

‘A more flexible exchange rate is a better shock absorber compared to the current regime.’

The World Bank’s PNG Country Economist said both the resources and non-resources sectors of the economy have been hit, with the resources GDP falling to minus one per cent and non-resources GDP flatlining.

‘We expect a decline in production in the resource sector due to demand and price effects. More importantly, the non-resource economy is expected to stop growing this year because of decisions to restrict the movement of people and the operation of businesses during the lockdown period.

Global factors

Global factors will also have a significant effect on PNG’s economy for the rest of this year.

‘Global trade will be negatively affected by the crisis, impacting demand for key commodities exported by Papua New Guinea: LNG, mineral production and agriculture. On the price side, the impacts are also negative. In 2020 prices went down and therefore the terms of trade shock adds to the volume shock, driving the PNG economy down.’

Credit: World Bank

Sarsenov cited World Trade Organization figures that suggest global trade will fall by 14% this year.

Foreign exchange pressure

Sarsenov said that PNG will continue to record a current account (net income) surplus, but it is expected to fall from 25 per cent of GDP down to 15 per cent of GDP.

‘The Balance of Payments will turn negative, creating an additional finance gap. These developments will lead to higher pressure on the exchange rate.

‘If the Bank of PNG decides to maintain stability on the exchange rate, it may put an extra pressure on official reserves. This may require the authorities, the government and Central Bank, to work with development partners to bring more foreign exchange into the economy through official loans.’

Revaluation of kina?

Sarsenov suggested that a ‘gradual adjustment’ of the kina might be a way to respond to the current crisis.

‘A more flexible exchange rate is a better shock absorber compared to the current regime that the Central Bank has decided to apply for the last several years. The magnitude of adjustment depends on central bank,’ he told Business Advantage PNG.

In recent years, a backlog of foreign exchange orders has been a feature of PNG’s financial system, with businesses sometimes having to wait several weeks for their foreign currency orders to be met.

‘To address the backlog situation, the government will require more external financing to be available to the government and the central bank. Otherwise, the pressures remain.’

Sarsenov said he is ‘sure the Central Bank does not want to see’ foreign exchange reserves deplete further, because ‘it will lead to additional obstacles for the private sector’.

Short-term actions being undertaken in PNG, and the medium-term opportunities it should consider, according to the World Bank. Credit: World Bank

Keeping promises

World Bank’s Ilyas Sarsenov

Sarsenov said prices for two of PNG’s biggest exports, LNG and gold, are holding up, but there ‘have been some negative impacts’ for agricultural produce.

He believes the government must have a ‘vision for the medium term’ to prepare the economy for a more ‘robust and resilient recovery’.

It’s a difficult balance to achieve, he concedes.

‘We do see the desire of the current government to bring more benefits to the population. There is a line between this desire to bring more benefits and how this may impact investor relationships.

‘They need to deliver on their promises, but at the same time they may scare off their investors, current or future. The government won’t be able to deliver [resources projects] on its own. The economy requires foreign direct investment and not only into the resource sector. The non-resource sector would benefit from foreign investment, knowledge and other benefits that external investors bring to the country.’

The World Bank’s latest PNG economic update can be read here.