Papua New Guinea has been dealing with a ’triple crisis’, according to Ilyas Sarsenov, Country Economist for the World Bank in PNG. Speaking at a Business Advantage PNG online briefing, he said that the economy has fallen well below previous growth forecasts.

Speaking at a special online event hosted by Business Advantage PNG last week, the World Bank’s Ilyas Sarsenov said that the crises faced by Papua New Guinea in 2020 are expected to linger into 2021, although its economy will return to positive growth.

‘We all know that Papua New Guinea faced three crises: the health emergency, economic contraction and political turmoil at the end of 2020.

‘They will continue impacting the lives of Papua New Guineans in 2021 as well, although on the economic side we will see a rebound in growth in 2021.

‘The health emergency situation will continue with the recent surge in COVID-19 cases; we expect the curve to continue rising. The economy will be smaller, compared to our pre-pandemic forecast. And political uncertainty and fluidity of the political situation remains a concern.’

Management

Sarsenov said that the PNG government needs to strengthen its economic management if it is to be resilient against external shocks in the future.

He said most of PNG’s key trading partners of PNG experienced a downturn in 2020.

‘We estimate that the PNG economy will be nine per cent smaller in 2023 compared to our pre pandemic forecasts. This shock was substantial for this economy.’

‘PNG is not an exception,’ he noted. ‘Even China experienced a substantial downturn compared with pre-pandemic growth forecasts. PNG’s growth in 2020, both the resource part of the economy and the non-resource part of the economy, experienced a contraction.

‘This was due to both external and domestic factors. COVID-19 affected global demand and key commodity prices for goods exported by PNG were negatively affected.’

Credit: World Bank

The Porgera effect

World Bank’s Ilyas Sarsenov. Credit: BAI

Sarsenov said the PNG government’s decision to enter into renegotiations in the resources sector, ‘especially the Porgera mine, but also some delays in agreements on new projects’ also affected the growth outcome.

‘According to our estimates, the economy contracted by 3.8 per cent in 2020 compared to the 2.9 per cent growth that we estimated before the pandemic. So we can see the magnitude of the downturn; it is almost seven percentage points [below the 2019 forecast] that the economy experienced.

‘If we consider the Porgera impact [closure of the mine] it was 1.5 per cent out of that seven per cent. It was a significant impact. According to Barrick, there was US$3 million (K10.6 million) a month [of lost revenue] to the government of PNG. So it would be a one per cent drop in [total] revenue to the government. Hopefully in the future, with more beneficial terms, there will be some gains in the coming years.’

Technical rebound

Sarsenov said the World Bank is forecasting 3.5 per cent growth for PNG in 2021.

‘Although it is higher than what we estimated pre-pandemic, this is a technical rebound starting from a very low base, which was negative. If we take 2020 growth and 2021 growth together and average them PNG growth would be close to zero, in contrast to our estimate pre-pandemic of three per cent growth on average.

‘We estimate that the PNG economy will be nine per cent smaller in 2023 compared to our pre pandemic forecasts. This shock was substantial for this economy.’

‘With an upcoming boom cycle, the economy will be smaller, but it will resume growing.’

Forthcoming boom

Sarsenov said the kina depreciated against the major currencies last year, but, after the effect of inflation is taken into account, the currency actually went up in value. The World Bank’s advice to PNG’s authorities is to allow ‘more flexibility and more convertibility’ of the kina, which he believes can help address the backlog of orders for foreign exchange.

Credit: World Bank

‘With an upcoming boom cycle, the economy will be smaller, but it will resume growing. It will provide more foreign exchange, helping the authorities make adjustments on the exchange rate without any substantial shocks to the system … Hopefully, it will be supportive for non-resources development.’

Sarsenov said he expects more in-flow of foreign exchange from exports, but warned that this may be offset by greater imports for the resource sector ‘both in terms of goods but also services attached to the new upcoming projects’.