The Papua New Guinean economy is set to surge in 2019 and stabilize in subsequent years, according to a report by the World Bank. David James takes a closer look.

A new World Bank report suggest PNG’s economy will stabilise after 2019. Credit: BAI

The report Papua New Guinea Economic Update: Slower growth, better prospects forecasts that inflation will be subdued, the kina will rise and GDP growth will approach five per cent in 2019, ‘primarily due to the return to full production in the extractive sector’.

It says activity in the non-extractive sector is expected to continue expanding ‘with better investor confidence supported by improved access to foreign exchange.’

Agricultural production is projected to increase this year and trade and transportation services will benefit from higher production in the extractive sector in 2019.

‘There has been a notable improvement in PNG’s foreign exchange reserves.’

‘In the years after, GDP growth is expected to edge towards its potential rate, estimated at 3-4 per cent per year,’ the report says.

Foreign exchange

The report says there has been a notable improvement in PNG’s foreign exchange reserves

‘In US dollar terms, reserves grew by 3.2 per cent in 2017 and are estimated to have risen a further 22.2 per cent over 2018, reaching about $US2.1 billion by end-2018.

‘While this is less than half the level reached during the highs of the commodities boom, the improved reserves position will promote confidence in the authorities’ ability to navigate challenges.’

The World Bank says inflation was 6.3 per cent in 2018, but will fall to 3.3 per cent this year and 3.1 per cent in 2020.

‘The kina will appreciate by 2.5 per cent in 2019, 1.8 per cent next year and 5 per cent in 2021.’

‘The impact of fiscal policy (government spending) on domestic prices will be neutral in 2019.’

Although public spending will rise, it is predicted to be ‘constrained as a share of GDP.’

Despite a fall in export volumes, the value of exports has been stable. Source: World Bank

Trade balance

The report projects an improvement in PNG’s external trade balance, due to higher exports.

It says exports from the oil, gas and mining sectors will rebound this year, recovering from the effect of last year’s earthquakes.

‘As the non-resource economy continues to recover, imports are also expected to increase,’ the report says.

The Bank anticipates that PNG’s strong trade outlook will mean outflows of goods, services and investment incomes will exceed inflows by over 20 per cent of GDP in the medium term (a current account surplus).

It says this ‘sizeable surplus’ should be sufficient to ease downward pressure on the kina.

The report forecasts that, after inflation is taken into account, the kina will appreciate by 2.5 per cent this year, 1.8 per cent next year and 5 per cent in 2021.

PNG has a current account surplus because exports exceed imports, but money is still flowing out of the country because of the financial account deficit. This is why foreign exchange is hard to obtain. Source: World Bank

Economic diversification

The World Bank report comments that PNG is proving itself to be an efficient and low-cost natural gas producer.

‘Given the low costs of domestic production, PNG is well positioned to take advantage of growing regional demand and rising global prices.

‘Future large-scale investment in the sector appears likely.

The prospect of stronger economic growth and a ‘further concentration of exports in the resource sector’ means the government’s economic diversification agenda is more critical, according to the Update.

The report notes that resource projects do not create high levels of employment.

‘If PNG is to reduce poverty and boost shared property through jobs-laden, inclusive growth, private sector development efforts will need be focused on the non-resource economy.’

It describes a paucity of medium-sized businesses: a ‘missing middle.’

‘Over 90 percent of private enterprises are micro-sized and informal once subsistence and smallholder agricultural producers and the self-employed are counted.

‘Even amongst those firms that are administratively licensed in some way, estimates suggest that over 70 per cent have under 10 employees and about 25 percent are informal.

‘Given this economic landscape, if PNG is to reduce poverty and boost shared prosperity through jobs-laden, inclusive growth, private sector development efforts will need to be focused on the non-resource economy.’

‘Even amongst those firms that are administratively licensed in some way, estimates suggest that over 70 per cent have under 10 employees and about 25 per cent are informal.

‘Given this economic landscape, if PNG is to reduce poverty and boost shared property through jobs-laden, inclusive growth, private sector development efforts will need be focused on the non-resource economy.’