A World Bank report says Papua New Guinea government spending should be curbed to avoid a possible ballooning budget deficit.

The Ok Tedi mine. Credit: PNGSDP

In its latest report, World Bank East Asia And Pacific Economic Update October 2015, bank economists say subdued commodity prices and the fact that PNG income only reaches its full potential after 2022, indicates the need for the government to curb spending, ‘in a measured manner to avoid a ballooning budget deficit.’

They say PNG is facing ‘strong headwinds’ from lower global commodity prices, the suspension of production at the Ok Tedi mine, and unfavourable weather conditions brought on by El Niño.

Growth

The Bank predicts the economy will expand by about 8.7% this year, down from a forecast of 16% in April.

‘The downward revision stems largely from the drop in LNG prices, and from the suspension of production at the Ok Tedi mine due to both low copper prices and low water levels in the Fly River (making transport of ore difficult).’

This is expected to lead to a contraction of 20%, year-on-year, in the mining sector, it says. The non-extractive sectors will contribute 0.5% to overall growth, a slight fall, due to El Niño.

‘There are increasing downside risks, including a risk of a precipitous decline in commodity prices in response to the slowdown in China and generally anaemic global growth.

‘This may exacerbate the poor revenue performance and continue to adversely affect foreign exchange earnings.

‘Moreover, the Papua New Guinea Treasury will need to curb expenditure in 2015 by more than the proposed expenditure cut of K 1.3 billion in 2015 to effect a reduction in the debt ratio after 2020,’ say the bank economists.

‘Thus, failure to consolidate the fiscal position would worsen debt dynamics.

Reserves

A PNG family showing the effects of the drought. Credit: IOM Wanesi Sithole via ABC

‘However, fiscal consolidation, necessitated by weaker-than- anticipated revenue performance, will dampen growth in the non-extractive sectors over the short run, while a weak global economy could further dampen external demand and commodity prices. This will adversely affect foreign exchange reserves.

‘To preserve the foreign exchange reserve position, consideration should be given to improving the foreign exchange allocation mechanism, underpinned by sound fiscal and monetary policies.

‘Given that fiscal policy continues to be relatively expansionary, monetary policy should be tightened. This would help take pressure off the foreign exchange market.’

To cover its budget deficit, the Bank reports the government is preparing to issue a Eurobond, denominated in US dollars, with a face value of US$1 billion.

Other key points of the report include:

• The current account deficit is expected to turn to a surplus of 4.1% of GDP in 2015;
• Inflation will remain around 6%;
• GDP growth will average 3.5% over the next five years;
• Growth in the non-mining sector will be led by the construction, transport and communications sectors, ahead of the 2018 APEC summit;
• Monetary policy should be tightened to help take pressure off the foreign exchange market.World Bank says Papua New Guinea needs to avoid a possible ballooning budget deficit@WorldBank