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Papua New Guinea’s public debt noose

DEBT raised in the past two years by the Papua New Guinea government has been so immense it could never have been contemplated in the past. By PNG Report’s Inside Track columnist.

According to the government’s 2014 Mid-Year Economic and Fiscal Outlook Report, the projected budget deficit blowout this year has widened by K372.5 million to K2,725 million. Together with last year’s budget deficit of K2.5 billion, that takes public sector debt up by more than K5 billion in just two years.

The twice yearly review by Treasury projected public debt outstanding to reach K14.6 billion at the end of this year to make it the equivalent of 37.1% of gross domestic product in contrast to the original 2014 budget estimate of K13.96 billion.

Under the Public Finance Management Act, the legislated debt limit is 35% of GDP. Instead of trimming back this deficit in the current half year to meet legislative requirements, government overspending continues, particularly for next year’s South Pacific Games. Other big commitments are also being made.

Many observers believe that in raising the A$1.2 billion (about K3 billion) loan from UBS for funding of a 10% stake in Oil Search, the debt to GDP ratio may have soared to 50% or beyond, a claim that has consistently also been made by the former Treasurer, Don Polye.

By the subterfuge of claiming to make it an off-balance transaction, under the care of the National Petroleum Corp of PNG, which holds the government’s 19.6% stake in the PNG LNG project, this amount has not been included in the Treasury’s estimate of public debt outstanding.

Prime Minister Peter O’Neill, who gained office in a parliamentary coup in August 2011 and who won the subsequent national election the following year, has often criticised the previous Somare Government for not having much to show on the ground for successive record budgets.

Some are now throwing the same accusation in the way of the current Prime Minister even though much new infrastructure has been built in Port Moresby, mostly to prepare for the forthcoming South Pacific Games.

There are concerns that the budget deficit – and public sector debt – could blow out even more this year in the face of softening commodity prices and lower corporate taxes.

Cash flows from the PNG LNG project, which are expected to be substantial, are only anticipated to occur in the second half of next year after project lenders have checked the project has been satisfactorily completed.

When O’Neill took office in August 2011 there was widespread concern that he chose to ignore two Supreme Court rulings that the O’Neill-Namah government had gained office through illegitimate means. Similar disdain is now being shown for the rule of law with the overlooking of the legislative guidelines regarding public sector debt.

The UBS loan is of wider concern because PNG’s Ombudsman Commission has chosen to refer the matter to the Public Prosecutor on grounds that Prime Minister O’Neill may have breached government regulations in signing the deal, which led directly to the sacking of Polye.

Meanwhile, O’Neill’s Peoples’ National Congress Party has been growing by leaps and bounds and is currently believed, for the first time in the nation’s history, to command enough seats to hold a clear majority in the Parliament.

There are murmurings on social networks and elsewhere that corruption in the country may be reaching new heights with overpriced road projects and sporting infrastructure but, for the moment, O’Neill’s grasp on political power appears unshakable with the two impending court cases against him providing the only reason that he could fall from grace.

Besides the UBS loan, O’Neill also faces potential charges for illegitimate payments to Paraka Lawyers, a law firm that has carried out much work in the past on behalf of the government.