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Reaction to Papua New Guinea’s 2016 Budget: necessary cuts but still some challenges, say experts

The Papua New Guinea Government has made tough decisions in its 2016 Budget to avoid a cash and macroeconomic crisis. Business Advantage PNG talks to some experts on how the budget measured up to expectations, and what is still needed.

‘Reporting on the general government budget has definitely improved, thanks to parts of the Budget adopting new reporting standards,’ Troy Stubbings, Managing Partner at KPMG in Papua New Guinea told Business Advantage PNG.

‘It’s a technically better-constructed Budget.’

‘Increasing allocations for the provinces can only achieve sustainable economic growth if it’s productively spent … Underlying all this is the ability of the bureaucracy to deliver and the capacity building support and systems required,’ he said.

Big ticket items

‘They just weren’t going to be able to finance the expenditure levels they were planning to before this Budget,’ Melanesian Program Economist at the Lowy Institute, Jonathan Pryke, told Business Advantage PNG, ‘but unfortunately there are too many big ticket items the O’Neill government has protected, such as free education, free health, major infrastructure projects and, most importantly, provincial expenditure and the Constituent Development Funds, which make up 10% of government expenditure.

‘And this has come at the expense of primary service delivery and core government services.’

Treasurer Patrick Pruaitch has forecast an overall Budget of K14.76 billion, a deficit of K2.1 billion (3.8% of GDP), and the country’s debt-to-GDP ratio will rise from 34.7% to 35.8%, above the legislated limit of 35%. Economic growth is predicted to fall from 9.9% to 4.3% and PNG’s debt will rise by K2.02 billion to K19.7 billion (see our budget report for more details).

The Asian Development Bank’s Country Economist for PNG, Yurendra Basnett, told a business breakfast in Port Moresby yesterday that ‘the quality of public expenditure will be key for softening the impact of economic slowdown in 2016’ but that more work was required to increase the efficiency and performance of public expenditure.

Revenue

‘It’s a budget of severe cuts reflecting the drastic fall in revenue that PNG has had since the last budget,’ says Pryke.

‘In last year’s Budget, they were forecasting an increase in revenue of 10%, but instead it fell by 15% in 2015, so it’s roughly a 20% drop in the total amount of revenue they were expecting to receive this year.

‘They were planning on spending far above that with the plan for all this extra revenue coming in from the PNG LNG project so they’ve had to made some pretty dramatic, and necessary, expenditure cuts.

‘But when you dig deeper into how they’ve made these expenditure cuts you start seeing more of a worrying picture.

‘I think the cuts are in the wrong areas. If anything, they probably didn’t need to cut as much as they have. Now that they are showing next year’s Budget deficit will be the smallest in the O’Neill government’s history and I don’t think it needs to have a deficit that low in a period where the economy is so weak.’

Tourism, Agriculture

At yesterday’s business breakfast, Yurendra Basnett emphasised the need to maintain infrastructure spending, and also ‘to expand business opportunities and increase private sector participation, particularly in the non-mineral sector’.
Pryke says he was disappointed the Government missed an opportunity to boost the tourism and agricultural sectors, although he pointed out last weekend’s inaugural direct international flight from Brisbane to Milne Bay has the potential to start broaden tourism income.

‘The current commodity price crisis opens up the opportunity to develop agriculture and tourism.

‘Tourism did get a K50 million surge in investment but who knows if that will actually get spent or if that cash actually shows.

‘In terms of agriculture, there hasn’t been a surge in investment. You would have hoped to see it, but agriculture has been “stuck” in the PNG economy for a long time now and if it is properly addressed, it’s an area for great potential.’

Debt servicing

‘Too much revenue,’ says Pryke, ‘is being directed to debt servicing, to provincial level expenditures and to certain district improvement programs, and some other controversial expenditure.

The UBS loan (to fund the Government’s shareholding in Oil Search) is another cause of concerns, he says.

‘That loan was taken by a state-owned enterprise and SOEs aren’t actually included in the current Budget process.

Sovereign bond

Both Pryke and KPMG’s Stubbings see positives in the move towards a US$1 billion (K2.8 billion) Sovereign Bond, as it will allow the Government to restructure its short-term debt on more favourable terms.

‘It puts some real fiscal discipline on PNG—if you’re going for a sovereign bond, your house has to be in order,’ noted Stubbings.

‘The double benefit of the sovereign bond is that if they do achieve a billion dollar investment in the bond, they’ll be able to bring US$1 billion into the economy which would help shore up the foreign reserves which have been quite rapidly draining over the last few years,’ Pryke told Business Advantage PNG.

‘So, I don’t see any problem with that. The question is: What kind of terms is PNG going to receive from these international investors?’

Drought

Pryke says the Government has made pretty realistic forecasts of how the drought will impact its revenues.

‘They did make mention in the Budget lock-up that close to K220 million will be allocated through provincial allocations, but there’s no mention of that in the Budget document itself and a more targeted, state-led approach is needed.

‘The drought could be the worst in PNG history and while there was a breakout section on APEC [2018] and APEC expenditure, I would have expected at least the same on the drought because of its direct impact on the lives of many Papua New Guineans.’

Given PNG cannot avoid phenomena such as droughts and falling commodity prices, the government’s longer-term goal must be, as Yurendra Basnett put it, to ‘strengthen the economy’s resilience to economic and natural shocks’.

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