Papua New Guinea will find itself in a tight fiscal situation in 2016, according to the latest analysis by the Asian Development Bank’s economists. While more efficient public spending could yield large savings, they suggest more may need to be done to arrest the downward pressure on the currency.
The latest edition of the Pacific Economic Monitor also states that PNG has been hardest hit among Pacific economies by the fall in commodity prices, worsened by the impact of El Nino and a prolonged drought.
The lead author for the PNG section of the publication is the ADB’s PNG Country Economist, Yurendra Basnett.
The 2016 Budget deficit is expected to K1.7 billion in 2016 (3.1% of GDP) and continues to reduce in size until a balanced budget is reached in 2020.
‘This is expected to keep the public debt to GDP ratio under 35%, falling to about 30% by 2020,’ notes the report.
But debt service costs are increasing and are now estimated at K1.5 billion, or 10% of the 2016 budget.
‘The stock of domestic debt is shifting toward shorter-term maturity with banks unable to purchase any more Treasury bills, further raising interest rate risks.’
Thus, more severe cash flow constraints are likely in 2016, it says.
While the government is exploring the option of floating a US$1 billion sovereign bond of US$1 billion in 2016 to refinance its borrowing, that ‘may lead to high financing costs, and exchange rate movements could raise nominal debt’.
The report says, however, more efficient public spending could yield large savings.
‘It is estimated that up to K700 million could be saved by weeding out non-performing workers and spurious posts.
‘Each year, the government places a sizable part of the budget in commercial bank trust accounts. Not only are these subject to service fees, banks also use the cash to purchase Treasury Bills when the government faces cash flow problems.
‘This reportedly costs the Treasury over K1 billion, which could be avoided through better planning and budget implementation.’
The report also warns that spending on the completion of ongoing projects, preparations for hosting several large gatherings (e.g. the African, Caribbean, and Pacific states meeting in 2016, and the APEC summit in 2018), and the national elections in 2017, ‘could challenge fiscal discipline’.
The tight fiscal situation is exerting downward pressure on the kina, notes the report.
‘After the completion of construction on the LNG pipeline, imports were expected to decline, but this has occurred more slowly than anticipated with upscaling of government capital investment.
‘Foreign exchange reserves are likely to continue falling (from US$2 billion in September 2015), and further measures may be needed to arrest this decline.’
Droughts throughout Melanesia are expected to cause significant losses in agricultural output, says the report.
‘Other impacts include changing migration patterns of commercial fish species, increasing risks of cyclones, freshwater shortages, and waterborne diseases.
‘PNG has been one of the most severely affected Pacific countries, with heavy rains in March causing an estimated US$36 million in damages to infrastructure and agriculture.’
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