By ROWAN CALLICK
Dec 23, 2014
PAPUA New Guinea has joined the list of countries severely damaged by the collapse in oil and gas prices.
It faces a spiralling budgetary deficit unless it swiftly adjusts to lower revenues and unwinds ambitious new spending, according to former Treasury official Paul Flanagan. “PNG had set itself on a slippery slope towards a crisis, and the world just gave it a great big shove,” he said.
If the government does not act soon, he said, “PNG will be going to the International Monetary Fund or another country seeking a large bailout”.
Opposition leader and former treasurer Don Polye agreed, yesterday saying the country’s budget deficit threatens to rise above 10 per cent, and the debt to GDP ratio to 75 per cent by 2017 — 2½ times the maximum level permitted by the country’s Fiscal Responsibility Act.
Mr Polye urged that the kina, the rate of which has been managed since June 4, be allowed to depreciate — claiming that international reserves would otherwise be exhausted within two years. “Unfortunately Santa Claus isn’t going to be visiting the government this Christmas.”
Prime Minister Peter O’Neill responded that “the opposition leader should not panic, but needs to better consider the current global market situation before making irrational claims”.
He said that “price fluctuation is factored into the budget”, and the government was monitoring the situation. “Energy production is a long-term investment that will experience market turbulence. The market for liquefied natural gas remains strong.”
The government announced in its 2015 budget plans to cut spending by 6 per cent in 2016 and 2017.
Mr Flanagan, who was seconded as an adviser to the PNG Treasury from 2011 to 2013, has written a paper for the Development Policy Centre at the Australian National University, where he is now a visiting fellow, saying that LNG production had often been conceived as transformative for PNG. “But just at the time the country was to benefit from the revenue and foreign exchange flows from (PNG’s first, ExxonMobil managed, LNG project which came on stream in midyear), international markets have dealt a cruel blow,” he said. There would be no tax revenue from this first LNG project “for many years,” Mr Flanagan said — until depreciation allowances end.
The oil price collapse “also significantly reduces the viability of other LNG projects in the pipeline”, he said.
The country’s growth rate for 2015 was forecast in the budget — just six weeks ago — at a world-topping 15.5 per cent thanks to LNG receipts, but is now expected to reach 6.9 per cent. With good policies, suitable adjustments could be made. “However, PNG has moved to poor policies over the last six months such as moving away from a market-based exchange rate, starting to print money to fund the deficit, and deciding on an unsustainable fiscal policy in the 2015 budget,” Mr Flanagan said.
The adjustment needed to avoid a crisis is thus all the more painful, Mr Flanagan said, urging that the 2015 budget be rewritten to avoid a spiralling deficit: “Good public policy making just became much harder — but also more important.”
The shift from the market-based kina, he said, triggered a fall in income for PNG’s 2.1 million people who depend on coffee-growing, as well as other small-scale agricultural producers. The kina has since risen by 22 per cent against the Australian dollar since the June 4 intervention — “which makes no economic sense unless payments against major loans in US dollars are being protected”.
The return to a market-based exchange rate would provide a “shock absorber” for the economy, he said. “Market estimates are that the oil price will recover, but only very slowly — and by the end of 2019 it would still be nearly 30 per cent lower than PNG Treasury forecasts.”
At a PNG Mining and Petroleum conference in Sydney earlier this month, Mr O’Neill detailed the government’s “record investment” via the 2015 budget “in free primary education, free universal health care, and expanded skills training.”
The country remained, he said, “a sound and secure nation in which to invest to do business.”
The Asian Development Bank said in its recent regional review that the rest of the PNG economy beyond mining and petroleum was unlikely to salvage the dilemma — with its growth forecast at just 1.6 per cent for 2014, and with 2015 returns shadowed by the boosted kina.