Wednesday, December 16, 2009

Do We Still Have Our Hands on the Wheel? - 2010 Papua New Guinea Budget Raises Serious Concerns

From NASFUND December Newsletter


The recent delivery of the 2010 Papua New Guinea budget leaves a lot of unanswered questions.

While we applaud a balanced budget, this in itself has been “masked” by slippage through Trust accounts over 2008-2009.

Two years ago, we proudly talked about a surplus in those trust accounts of between 3-4 billion kina - partly as a by product of lack of capacity to spend the money and partly as a means of maintaining macro stability.

 Now it has been revealed that the trust accounts have fallen to K1.5 billion with lack of full accountability on how and why this money was spent.

 The implications of that expenditure are very clear - an economy that is overheating and the flow on effect of anticipated inflation of 9.5% in 2010.

The economy needs no further stimulus, in fact remedial action is now required – to ensure that public sector largess does not crowd out the development naturally occurring through the private sector vis-à-vis led by LNG Project, ancillary support industries and an array of other mining, fishery and agricultural pursuits currently underway.

The economy has moved into over heating through unnecessary stimulus and requires a reality check.

Evidence of the current exuberance has been the extraordinary credit growth in excess of 30%, over the last few years.

 It is clear that the government must freeze any further expenditure from the trust accounts.

Similarly it is now time for the Central Bank to flex its independent muscle and raise interest rates to curb further exuberance and stymie on the margin investment.

The other important consideration is the exchange rate.

The current policy setting appears to be maintaining the currency within a short band against the Australian/US dollar.

While we accept the proposition that an appreciating Kina can risk eroding international competitiveness, we also have to accept that the LNG project will put strong upward pressure on the Kina anyway. It may be advantageous to preempt this with a broader policy setting - allow the Kina to appreciate closer to .50 to the AUD from the current .40.

This would have a positive deflationary effect, taking some of the steam out of the 2010 expected inflation rate of 9.5%.

It will also increase the real purchasing power of urban workers who are facing rising costs of imported goods and fuel.

Clearly the country is about to move into three to four years of extraordinary development with all that comes with it, including higher wages and costs.

 There can be no room for complacency or undisciplined expenditures.

To do so, would undo much of the good work already achieved.

We need to keep our hands firmly on the wheel.

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