Thursday, June 02, 2011

IMF: PNG suffers from poor governance

PAPUA New Guinea has enjoyed a decade of solid economic growth but suffers from week infrastructure and problems with governance and crime, the International Monetary Fund (IMF) has reported, The National reports.

Following a May 18 visit to the country, the executive board of IMF concluded that the solid performance was supported by greater political stability, a sound fiscal framework, and a healthy banking sector.

Despite its commendable performance, PNG remains “a low-income country highly exposed to commodity price fluctuations”, the IMF said.

The report stated in part: “The economy has weathered the global recession relatively well and real GDP growth is estimated to have picked up from 5½% in 2009 to 7% last year.

“Higher commodity prices and the construction of a liquefied natural gas production facility (LNG) – a 190% of GDP project – have boosted the economy, while banks continued to provide finance, and agriculture production rebounded.

“However, the country’s infrastructure–roads, ports, and utilities–has shown signs of capacity constraints, and bottlenecks have appeared in the markets for skilled labour and land.

“Inflation has reached 7.8% at end-2010 and is increasingly driven by domestic demand.

“Higher commodity prices boosted revenues last year, at the same time spending from off-budget accounts slowed.

As a result, after the deficit had reached 9½% of GDP in 2009, a balanced budget was almost achieved in 2010.

“The Bank of Papua New Guinea has kept the policy interest rate at 7% since end-2009.

However, monetary conditions loosened as short-term interest rates declined to around 3% and the nominal effective exchange rate depreciated by more than 7% in 2010.”

Banks, although well capitalised and liquid are vulnerable to a possible correction in property markets, the IMF said.

Although commodity prices and exports recovered in 2010, the current account deficit has widened to 24% of GDP.

It was, however, largely financed by foreign direct investment related to the LNG project.

External debt declined to about 11% of GDP last year.

The IMF directors considered the near-term outlook to be generally favourable but encouraged the authorities to consider tighter macroeconomic policies in the face of rising inflationary pressures.

“Over the longer term, it would be important to reinvigorate structural reforms to support the development of the non-mineral sector, while ensuring effective use of mineral resources to sustain economic growth and raise living standards,” the report states.

The directors stressed the need for tight fiscal policy during the construction phase of the liquefied natural gas plant.

They welcomed the agreement on a balanced 2011 budget and recommended strict adherence to budget allocations and the limit on trust account spending.

The IMF advised that it would be prudent to save windfall mineral revenues and use part of such resources to reduce government debt.

Further the directors welcomed the government’s plan to manage resource revenues through a sovereign wealth fund (SWF).

They stressed that the SWF should be well governed and adhere to the Santiago Principles to ensure effective management and use of the resources.

They considered it important to integrate use of the resources in the SWF into the budget and macroeconomic framework.


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