Central bank: PNG economy grows strongly in 2011

By MALUM NALU

Papua New Guinea has realised high economic growth rate as measured by the increase in gross domestic product of 8.9%, while inflation for the year was a moderate 6.9%, according to the Bank of PNG, The National reports.

Bank of PNG Governor Loi Bakani, in the bank’s six-monthly monetary policy statement released last Friday, said real GDP growth was expected to remain buoyant in 2012 of around 8%, supported by strong domestic demand, as construction activity for the PNG LNG project peaked, production at Ramu nickel/cobalt mine commenced, other private sector investments came on line, and private spending ensued in the lead-up to the national elections.

Bank of PNG Governor Lo Bakani gives BPNG’s monetary policy statement during breakfast organised by Institute of National Affairs at the Royal Papua Yacht Club last Friday.Picture by MALUM NALU

“All sectors are expected to grow, led by manufacturing, building and construction, and transportation/storage/communication,” Bakani said.

“The bank projects annual headline inflation for 2012 to be around 8%, and both the exclusion-based and trimmed mean measures to be around 7.5%.

“PNG has also experienced significant levels of excess liquidity within the banking system in recent years, which poses a threat to the soundness of the financial system and to macroeconomic stability.

“The main source of liquidity is the foreign exchange reserve build-up, stemming largely from dollar-denominated mineral tax earnings, inflows related to the PNG LNG project and other private foreign direct investments.

“Whilst liquidity does not seem to currently have an impact on inflation via private sector credit, despite strong economic growth, the Bank of PNG is concerned about its potential adverse impact on price stability.”

Bakani said balance of payments recorded a surplus in 2011 and was projected to increase further in 2012.

“This outcome is associated with inflows for the PNG LNG project and high export earnings,” he said.

“At the end of 2012, the gross foreign exchange reserves are projected to be around US$5.087 billion (K10.598 billion), sufficient for 7.6 months of total and 19.9 months of non-mineral import covers.”

Bakani said the increase in international reserves led to growth in the money supply and liquidity.

“The trends in growth of monetary aggregates as experienced in 2011 are expected to continue in 2012,” he said.

“In 2012, broad money supply is expected to increase to increase by 14.8%, driven mainly by an increase in the net foreign assets (NFA) of the banking system.

“Monetary base and private sector credit are expected to grow by 33.2% and 7%, respectively.

“The government projects a balanced budget of K10.5 billion for 2012, with emphasis on key priority areas, consistent with its medium-term plans.

“However, any further increases in government expenditure in relation to the national elections and rapid draw down of trust accounts at the Central Bank would exacerbate the already high levels of liquidity.

“It is therefore important that there is close coordination between fiscal and monetary policy to ensure macroeconomic stability.”

Bakani also spoke about:

• ·         Creation of the Sovereign Wealth Fund (SWF) Act of February 2012 in anticipation of sizeable revenue inflows from LNG; and

• ·         The bank maintaining a tight policy stance so inflation was at an acceptable level and stability in the financial system was maintained.