PNG: Beyond the boom

Economic update from Oxford Business Group

Asia | 20 Apr 2012

Papua New Guinea’s recent surge in natural resource projects has had a spin-off effect on other sectors, thus giving the country a positive near-term outlook for its economy, which is expected to see GDP growth reach 8% this year.

Work progresses on the LNG processing plant outside Port Moresby.-Picture courtesy of EXXON MOBIL

 However, the government has been advised to tighten its management of revenues from mining and natural gas projects, as well as curtail spending to ensure expansion remains stable moving forward.

In February, the International Monetary Fund (IMF) said Papua New Guinea (PNG) continues to see high growth due to elevated commodity prices and the construction of a liquefied natural gas (LNG) project, with the benefits seen in the construction and transportation sectors.

The IMF noted this was the 10th year of uninterrupted economic growth, but added that by 2013, growth will likely dip to 4%, as construction winds down and output at maturing mines declines.

The IMF’s confidence is mirrored in the latest regional review by the Asian Development Bank (ADB), which noted in March that the economy continued its strong performance during 2011.

“Industry made the largest contribution to growth, boosted by construction of the $16bn, ExxonMobil-led LNG project and high levels of government spending.

"Spillover from this activity also drove growth in the services sector, including wholesale and retail trade and transport,” wrote the ADB.

However, the bank also noted that increasing prices, driven by high government expenditure, large resource project investments and rising international commodity prices, saw the consumer price index (CPI) growth reach double digits in mid-2011.

Indeed, keeping inflation stable will remain key to maintaining economic stability as major mines close in the coming years and the PNG LNG project comes online in 2014.

 However, the Central Bank has been praised for monetary tightening in 2011, which helped see inflation fall to an annual headline rate of about 7% at the end of 2011, from close to 10% in the second quarter.

According to the IMF, the economy’s future also depends on Port Moresby’s commitment to ensuring that revenues from the LNG plant and minerals such as gold benefit the population.

“PNG’s resource sector could make a larger contribution to public revenues,” the IMF said. “Efforts to promote this could include strengthening revenue collection, reinforcing the internal revenue and Customs services, streamlining existing tax concessions, as well as an additional profits tax to mining activities, given that the average effective tax take from resources appears to be on the low side when compared with other fiscal regimes across the world.”

Concerns have been raised that the profits of PNG LNG could be spirited away from the country, with the government admitting in 2011 that only 4.5% of the project’s investment flows will be retained in the local economy between 2011 and 2013, as most project costs will be for imported goods and services.

In this regard, the passing of the new sovereign wealth fund (SWF) law by parliament in February is seen as an important step forward. The fund will be managed onshore and fully integrated into the budget and PNG’s fiscal framework, and will follow strict governance, transparency, disclosure, accountability and asset management rules.

To ensure growth, investment will need to continue to flow into the country. However, controversy has clouded Canadian firm Interoil’s plans for a $6bn LNG plant in the country’s Gulf province, with the plant initially expected to produce 5m tonnes per annum (tpa), ramping up in stages to 7.6m tpa and 10m tpa. The PNG government has shelved the plan, stating that the project was “fragmented” and “deviates from the [government] agreement”.

Also expected to impact foreign investment are political uncertainties, with fallout from last year’s stand-off between Prime Minister Peter O’Neill and former premier, Michael Somare, continuing to negatively influence the decision-making process. As a result, tensions are expected to intensify in the lead up to national elections scheduled for June 2012.

The need to spend to attract voters has also been flagged as a potential source of economic instability. In December 2011, the government passed its largest-ever budget at $4.98bn, an increase of 13% over the previous year. “We recommend moving toward a path of steady and affordable real expenditure increases,” said the IMF.

Improving financial management issues, strengthening procurement systems and creating greater integrity in public financial governance will go a long way to securing positive growth in the near term.