PNG’s fiscal woes: where has all the money gone?

Nurse helps patient with admission, St Mary's Hospital, East New Britain (image: Flickr/DFAT/Jacqueline Smart)
Written by Stephen Howes

Nurse helps patient with admission, St Mary's Hospital, East New Britain (image: Flickr/DFAT/Jacqueline Smart)There are widespread reports these days from Papua New Guinea of budgetary difficulties, from budget cuts to church health services to government salary payment delays. Why?

Total expenditure is budgeted in 2016 to be slightly below the 2015 level. But it is still 50 per cent above 2012 levels. (With the change in accounting rules, it is difficult to make comparisons going back before 2012.) That’s massive growth. So what is the problem? There are three.

The first is a big shift in allocations. Since 2012, there have been big increases in interest payments (due to increased borrowing), payments to MPs through district and provincial funds, payments to schools (in lieu of school fees), and compensation to employees. Deduct these and there is an 18 per cent increase in spending compared to 2012 to fund everything else, which includes critical things like maintenance and church health spending. That’s the “discretionary spending” shown in Table 1 below. (It is not actually all discretionary but A to D cover major items that are inflexible (wages), obligatory (interest), or top government priorities. “Discretionary spending” covers everything else.) 18 per cent sounds like a reasonable increase, but it is before inflation. Adjust for inflation, and the 2016 budgetary allocation for what I’m calling discretionary spending actually falls slightly relative to 2012.

Table 1: Comparing expenditure in 2012 and 2016

Table 1: Comparing expenditure in 2012 and 2016

Source: 2016 budget analysis. Inflation (CPI) between 2012 and 2016 is estimated at 22.7%. Table 9 of the 2013 budget gives the 2013 education subsidy payment.

The second problem is revenue. The budget assumed that 2016 revenue would equal that of 2015. Given the slowdown in growth, this is realistic. Indeed, things may be worse, given that the oil price is below the level assumed in the budget. (The budget assumed an oil price of USD$54, up from $52 late year. In fact, oil prices are much lower. The UK Brent crude, for example, averaged $53 per barrel last year, and only $31 a barrel so far this year.) Unfortunately, 2015 revenues were not the K12.5 billion estimated at the time of the 2016 budget. In fact, according to the final numbers just released, they were only K11 billion. It is hard to predict what will happen to non-tax revenue, but it seems reasonable that the K788 million shortfall in tax revenue in 2015 (final figures compared to revised estimates) will flow through into 2016. So that’s another (roughly) K800 million shortfall.

The third problem is borrowing. PNG needs to raise K2.1 billion in net borrowing this year to meet its budget targets. Domestic sources are limited, and the budget assumed K2.8 billion in a sovereign bond: almost 20 per cent of total spending. But that plan has apparently been shelved, presumably assessed as infeasible, leaving a huge hole in the government’s financing plans. PNG can borrow more domestically than it assumed in the budget, but will find it difficult to fill the gap entirely. Let’s say the government doesn’t retire K1.5 billion of domestic debt as originally planned, but is unable to increase net domestic debt either, due to limited market appetite. This would leave a funding gap of K1.3 billion (K2.8 minus K1.5 billion).

That means there could be, because of the estimated revenue and borrowing shortfall, K2.1 billion less to fund the budget. If we assume all shortfalls fall on the discretionary category of spending, that means that the maximum expenditure on that category is only K5.6 billion instead of the budgeted K7.7 billion: a 27 per cent shortfall, as Table 2 shows.

In summary, take out interest costs, wage costs and a couple of areas of priority spending, and the budget for everything else is back at 2012 levels after inflation: that’s Table 1. But, as per Table 2, even the modest allocations for many items can’t be met because of revenue and borrowing shortfalls.

Table 2: Funds available for “discretionary spending” in 2016

Table 2: Funds available for "discretionary spending" in 2016

Sources: Table 1, and the text.

Of course, these are just predictions and guesses, but they do give a good sense of the situation PNG is in. Its current fiscal problems are due to the big shifts in the way the budget is spent, an inability to finance the deficit and much lower than expected revenue receipts. The fall in commodity prices is certainly a major factor behind PNG’s current fiscal woes, but the situation is exacerbated by the big spending initiatives of recent years – the large payments to schools, the funds to MPs, the rapid growth in the salary bill, and the big increase in borrowing.

What needs to be done? There are no easy answers. Expenditure reforms are needed. Nothing can be done about the interest bill, but the other “non-discretionary” items could in fact be put on the table. Reform options include a freeze on salary increases, further cuts to district and provincial MP funds, and cuts to the school subsidy program. Revenue reforms should be re-examined. And a new borrowing plan is needed. Given the difficulties accessing both foreign and private commercial markets, PNG may need to turn to the multilateral system and negotiate a package of funds in return for reforms.

Finally, the government left it until very late last year before it introduced a supplementary budget. These numbers suggest that another supplementary budget will probably be required this year. It would be better to bring it down sooner rather than later.

Stephen Howes is Director of the Development Policy Centre.

Stephen Howes

Stephen Howes is the Director of the Development Policy Centre and a Professor of Economics at the Crawford School.

4 Comments

  • Have we ever thought about restructuring the government system to protect it from our cultural norms that tends to manipulate it regardless of the government of the day? I would definitely agree with Gitte Heij above. Blockchain can be an avenue to explore to keep the system clean. Stephen would you have a response to that suggestion?

  • Dear Stephen
    It may be too optimistic, but is there any scope or discussion to use blockchain technology? It is not only rich countries adopting this technology.The government of Honduras is using it.

    Governments adopting blockchain technology is only a matter of time. In 2015, UK Government’s Chief Scientific Adviser, proposed that the government use Blockchain technology as a secure method of managing data, collecting taxes, issuing passports and registries, etc (Uk Government Scientific Adviser, 2015)(Lyon, 2016).

    The key question for blockchain technology is, will governments adopt it as it will hugely increase efficiency at the expense of many government jobs (Lyon, 2016)? Blockchain technology makes many jobs redundant, in departments of transport, land administration, tax administration electoral services, passport and other identity services, and health services. The sudden loss of many jobs may not be acceptable to the electorate. However, it would solve a chunk of the revenue problems for governments, with reducing government expenditures.

    If governments embrace blockchain based encrypted currencies, they become transparent at every level of government. This is the ultimate tool for transparency (Smith, 2015).

    Blockchain technology can also assist in other area that may reduce the need for government revenue. It makes changes to public ledgers more efficiently.

    Too good to be true, pie in the sky? The government of Honduras is already using block chain technology to improve its land registry system. It can reduce corruption, be it in a charity or a government the department or a money launderer (Prosser, 2015). The Australian stock exchange uses it as does the NASDAQ.

    It could be used to set up a worldwide financial registration system as proposed by French economist Zucman (Johannesen & Zucman, 2014). The register has information regarding ownership of shares, bonds and other financial papers. The information will be automatically shared with tax authorities around the world. An organisation like the International Monetary Fund could be the holder of the system.

  • Dear Professor Howes,

    Your post analysis of 2016 Budget is a wake-up call for the Government. Our spending is so excessive, beyond the match of decreasing revenue. Part of revenue is serving the borrowing commitments, putting huge pressure on essential public programs and commitments including salaries. Your suggestion on expenditure reform and supplementary budget is urgent to get the economy back on track.

  • Thank you Stephen for the PNG budgetary analysis and pointing out some of the causes, why the economy is currently facing huge budget difficulties.

    There are also other major contributing factors that had huge impact on the budget and cash flow surplus situation in PNG as well for the last 18 months or so. Briefly, the following will give you a heads up.

    • Huge borrowing from external and domestic funders-estimate debts has gone up to over K25billion (over the limit of 35% under the Fiscal Management & Responsibility Act) with some due for repayment which the country is unable to repay and has gone into co-financing to repay, increasing the debts.
    • The projection of expected revenue annually is higher that the country’s revenue, some expected revenue has slipped off unaccounted, therefore, there is huge unfunded commitment around the country, the recent claim about the economy is being affected by external shock like the low world oil prices is an unreasonable excuse.
    • Lately in the last 12 months, huge spending goes into projects that have no benefit to the nation, or of little impact as far as socio-economic development is concern.
    • Many of the economic decision made by the government in the last 2 years or so is outside the annual budget limit, therefore the true picture of state of the economy is not declared, thus kept to few individuals who take a band aid approach creating one problem to the next.
    • Huge corruption in PNG, starting from the highest levels down to the customer service counters is an ignorant issue in PNG. Because of this it create opportunities for private sectors to creep in with their sweet fatty bucks. Talk to someone in PNG and its mindboggling what you can hear.
    • The INA and TI in PNG are critical of the country’s economy as well as other institutional issues, but something is still missing to make the heads turn, good leadership.
    • As you pointed out, budget cuts to churches and delay in salary payments, there are a host of other things as well, schools are currently closing early for break because TFF money is not coming in, and DSIP funds for some district have not been paid for the last 3-4 years, free health services policy existed on paper, outstanding state contribution to public servants superannuation and the list goes on..
    • While the problem continuous to increase, the government seen fit to increase funding to small impact projects, million kina projects to foreign companies that have dubious records of professional experiences and even some were black listed by international system like WB.

    So the concern on PNG budget difficulties are not an error in budget figures but a host of other unwritten issues that underpins the difficulties as well.

    Thank you

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