2022 was a momentous year for Papua New Guinea. It held its 10th national elections. The 2022 election has been labelled one of the worst since elections were first held in 1977, due to inadequate preparation, violence and poor organisation. The elections also made history by returning 64% of incumbent MPs to parliament. Normally only half the incumbents are returned.
The overall results were in favour of the ruling Pangu party, which won 34% of the seats – the second highest since independence. The incumbent Prime Minister James Marape was re-elected unanimously by MPs after the election.
The government projects that PNG’s economy will grow by 4.6% in 2022, and 4.0% in 2023, with a marginal rise in formal sector employment, after doing poorly in 2021 due to COVID-19. The non-resource component of PNG’s economy – covering sectors such as agriculture, fisheries, forestry and tourism – portrays a more accurate picture of the economic situation, given the enclave nature of the resources sector. After negative growth in 2020, the non-resource sector is estimated to have grown by 4.8% in 2021. Projected growth rates for 2022 and 2023 for this sector are 4.5% and 4.6%, respectively, but it remains to be seen whether this will be achieved.
The 2023 budget which was announced in November, increased government spending by more than 10%, leading to a deficit of 5.4% of GDP. The pre-election 2022 budget also saw a large increase in spending, but promised to start cutting expenditure by 2023. PNG has since benefitted from the Russia-Ukraine war, with higher petroleum prices resulting in a windfall in mining and petroleum tax revenue and an improved current account.
According to its own legislation, the government should save a significant part of the windfall in its Sovereign Wealth Fund (SWF). But in the 2023 budget, the government decided instead to “fully allocate extra resource revenues to increased investments, and further household relief, rather than a SWF or other savings options”. To add to the confusion, the government announced a token first deposit into the SWF, far below what the law requires.
Inflation – estimated at 6.6% in 2022 and 5.7% in 2023 – is hurting real incomes and may exacerbate economic hardship. The government’s relief package of K560 million (US$159 million) in the 2023 budget is welcome news for low-income earners. But apart from a subsidy for school project fees, the unemployed and the country’s majority rural population have been left out, with no indirect tax cuts on basic goods and services.
The effectiveness of the measures has also been called into question, given Prime Minister Marape’s remarks regarding the K610 million (US$173 million) relief package provided in 2022 elections that “the agencies that were supposed to implement this were slow”.
The temporary supply-side measures put in place by the government over the last few years, such as the agriculture transport subsidy, need to be transitioned quickly to concrete policies to lower the cost of production and increase productivity in the non-resource sector. Increased road spending under Marape’s flagship ‘PNG Connect’ program may help, but the electricity sector is in crisis with daily blackouts in parts of the country and law and order seems to be deteriorating.
Progress in these areas will be essential to transition from a resource-based economy and to grow other productive sectors to support and sustain the economy when mineral wealth and resources are exhausted in over a generation’s time.
Another important issue that the government will need to grapple with in 2023 is exchange rate convertibility. The central bank, in its effort to lessen the kina’s depreciation, moved from a floating to a pegged regime in 2014. It has been rationing foreign exchange ever since. This is impeding the private sector’s ability to import and grow.
This has not only affected businesses, but also the public. For example, Air Niugini recently suspended flights temporarily due to lack of aviation fuel as the supplier Puma Energy and the central bank couldn’t resolve forex issues. The treasurer acknowledged the problem in his budget speech but provided no solutions. The government needs to fix this issue in collaboration with the central bank in the new year. This would greatly benefit the non-resources sector.
The 2022 elections were the fourth in a row in which the incumbent prime minister was returned. The success of prime ministers at elections only adds to the pressure on them at other times, since a vote of no confidence has become the only way to change prime ministers in PNG. In late 2023, Marape will have his work cut out for him manoeuvring politics when the 18-month grace period in which a no-confidence vote cannot be held nears its end. PNG’s fluidity of political alliances will then come to the fore, and the inevitable jostling for a vote of no confidence will begin.
A strong economy will help Marape’s chances of survival but tough decisions like expenditure restraint or ending foreign exchange rationing will harm them. The prime minister will then face a tough decision between prioritising the national interest or his own chances of political survival.
This blog was originally published on East Asia Forum.
Failing Government System in PNG
In the recent mass media news reports, there were concerns raised by leaders in various government agencies that governing systems were failing. This is bad for Papua New Guinea (PNG) as a developing nation to achieve its developmental goals, enshrined in its Vision 2050. There are several reasons that have contributed to failing governance systems. In the following discussion, the main contributing factors are being discussed in length, and providing with strategies which the government can adopt to address these issues for to make the governance system work effectively.
Firstly, and most pressing issue is the higher prices of goods and services that is felt by the citizens of this developing country, Papua New Guinea. For example, previously diesel was K2.90 per litre in 2012 and now increased to K4.45 per litre in June 2022. Now further increases to K4.50 per litre. This is due to high inflation rate in the economy. Inflation simply refers to an increase in prices of goods and services over time, resulting in the loss of buying and selling power for customers. The impact of inflation can be very severe as every Papua New Guineans are going through, where many people are living below the poverty line and struggling to meet their daily needs as prices of goods and services are increasing rapidly.
One of the primary causes of inflation in Papua New Guinea is excessive government expenditures on paper contracts. Government often resort to printing more money for their spending, though the blame goes to Russia-Ukraine conflicts and covid-19, which leads to an increase in money supply and eventually inflation. Papua New Guinea has a history of high government spending, with large investments being made in infrastructure projects. While these investments may be necessary for the country’s development, they also contributing to inflation by putting more money into circulation.
Furthermore, heavy reliance on imported goods and services is another cause of inflation in Papua New Guinea today. As a smaller island nation, Papua New Guinea can import many of the goods and services it needs. When the value of country’s currency declines against foreign currencies, as often happens in periods of inflation, the costs of imported goods increases. This in turn drives up the prices of local goods and services, leading to inflation. High inflation rates reduce the value of people’s savings and reduce the purchasing power. This is leading to lower standards of living, increased poverty rates, increases social unrest in both rural and township, which PNG is experiencing today.
Moreover, businesses shutting their operations like Lae Biscuit company, and investors are less likely to invest in the country due to the risk associated with inflation. This is now limiting the economic growth and developments, further exacerbating the country’s economic problems.
So, to address these issues, the government needs to take steps to control its spending by cutting down expenditures on imported goods and promote domestic production of goods and services. And also, foreign investment should be encouraged to help diversify the country’s economy and reduce reliance on imports. By taking this approaches, Papua New Guinea can work to restore its economic stability and improve people’s lives.
Another factor that is crippling the economy of Papua New Guinea is government’s mismanagement on public funds. The government is mishandling the economy by unnecessarily creating all kinds of entities which were previously run under one department. As this is the cause, huge amount of money is being consumed into those areas which is a waste of public funds. For instance, like for the department of civil aviation, there are four (4) entities; (1) National Airports Corporation (NAC) looking after all the 21 airports (major airports) in the country, (2) Civil Aviation Safety Authority (CASA), which is the regulator of all the airports in the country, (3) NiuSky Pacific Limited, which is another organisation that is responsible for looking after and collecting fees for other planes from other countries for using PNG’S airspace, and (4) is the Air Investigation Commission (AIC), which is the body that investigates any plane crushes. So, all these four (4) organisations are coming under one- Civil Aviation Sector.
Previously it used to be the department of Civil Aviation, or Civil Aviation Department, and only 4 directors look after all of those, which is cheaper to look after in terms of public service salary. But now, what Marape government has done is, when they created those entities, they are like companies comprised of managing directors, deputy managing directors, and general managers which are very highly paid, and summing up with the salary expense for the staffs and other bottom line workers of each of those four entities, the government is spending very significant amount of money. And that is why it is consuming a lot of money there which is a waste of public funds. That is one area that the government should have saved money. If it was one department (in this case Civil Aviation Department) running them then, those four entities should be looked after by four directors, or First Assistant Secretaries (FAS), and then some staffs working under, and that is more-cheaper to look after. As the economy is in dire need today, government needs to look into such areas and cut down those unnecessary costs and use those money for other government’s priority areas like health, education, and infrastructure.
Another example is like PNG Power. PNG Power is seen as a liability to the government. Every time government is subsidising PNG power to run because it cannot make its own money. PNG Power should be a self-income generating entity but it does not. Why? This is simply because all the revenues generating are being consumed into the staffs. Managing directors, CEOs, and all the other officers down the line are all being highly paid. Much of the money is being wasted here.
This entity, PNG Power, supposed to be the department of Petroleum & Energy, but not. And, now they have created another entity called National Energy Authority (NEA) which they are trying to put in those other power related areas like harnessing renewable energy and downstream gas industry to be administered under this new authority which is not right as it is going to consume a lot of money. It should just come under Department of Energy, with one secretary, and then some of those deputies and directors so that they look after PNG Power and other energy related areas. In this way, government will safe cost in that department.
Finally, one of the very main factors that is contributing to the failing governance system in Papa New Guinea is none-other than corruption. Rampant corruption at all levels from public (government) sector to the private sector is the main impediment towards the progress of this nation. As PNG is well associated with multi-cultural groups with abundance of availability of valuable resources, the country should have been fully developed some decades back. Yet, PNG is still in poor state. This is simply because of corrupt practices of the so-called leaders, especially parliamentarians. Thus, these bad practices at highest level leads to stagnancy in terms of economic growth of the country. Particularly, political corruption is hereby described as use of position of trust (power) for dishonest gain or personal interest. Most of the people think that being parliamentarians means to build one’s empire because every elected member in parliament now a days are likely doing so.
Meanwhile, the most common and well-known bad practices being practiced which fuelled to existing corruption by our leaders are nepotism (wantok system) and bribery.
These unpleasant systems dwelling in all levels of government systems and processes have been seen as root cause of various issues dramatically evolving throughout the nation like increased unemployment, acceleration of goods and services price, over borrowings and deficit budget. These are all happening because elected leaders as well as bureaucrats in the higher offices have been promoting corruption by performing their duty with dishonest and greed. Stealing, bribery, nepotism and favouritism for their self-interests and, or political interests, all have caused setback and downfall rather than being progressive and prosperity in achieving some of the major goals and objectives in the country.
Therefore, government should need to take steps ahead and put forth some specific measurements in place purposely to eradicate the corruption. This could be targeted when constitutions that were outlined and amended under democratic governing system in PNG must be reviewed. Just because of freedom, people take advantages and do things according to their own will because they without doubt, know that they will be safe because the law (mama law) itself and law enforcement bodies are so weak in this country.
To conclude, it is understood that there are many more factors which are becoming detrimental to the progress of this nation. But the very main factors that are heavily contributing are excessive government spending, mismanagement on public funds, and corruption practices by our so-called leaders.
This nation (PNG) is facing economic doldrum as a result of growing expenditure with slow and lower revenue collections. Higher rate of inflation leading to skyrocketing of the prices of goods and services, and other issues like increase in crime rates, increased unemployment, rural urban drift, and the list goes on… To address these pressing issues, the government really needs to get to the bottom and fix the root causes. Systemic corruption, mismanagement and overspending are the root causes of all the other effects that are being felt on our economy. In doing so, the effects or indicators will go away.
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Thanks for this Andy.
Just a few fact checks/comments (conflict of interest statement – I work for the PNG Treasurer).
2023 Budget deficit is 4.4% of GDP, not 5.4%. This is now less than half the 8.9% budget deficit in 2020 (using new NSO figures) indicating rapid budget repair.
Expenditure increases by 10% but revenue increases by 20% in 2023, meaning a K1 billion reduction in the budget deficit.
2nd household assistance package totals K590m, not K560m. Over 2022 and 2023, expected funding totals K1,177m – first time for a PNG government to provide such support for households in the context of a global inflation shock.
Most of this package has already been implemented – with the income tax cuts being applied by employers and the fuel tax reductions in place from 1 January. The school project fees component is implemented by parents simply not having to pay these fees (schools ask parents to generally contribute 20% of the value of school fees – the school fees are already paid by government and they will fund the project subsidy also in 2023). The slow implementation referred to by the Prime Minister covered public servant income tax cuts not being processed until November (which was pretty extraordinary) and then IRC advice that it was not possible to implement targeted GST reductions – so it has not been included in the second household assistance package.
Treasurer has indicated that the foreign exchange shortage issue is a priority and is calling on the central bank to release higher levels of financing (PNG has K13 billion in FX reserves – the highest value ever). He initiated the review of the central banking act to address this fundamental issue and is also working with the IMF to move back to full Kina convertibility. But as noted, the issues are complex and politically challenging.
The Marape Government is taking a much more balanced approach to economic development with a strong focus on the non-resource sector. At the same time, PNG remains one of the highest rated countries in the world in terms of mineral “prospectivity”. PNG already has strong pipeline of minerals/petroleum projects, and it is highly likely that more prospects will be found over the coming decades. PNG needs to deal with the well documented “resource curse” issues facing many countries, but it should do so even in the context of continuing strong resource sector growth.
The Government’s 13 year fiscal repair plan (with a return to budget surplus by 2027) is based on strong expenditure constraint already, with expenditure planned to drop from 22.6% of GDP in 2019 to 21.7% of GDP in 2023 to 19.4% of GDP in 2027. The K13 billion FX buffer will assist with any adjustment on the external accounts.
Prime Minister Marape is very capable of meeting PNG’s national interests while also holding together his government coalition. Debt is incredibly unpopular in PNG – even more-so than in Australia. Going to the 2027 election with a budget surplus would be very popular. And he has a K13 billion FX war-chest to ease the time-frame for adjustment back to the pre-2014 situation of Kina convertibility.
Appreciate all the work you do on the ANU-UPNG Partnership!