Economic challenges await Papua New Guinea in 2023

Waigani, Papua New Guinea (Roan Paul)

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.

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Disclosure

This research was undertaken with the support of the ANU-UPNG Partnership, an initiative of the PNG-Australia Partnership, funded by the Department of Foreign Affairs and Trade. The views are those of the author only.

Andrew Anton Mako

Andrew Anton Mako is an associate lecturer and project coordinator for the ANU-UPNG Partnership. He has worked as a research officer at the Development Policy Centre and as a research fellow at the PNG National Research Institute.

1 Comment

  • 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!

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