All posts by pngeco5_wp

PNG’s Sept 17 Monetary Policy Statement (3) – Dangerous complacency on private sector credit growth

Two previous articles have analysed the latest Monetary Policy Statement from PNG’s central bank – see here and here. Unfortunately, this is primarily a bad news story.

One final indication of how PNG’s central bank  is  failing the PNG people is its dangerously complacent view on appalling credit growth rates to the private sector.

The latest statement estimates private sector credit growth being 2.5% in 2017.  It then states “The Bank considers the projected growth in monetary aggregates sufficient to support the growth in the non-mineral private sector” (emphasis added).

However, 2.5% is much less than BPNG’s forecast of inflation of 6% in 2017 – so there is actually less real money available. Real credit growth is actually a negative 3.5%.

This negative real growth rate means less money is available to small businesses  for investing into agriculture and tourism. It means less money available for house buyers.

This is an extraordinary contrast to earlier Monetary Policy Statements.  For example, going back eight years to September 2009 when Sir Wilson Kamit was Governor of BPNG we get the statement: “Private sector credit is expected to slow further to 15.0 percent in 2009, as the increase in cost of borrowing will slow aggregate demand. This is considered sufficient to support economic activity” (emphasis added).

So in 2009, the private sector needed 15% credit growth to support economic activity.  In 2017, the view is that 2.5% credit growth is sufficient. (Inflation expectations in both years are either 6 or 6.5%.)

Something has gone seriously wrong with PNG’s model of development. The latest Monetary Policy Statement from BPNG reveals a dangerously complacent view about what is adequate to support the private sector. This is especially concerning given the way BPNG is underplaying problems facing the private sector through foreign exchange restrictions as well as its support for an explosion in growth to the government sector.

The extent of complacency is shown in the following graph.  This sets out annual credit growth rates to the private sector (the low red line) relative to the government sector (the very high stacked blue columns).  These figures are straight from Table 1 in the latest Monetary Policy Statement.

This shows how badly the private sector is doing relative to the government sector.

Indeed, things are actually worse. The 2016 growth rate in government sector credit is actually understated by 20 percentage points. Using the source material for the table (Quarterly Economic Bulletin Table 1.31, net claims on central government moved from K5,345m in December 2015 to K9,008.7m in December 2016, an actual annual increase of 68.5%, much higher than the already extraordinary 48.3% mentioned in Table 1).  This is shown by the additional light blue area in the graph for 2016 (figures for 2014 and 2015 were correct).

Future projections that the rate of government credit growth will slow down are also suspect.  For example, in the September 2016 Monetary Policy Statement, BPNG predicted the government credit growth for 2016 would be less than 2%.  It turned out to be 68.5%. The 2017 year projection of 15.1% is more realistic, but is almost certainly understated given the 2017 Supplementary Budget was not sufficiently credible in winding back the budget deficit to 2.5% of GDP (see here).

The following graph shows how credit to the government is growing very rapidly as a share of the economy, while credit to the private sector is falling.

The graph uses BPNG figures (from QEB Table 1.31) with the National Statistics Office figures of GDP.

As much of the government sector growth includes relatively inefficient expenditure (such as APEC and the South Pacific Games, as well as overinflated infrastructure contracts) this is not good for PNG’s economic growth prospects.

The falling share of private credit in the economy goes to the heart of a lack of confidence by local businesses.

PNG’s share of credit to the private relative to the economy are considerably lower than other Asian countries that really appear to value their private sector. Using World Bank data, PNG’s share of private sector credit to GDP in 2014 (latest comparable information for PNG) was just above the level for least developed countries, just over half the level for other lower middle income countries, just under half the level for Pacific island small states, and less than a quarter the level for East Asia and Pacific.

BPNG, and the government, needs to do much more to support private sector growth rates. In part, this will mean ensuring that there are sufficient funds to support bankable projects. This is getting harder because of the explosion in credit to the government.

Messages from PNG businesses need to be considered more closely by government. There are positive signs of increased consultation by the new Treasurer. Considerably more could be done to also improve PNG’s ranking on the Ease of Doing Business scores.

Conclusion

BPNG’s claim that private sector credit growth of minus 3.5% is “sufficient” is ridiculous for a country facing the worst economic growth prospects in the Asia-Pacific region – see here.

BPNG needs to adopt the policies that will remove PNG’s foreign exchange shortages. They need to stop printing money which allows the government to duck the hard decisions. They need to get more money flowing to the private sector to encourage investment and get people into housing.

BPNG needs to stop playing games with statistics and being complacent about the collapse in the private sector.

BPNG is failing to meet the valid expectations of the creators of an independent central bank – a lesson from the devastating economic crisis of the late 1990s.

This is the worst Monetary Policy Statement from the BPNG for more than a decade. Shame BPNG.

There are some great people in BPNG and it is hard to tell what has gone so wrong to create such a poor statement. One hopes the bank’s future actions will build on its excellent work on financial inclusion and start doing its part (along with the new Treasurer) in getting the PNG economy back on track.

PNG’S SEPT 17 MONETARY POLICY STATEMENT (2) – PRINTING MONEY EXPLANATIONS NOT CONVINCING

The Bank of PNG’s recent Monetary Policy Statement was the worst for more than a decade.

BPNG is trying to hide the truth that its monetary policy actions are killing growth prospects in PNG.

This is the second of three articles analysing the worrisome errors in the statement.

Pretending that printing money isn’t a problem by using erroneous statistics

In a second extraordinary attempt to justify its actions – see here for the first – BPNG argues “In light of the Government’s tight cash-flow and domestic financiers reaching their limit on sovereign exposure, the Central Bank had (emphasis added) to assist the Government by buying Government Securities (Treasury bills and bonds) when the auctions were undersubscribed.”  This was known as the “Slack Arrangement”.

Indeed, it is a very slack arrangement!

No central bank governor has to assist the Government in this way. There may be extraordinary circumstances when such actions become necessary. These could include financing during wartime, and possibly for dealing with a very short-term financing crisis with a known resolution. However, the fall in international commodity prices occurred three years ago at the end of 2014. PNG should have got its fiscal house back in order by now. Printing money takes the pressure off the government to make the needed changes – including putting in place better policies to get growth going again or reaching out to the international community for assistance.

What is even worse is that the Governor is pretending that there is not a problem. Indeed, he mischievously argues “The Bank has actively sterilised (emphasis added) this liquidity generated by the Slack Arrangement through on-selling of the Government securities and CBBs to the market.  As at the end of August, the Bank’s holding of securities (Treasury bills and bonds) under the Slack Arrangement was K1.600 billion. It has issued CBB and Tap totalling K1.588 billion.”

So the argument is BPNG printed K1.6 billion but then took almost exactly the same amount out of markets so there is no risk to the economy.

This is not true.

PNG’s monetary policy stance

The following chart follows a key element of PNG’s monetary policy over the last 10 years.

BPNG can help control inflationary pressures in the economy through buying and selling its Central Bank Bills (CBBs). There are other tools but these have not been actively used in recent years.

CBBs essentially take money away from the private sector (so it is no longer available for lending) and park it with BPNG. This can help remove over-heating pressures from the economy which can lead to accelerating inflation and balance of payment problems with foreign exchange shortages.

The green line going up shows “sterilization” of excess liquidity (reducing over-heating pressures). A flat green line is a neutral approach. When the green line goes down, it is the reverse of sterilisation, and increases over-heating pressures on the economy.

Appropriately, BPNG rapidly reduced its level of CBBs in response to the Global Financial Crisis in 2008 to help stimulate the economy (shown by the dip in the green line in 2008).

Also appropriately, it took excess liquidity out of the banking system during the commodity price boom and then the PNG LNG construction boom from 2009 to 2012.

BPNG started in early 2012 to release some of these funds back into the market (the green line going down). In reality, especially with Treasury Bills moving into shorter-term securities of three months, this has effectively created the space to allow PNG’s private financial institutions to swap CBBs for Treasury Bills (which was confusing monetary policy with fiscal policy objectives).

Release of CBBs effectively has been a major source of funding from the private sector for the government’s historically high budget deficits.  And these high deficits can also tend to over-heat the economy.

But BPNG has gone even further than creating space for the private sector to buy up government securities as the Slack Arrangement means BPNG is also directly funding the deficit.

So with that simplified technical background, what about the claim that the Slack Arrangements purchase of about K1.6 billion in government securities has been effectively sterizilised?

First, any reference to K1.6 bn only refers to the most recent period in which it has been acquiring government securities (the red line going up).

BPNG currently has, according to its detailed tables in the Quarterly Economic Bulletin Table 2.3, K3.5598 billion (at March 2017 – the latest available detailed data) in government securities.

So BPNG actually has some K2 billion more in government securities than the K1.6 billion mentioned in its latest statement.

And if BPNG is only referring to a 12 month increase in its holdings of government securities (so not the full level), one can get a K1.6 billion increase figure by only looking at the increase from March 2016 to February 2017 (so ignoring the earlier K2 billion).

Second, did the green line go up by K1.6 billion during this time to sterilise the K1.6 billion extra in the red line (as claimed by BPNG)?

No, in fact the green line fell by K0.16 billion (specifically, from K1.949 billion to K1.789 billion).

Unless there is some new information that the BPNG has not made available to the public, BPNG has not been “sterilizing” their increased holdings of government securities.

And this is putting the economy at risk by delaying needed adjustments and building pressures on foreign exchange.

Conclusion

BPNG is undermining its own credibility with deceptive statements about dealing with the side-effects from printing money.

Rather than misleading claims about “sterilisation”, the statement should have provided more information on the Slack Arrangement. Currently, it could appear as if the Slack Arrangement is an open chequebook to the government. This would undermine confidence in the PNG economy.

Yet we know that there are government cash shortages and many unpaid bills. So unless there is exceptionally poor management in distributing government cash, it would seem that there is not an open chequebook.

BPNG should be spelling out to the public and international investor markets the guidelines and limits on the Slack Arrangement and any planned exit strategy. This would be a better way to build confidence.

BPNG – you have a proud history and you can do better for the people of PNG.

PNG’s Sept 17 Monetary Policy Statement (1) – Deceptively denying foreign exchange shortages

Summary

The good news is that PNG’s inflation rate is falling.  Good progress continues on financial inclusion initiatives and technical improvements in the banking system.

The bad news is that the September 2017 Monetary Policy Statement is the worst for more than a decade. It is out of touch with the economic pain being felt by many people and businesses in PNG. Even worse, it tries to cover up its contribution to that pain.

There are three major deficiencies in this statement.  The next three articles will deal with one major deficiency at a time as each is substantive and somewhat technical.  The three deficiencies are:

  1. Deceptively denying that there is a foreign exchange shortage and blaming it on the private banks;
  2. Pretending that printing money isn’t a problem by using erroneous statistics; and
  3. Killing private sector credit growth.

This is sad news for the people of PNG. PNG needs to acknowledge its poor policy settings if it is to improve its economic prospects from being the worst in the East Asia and Pacific region – see here.

Details

The six monthly central bank Monetary Policy Statement was released on 30 September 2017.

The 14 page document follows the usual structure with two exceptions. Both of these exceptions attempt to explain the bank’s unfortunate behaviour in creating exchange rate shortages and printing money to finance the government’s budget deficit.  This is the first of three articles covering the statement.

Exchange rate shortages – BPNG effectively says businesses are lying

In an extraordinary attempt to pervert the truth, BPNG argues “The Bank’s assessment of foreign exchange market data shows that the total supply of foreign currency, including the Central Bank’s intervention, was more than sufficient to clear the outstanding daily orders in the spot market.”

In other words, there really aren’t any foreign exchange shortages.

Contrast this with the views of 100 of PNG’s CEOs where foreign exchange shortages were considered the most critical issue faced by businesses in PNG – see here.

Why is it that businesses are saying their greatest challenge is foreign exchange shortages, but BPNG says things are fine? So are PNG’s businesses are lying?  Or is BPNG now into ‘fake news’?

There is little information available to examine the BPNG claim.  BPNG includes the graph below.  However, it is seriously flawed.  There is no definition or source for the lines of foreign exchange inflow and outflows – they do not match Balance of Payment information such as the level of imports and exports. The cumulative balance clearly does include BPNG interventions (contrary to the legend’s description). The green line of outstanding sell orders is known to be an understatement as private banks can’t actually report all of their outstanding sell orders due to prudential limits on their reporting to the central bank. Even then, these orders have risen from essentially zero in 2012 to over K600 millionby August 2017.

And if there have been K4.5 billion in cumulative net foreign exchange flows (the dotted line starting from a minus K1 billion in 2011 to a plus K3.5 billion in August 2017) why haven’t PNG’s international reserves increased remarkably (even after netting off the interventions)?

Instead, they have fallen dramatically over that period from to K9,266 in 2011 to K5,398 million in June 2017.

So after providing a deeply flawed and misleading graph, BPNG then tries to shift any blame. They state “However, the Authorised Foreign Exchange Dealers (AFEDs) claim that the inflows are not enough to meet the demand for foreign exchange and the imbalance continues to persist. The outstanding orders by AFEDs reflect frontloading of orders, preference for serving small orders and others not backed with the required kina funds.”

So it is the private banks fault! None of the explanations are credible. For example, why is there a problem having a “preference for serving small orders” (which is arguably a good thing rather than just looking after big businesses)?

BPNG’s foreign exchange actions have already reduced PNG’s imports to only half previous levels in absolute nominal terms and even less in terms of the economy. The following graph from an excellent paper at the UPNG Economic Update in August – see here – illustrates that this killing of PNG’s imports is the most dramatic in PNG’s history. For example, the major currency crisis that led to the floating of the Kina back in 1994 appears as only a small downward blip relative to the collapse since BPNG started fixing the exchange rate and moving away from a freely convertible currency in 2014.

BPNG’s actions continue to descend down this slippery slope with the April 2017 banning of trade financing. This is an extreme anti-small business approach.

No option of trade financing means small businesses can’t continue for that crucial period between placing an order and being able to actually sell the product. Big businesses can cover this cash flow gap but smaller ones often cannot.

This banning of trade financing is a devastating policy for SME’s that are trying to start up new businesses.

Such actions by BPNG on destroying imports and banning trade financing are a growing reason for PNG’s forecast economic performance being the worst in the entire East Asia and Pacific region.

Conclusion

The latest Monetary Policy Statement from the Bank of PNG uses misleading statistics to cover up serious policy flaws in the conduct of monetary policy.

Denying foreign exchange shortages is foolish.

Blaming any shortfalls on the private banks is simply playing games.

And the actions to stifle imports hurts growth, stopping dividend payments kills foreign investment, and banning trade financing seriously hurts small and medium sized enterprises.

If one cannot accept that there is a real world issue, then one cannot start finding solutions. The first step forward is to acknowledge that there is a problem. BPNG is in a fantasy land but one that is having very adverse real world implications.

BPNG, you are killing growth in PNG.

PNG’s budget strategy not yet credible

The World Bank recently released its update on economic prospects for countries in the East Asia and Pacific region – see here. This is the second of two parts analysing that report.

The Budget – more credibility required

After reviewing the Supplementary Budget, the World Bank estimates that the deficit will not be 2.5% of GDP  in 2017 but 3.2%. This is in line with the IMF’s earlier expectation of the deficit being just over 3%.

The public debt to GDP ratio would be slightly under 35% by the end of 2017.

Going forward, the World Bank estimates that the deficit will fall slightly to 3.1% of GDP in 2018 and then increase to 3.5% in both 2019 and 2020.

The debt to GDP ratio is expected to climb to nearly 40% of GDP (see orange bars in graph below with the height showing as a percentage of GDP on the left hand side axis – graph from p134 of the report )

There is not much international confidence about PNG’s claimed path back to a budget surplus and reducing debt levels.

Given past experience, those concerns are justified.

Genuine budget savings are very, very difficult to deliver because of entrenched political interests in key areas such as the electorate funds to parliamentarians. PNG failed in its attempts a decade ago to make for a more efficient and effective public service. With higher public debt levels expected, interest costs will continue to rise.

The cuts in budget expenditure in recent years have already been more draconian than those imposed on Greece. And the report actually indicates that PNG needs to spend much more on basic services to improve PNG’s worst rating in the region on the Human Development Index (see table B1.C.4.1 on p67)

Much more needs to be done on the revenue side.  The best way to get revenues up is to get growth going again. In addition to better pro-growth policies, there will be a need to look at either raising tax rates or introducing new taxes.

Conclusion

Yet another outside umpire is extremely worried about the health of the PNG budget.

There is a need for some tough medicine.

The 2018 Budget, due to be delivered in a month’s time, will hopefully turn around the current negative perceptions. But this will require much more whole-of-government unity than shown in the Supplementary Budget – see here.

I still hope Charles Abel, the new Treasurer and Deputy Prime Minister, can perform a miracle and get his Prime Minister to accept that real change is needed after the economic mismanagement of the previous five years.

PNG – East Asia’s worst economic prospects

The World Bank recently released its update on economic prospects for countries in the East Asia and Pacific region – see here. This is the first of two parts analysing that report.

The growth prospects story

There was some very sad news for the people of PNG.

PNG, for every year from 2017 to 2019, is expected to have the worst economic performance in the region (see table below from p30 of the report– I’ve highlighted in yellow the growth figure for PNG which is the lowest in each of the columns).

PNG is coming last.

And with economic growth of 2.1 to 2.5% and population growth of 3%, it means that the economy is going backwards in per capita terms .

Since the last report 6 months ago, experts at the World Bank have taken off 0.9% from growth expectations for 2017, and a further 0.7% off growth in 2018.

These major cuts in growth expectations come after the new O’Neill government has released its Alotau Accord II, its 100 day plan and the Supplementary Budget.

It is a very negative vote about those new policies.

PNG’s “moderate” growth rate in the non-resource sector is expected “due to the expected on-going shortage of FX (foreign exchange) and continued fiscal consolidation.”

In my next blog on the recent BPNG Monetary Policy Statement, I’ll explore further the extremely adverse impact of these foreign exchange restrictions (and how BPNG is trying to cover these up).

Ironically, when the engine of growth dies in an economy, so do inflationary pressures.  So inflation is now expected to drop to only 4.1% in 2017.  BPNG still expects 6.0%.

So after high rates of growth flowing from the PNG LNG project (PNG had the best growth rate in the region in 2015) there is no wind left to power the PNG economy.

PNG is much too resource dependent. It needs to diversity its economy, especially towards building on its agricultural potential which would provide much more inclusive growth.

Conclusion

Yet another outside umpire is extremely worried about the health of the PNG economy.

There is a need for a new direction in economic development policy. One suggestion for a way foward, based on analysis of the last 40 years, is here (and here for Tok Pisin version).

This people-centred version of development is not simply about doing more in agriculture or tourism. Doing things in these areas must be done in an inclusive way.

Current trade policy and sectoral policies suggest the government is looking after a few mates rather than truly being inclusive. Creating high import barrier wars just ends up hurting consumers.  PNG’s own experience with Ramu Sugar indicates this is a failed form of development.

In the long-term, that will harm growth prospects.

Charles Abel, the new Treasurer and Deputy Prime Minister, needs to be very careful about what advice he listens to in trying to find a real way forward for the people of PNG.

Hopefully, in five years, PNG will have the best performing growth figures in the region with that growth coming from areas other than mining and LNG.

PNG 2017 Supplementary Budget – Cash crisis opening political games?

The new Treasurer, Charles Abel, presented the promised 2017 Supplementary Budget to Parliament on 27 September.

This is a very mixed document.

Good news

There are some very positive messages about medium-term paths for getting fiscal policy back on track. There has been a worthy attempt to target a more reasonable budget deficit of 2.5% of GDP in 2017 relative to the excessively high 4.6% of GDP in 2016. Some key expenditure priorities are being protected and there are some sensible cash-flow fix-ups (such as pharmaceutical drugs, office rentals and interest costs) and small initiatives (such as funding for the Coffee Berry Borer Disease response).

On the face of it, it appears that the government has started doing some of the hard yards required to get the budget back on track. There will be an expenditure reallocation of K800m to pay for cost over-runs, and a further cut in expenditure of K494m – a total of K1,294m. Given the original 2017 budget had total expenditure at K12,008m (excluding donor grants), this is a domestic expenditure saving effort late in the year of 10.8%. This is an extraordinary effort.

A worrying silence on claimed savings

However, there is actually significant doubts about the true nature of the “savings”. The Supplementary Budget includes massive cash reductions to the various Support Improvement Programs (SIPs) of 75% to 100% (with savings of K692.8m from DISP, K168m from PSIP and K64.42m from the WSIP – a total of K925.22m).

So 71.5% of the total “savings” in this budget (K925m divided by K1,294m) are for the various Support Improvement Programs. There is no mention of this anywhere in the Treasurer’s 14 page speech. This is deeply disturbing.

The silence on these major cuts is particularly problematic given that the Prime Minister declared from New York that these programs would not be cut. What is actually happening?

One thing that was discussed in Parliament the day before the Supplementary Budget was a statement from the Prime Minister that DSIP funds would only be paid to new Parliamentarians. There are over 50 new Parliamentarians. This would imply a need for at least K500m – but the funding available has been reduced to only K173.2m. This is a long way from the understanding (see below) that the deferrals would be spread evenly across all politicians.

The reduction in the DSIP and PSIP funds, ironically, provides an enormously powerful lever for the Prime Minister to build the numbers in the government. He can now argue that there are not enough funds to pay all of the DSIP or PSIP allocations and be extremely selective who gets paid.

One way for the Parliament to limit the Prime Minister’s power (at least in the law) would be for Parliament to amend the suggested revised budget appropriations to provide SIP appropriations by each electorate and province. This would remove the discretion of political gaming and help protect all the people of PNG.

With such a major game being played on something supposed to deliver over 70% of the so-called savings, the Supplementary Budget inevitability loses some credibility.

Possible additional revenue shortfalls

There is a likelihood that the deficit will be significantly larger due to revenue shortfalls. While expected revenues have been reduced by K494m, there is still the unrealistic expectation of K850m in dividends.

Kumul Petroleum is still expected to pay a dividend of K350m – not very likely after the large losses it suffered on the foolish Oil Search transaction. Statutory Authorities, many of which are facing cash flow problems including from non-payment of government utility bills, are also still expected to pay dividends of K375m. These numbers just don’t seem credible.

On average over the last 3 years, revenues have fallen some K1,800m each year short of the budget prediction for that year. Based on past experience of excess optimism on revenue collections, the excessive level of dividends still in the budget, and probably some remaining excess optimism on company tax collections, I’d expect actual revenue outcomes to be down by well over another K500m on MYEFO forecasts.

Deferred Budget Pressures

This Supplementary Budget has actually just delayed some necessary hard decisions.

The discussions with Provincial Governors had indicated that the reductions in the various Support Improvement Programs were really just deferrals of expenditure – the balances from the original amounts would be paid in equal instalments from 2018 to 2021. The Treasurer’s proposal was that a DISP allocation may be reduced from K10m to K2m in 2017, but from 2018 to 2012 district parliamentarians would receive K12m (K10m base level each year plus K2m deferred in Supplementary Budget). Clearly, this creates cash savings in 2017 but just pushes the problem out to future budgets.

The deferral makes the task of returning to a balanced budget more difficult as expenditure cuts or revenue increases have to be found in other areas.

This is not actually a fundamental savings measure (certainly from an accrual budget perspective). Rather, it is just a way to handle a cash crisis. Probably better than alternatives such as not paying private contractors for work completed, but it does nothing to deal with PNG’s underlying budget crisis.

The deferral of the DSIP/PSIP payments has built up forward expenditures by around K231m per year (the K925m deferral over 4 years).

The K925m deferral of the SIPs also just comes back into the 2018 base and these savings must be found somewhere else (unless the SIPs are deferred yet again, further building up future year budget pressures).

The expected greater revenue shortfall of at least K500m also would build back into the base.

Overall, there have only been on-going savings of K369m in this Supplementary Budget (K1,294 less K925m in SIP deferrals). There are budget pressures of K1,656m that roll into all future years (see graph below).

This highlights the level of challenges still ahead of PNG in getting its budget back into order. Changes of such magnitude would only seem possible with the help of friends – see here.

Conclusion

There are some real strengths in the 2017 Supplementary Budget. It demonstrates the declared intent to improve PNG’s budget crisis. As things are so bad, this cannot be a short-term fix. The medium-term planning for adjustment is welcome. Updates on the 100 day plan are welcome.

However, after going through the figures, the 2.5% deficit figure just does not seem credible. Even the IMF thought the best possible outcome was a bit over 3% for the deficit. This would certainly seem to be the case after allowing for likely significant additional revenue shortfalls.

However, the greatest hit to credibility in this budget is the total silence in the Treasurer’s speech on the actual treatment of the various Support Improvement Programs. These represent 71% of proposed savings, there appears to be a major disagreement with the Prime Minister on the programs, and clearly political power games are underway by the Prime Minister to get new members onto the government benches. However, the Supplementary Budget indicates that the cupboard is too bare for even these promises to be met (at least in 2017).

This moves the burden of proof of the government’s economic credibility to the 2018 budget. The people of PNG and international investors will look to the new Treasurer for better explanations and actions.

There is an easier and wiser course for PNG. If there is a chance that the new Treasurer can demonstrate to the international community that the government as a whole is willing to make the necessary adjustments, then there are prospects for many billions in additional funding to help ease the pain of adjustment.

 

Pre-Supplementary Budget Investor Answers

PNG’s Supplementary Budget is due out this week.

This will be a key document for re-building investor confidence in PNG. Can it demonstrate the resilience of the great SP PNG Hunters win on Sunday?

There has been some encouraging news over the last few weeks from the new Treasurer Charles Abel.  This has included a commitment to better processes of consultation (including with Opposition Governors), better transparency (release of the preliminary IMF Article IV assessment), the sale of the Oil Search shares (what an awful initial mistake) and an indication of a willingness to cut electoral funds (the PSIP and DSIP).

The PNG Business Advantage Investment Conference in Sydney on 7-8 September was also an opportunity to build investor confidence in PNG.  How did it do?

In an earlier article – see here – I suggested three key questions for potential investors.  Following the conference, here are my impressions of the answers for at least some attendees (taken in reverse order to the initial questions).

PNG’s Business Stance

First, there was a strong sense that the new government was taking a much more pro-business stance than its predecessor. This was clearly more inclusive of the non-resource sector including agriculture, tourism and other investment options.

Frankly, I was very pleasantly surprised by Planning Minister Maru’s presentation. He stated the new government’s first priority was economic growth, and that the government recognised that it needed the private sector to help generate this growth. Probably too much emphasis on import replacement relative to export opportunities but overall the messaging was very good. However, there is a need for better information to be provided to such leaders as current figures being quoted are simply inaccurate (such as a greatly exaggerated  level of rice imports).

The Governor of the central bank was less impressive – the objectives of higher and more diversified growth are commendable.  However, there was no indication of any action to address a major barrier to growth caused by fixing the exchange rate at too high a level. The central bank has the simplest lever to help rebuild confidence in the economy but it is failing to use it. Rebuilding confidence and helping growth would be greatly assisted by moving to a more competitive exchange rate and freeing foreign exchange restrictions – see here. And the Governor’s focus was on import replacement rather than an export orientation. PNG’s long-term potential needs more of an outward orientation to the possibilities of the Indo-Pacific region.  And this means thinking about exports even more than import replacement.

The panels from businesses operating in PNG were generally reassuring especially over the medium-term. There is nothing to match the views of those with skin in the game. There were also practical panels on the legal obligations for investors as well as pragmatic issues such as dealing with health challenges.

Money in, money out?

Second, there is no doubt that a very major challenge facing existing businesses in PNG is that they cannot get their money out.

This is a major concern for any new investors.  Why invest and create jobs if they cannot actually get a fair share of their  returns? Indeed, they probably feel like many landowner groups around the PNG LNG project!

The inability for businesses to get their money out is leading to many distortions in the economy.  Ironically, this has some bonuses for the government as it encourages businesses to park their money in government securities while waiting.

So what are my peers doing?

This was probably the most depressing element of the conference.  Not so much in what was said, but in actions on the ground.  There were only about 200 people at the conference.  Even though attendance was at senior levels, one would have hoped for many more.

My last article highlighted that Australian foreign investment was actually flowing out of PNG (see graph below and the downwards dip in recent years).

When looking at government portals to encourage investment in PNG, such as the Investment Promotion Authority, it is a concern that economic and investment information hasn’t been updated over the last few years and that the once commendable on-line registration processes are currently off-line (apparently related to power shortages).

There would seem to be possible easy fixes to improve the way PNG presents itself to investor peers.  It is still not clear to me why there was a second PNG investment conference held in Brisbane in August.  A more unified approach would be helpful, along with some additional assistance to the Investment Promotion Authority.

There was a fascinating session on other investment possibilities in the Pacific. The Fiji presentation was particularly notable in that it seemed to have very few of the major challenges facing PNG.  However, as noted by businesses that were operating in both PNG and Fiji, the advantage of PNG were the potential upsides of a much, much larger market (some eight million people in PNG vs just under one million in Fiji).

Conclusion

Overall, the new government still has some way to convince new investors that the medium to longer-term opportunities in PNG are worth the risks demonstrated over the last few years.

There are some very positive noises from the new government including from the new Treasurer and the new Planning Minister. But the central bank could be doing much more to promote investment and growth by correcting the current foolish exchange rate policy.

The 2017 Supplementary Budget, and more importantly the 2018 Budget itself due in November, will more clearly demonstrate whether investors can be confident that PNG has a credible path out of the current mess.

Consistent messaging between the Treasurer and PM will be important, as will be transparency on the real state of government finances (including SOEs such as Kumul Petroleum and the real costs of the Oil Search share purchase).

May economic policy over the next few months do as well as the SP PNG Hunters.

 

PNG faces a tough road ahead

The press release from the latest mission of the world’s International Monetary Fund (IMF) – see here – highlights the difficult road ahead for PNG in dealing with recent years of bad luck and economic mismanagement.

Challenges

On the fiscal front, the IMF considers that the government will fail in the Supplementary Budget to bring the 2017 budget deficit back to the target of 2.5% of GDP. Rather, it estimates the deficit will be “a little over 3%” – so a gap of some K370 million relative to the 100 day target.

The goal to reduce the debt to GDP ratio back to the legislated level of 30% as part of the 2017 Supplementary Budget is also recognised as infeasible. Instead, the suggestion is a medium-term objective of moving to a balanced budget by 2020 (and GDP growth will work to reduce the ratio).

So the first two targets in new Treasurer Abel’s 100 day plan are likely to fail.

Expected growth is also wound back from the 2.7% estimate in 2017 down to 2.4%.

Positive processes

Despite these negatives, my overall reaction to the IMF report is a very positive one.

First, as the government would have had to approve the IMF post-mission press release, it indicates a very different attitude than the attempts to suppress the 2016 report – see here and here.  PNG’s behaviour ten months ago placed PNG towards the bottom of all countries and ensured it had little chance of issuing a Sovereign Bond. The release is a very positive step towards transparency.

Second, the IMF Article IV report comes out at a very similar time to another report from an IMF tax reform mission. PNG appears to be engaging positively with the international community.

Third, indications are that the consultation process in these missions were positive and wide-ranging. There is feedback that Treasurer Abel also worked to ensure a very broad-based approach towards the preparation of the 100 day plan. Broad and constructive engagement makes for better decision-making.

Tough Road Ahead

The IMF report highlights the tough road ahead for PNG to start crawling back up from itslippery slope of economic mismanagement in recent years.

On the budget side, the IMF targets public sector wage costs. As anyone with experience in the largely failed attempts to reform and reduce the size of the public service in the early 2000s, this is actually very difficult to achieve (see some details below as an example).

The second target for expenditure cuts in the DSIP and PSIP programs will also be a political hot potato.

On the revenue side, there is optimism for increasing tax collections on both the resource and non-resource sectors.  Given the precipitous drop in PNG’s tax revenues – most of it in the non-resource sector – it still seems very likely that new taxes will be required or rates increased. The early days of a new government are often seen as the best times for such difficult adjustments.

Loi Bakani’s shameful approach to monetary policy gets some stick – of course diplomatically worded between the lines. The rigidity of the foreign exchange rate controls are seen as both damaging current growth as well as undermining PNG’s international competitiveness (and thereby adversely affecting moves to strengthen other sectors such as agriculture and tourism).

On the exchange rate, it is interesting that the IMF is suggesting a gradual move towards a more competitive exchange rate given inflationary concerns (an alternative approach sometimes tried is the “short, sharp shock”). The IMF notes PNG’s core inflation rate is only 2-3%, suggesting the IMF considers there is scope to start moving to a more competitive currency immediately.

Conclusion

Overall, the IMF’s suggestions are sensible. The two-track approach of dealing with short-term challenges while building the base for longer-term inclusive and sustainable growth is appropriate.

The return to transparent and consultative processes by the new Treasurer is very welcome.

However, as highlighted in the discussion of the PERR below, similar sentiments and plans have been put forward in the past – in much greater detail than currently. PNG failed on much of this promised reform in the mid-2000s.

The challenge is credibility around on-going implementation.  There is some very tough politics ahead to get such reforms in place.  The Treasurer is only one voice in the NEC. He will need to galvanise his cabinet colleagues around the reform path and transform fine words into tough actions.

Details on the Public Expenditure Review and Rationalisation (PERR) Program

There are many lessons from PNG’s own economic history.  Following is an extract (available here) which outlines some of the background, plans and initial steps for the 2002 PERR program.

Much of this sounds very similar to discussions today  -disturbingly similar.

The key question now is the credibility for sustaining any similar reform path over many painful years.

 

“The PERR is a joint initiative of the Papua New Guinea government, World Bank, Asian Development Bank (ADB) and AusAID, initiated in 2002, aimed broadly at improving fiscal management. It is described in the MTDS 2005–2010 (57–58) as ‘a key vehicle for generating the savings and cost-efficiencies necessary for the successful implementation of the MTDS’. A PERR Implementing Committee is chaired by Treasury.

In 2003 the PERR produced six discussion papers: ‘Road map to fiscal sustainability’, ‘Civil service size and payroll’, ‘Restoring the integrity of budget institutions and systems’, ‘Expenditure adjustment and prioritization’, ‘Improving health spending’, and ‘Improving education spending’.

On the subject of fiscal sustainability, the authors of the PERR paper suggested in 2003 that:

‘The root causes of PNG’s fiscal malaise lie in poor governance in public finance management. Although most of PNG’s budget systems are sound, and by some accounts even sophisticated, poor governance over the years has led to an erosion of budgetary discipline, weakening of accountability and proliferation of waste, leakage, irregularities and malpractices across the board….tinkering with budget numbers and mandating ad-hoc expenditure cuts, as the Government has tried in the past, can hardly be expected to be effective in such a flawed system.’

Several areas were identified for attention in the subsequent papers.

With regard to civil service size and payroll, it was argued that ‘public sector employment in PNG is larger than the country needs or can afford’, and that ‘the payroll system is flush with waste, leakage and irregularities’. A DPM audit suggested that there were some 2000 unproductive public servants on the unattached list (1200 of them in provincial administrations) in 2002, and ‘a large number of ghosts on the payroll’. Departments were said to recruit and make payments with no regard to budget ceilings, and Treasury was accused of ‘unrealistic appropriations’.

On the topic of restoring the integrity of budget institutions and systems, it was argued that ‘poor governance over the years has allowed [budget systems and processes] to be ignored, neglected, misused and abused’ while ‘watchdog bodies have been rendered ineffective because of absence of follow-up action on the irregularities they uncover’, with cases ‘delayed, blocked or even abrogated because of political pressures and vested interests’. There was ‘no sense of collective responsibility for the overall budget strategy’. Decentralization was said to have ‘led to an erosion of budgetary control’.

In relation to expenditure adjustment and prioritization, the PERR authors proposed an agency-by-agency review of functions (apparently going beyond existing Functional Expenditure Reviews), expenditure patterns and staffing levels, outputs and results, and whether certain functions might be privatized. They also supported the development of a Medium-term Expenditure Framework.

Actions on several of these fronts were detailed by the Minister for Finance and Treasury in his 2004 budget speech. As part of improved management of public sector employment and control of personnel expenditure, measures had been taken to remove ghost names from the payroll, implement a Concept Payroll System, reduce the pool of unattached officers by reassigning them or scheduling their redundancy, reduce the number of casual employees, and improve budget estimates and expenditure controls. In 2003 the Public Service (Management) Act was amended to facilitate merit-based appointments at senior levels; this is to be complemented by measures to extend merit-based appointment procedures to statutory authorities, and supported by a system of performance-based contracts (the appointment of senior public servants has, however, remained a point of controversy[6]). A review of government procurement was undertaken in 2001, and subsequently measures have been taken to strengthen the Central Supply and Tenders Board (CSTB), reduce discretionary powers to create lower-level supply and tenders boards, and improve information, reporting and disclosure systems (though not all departments have subscribed to the new measures). A Budget Screening Committee, comprising deputy secretaries of the central agencies, was created in 2003 to evaluate spending programs, assist prioritization of spending, and establish expenditure ceilings in the preparation of the 2004 budget. The government also announced its intention to develop a Medium-term Budget Framework within which to consider adjustments to public expenditure in the light of changes in available funding. And the Financial Management Improvement Program (FMIP), ‘an integrated reform program of financial management at all levels of the government’, was described as ‘the most significant single reform of financial management ever undertaken by the Government’. (Papua New Guinea 2003, 27. Also see FMIP 2003).

Celebrating Independence – Time to look for a $US6 billion birthday present?

16 September 2017 marks PNG’s 42nd anniversary of Independence. How have things been going?

A good benchmark for measuring progress is PNG’s Vision 2050 document. This sets out a blueprint for making PNG “a Smart, Wise, Happy and Fair Society by 2050”. The Vision’s primary measurement indicator is “We will be ranked in the top 50 in the United Nations Human Development Index by 2050”.

So how is PNG going towards meeting this goal? The following graph shows PNG’s progress in improving its Human Development Index (this is a composite index of factors such as life expectancy, education, and incomes).

Since the 2050 Vision document was released in 2010, PNG had its lowest rate of improvement since 1990. After doing well in the early 90s and during the 2000s, PNG has gone back to even worst rates of development than in the disastrous late 1990s.

To meet the goal of being in the top 50, PNG needs to move from its 154th ranking of 188 countries in 2010 and jump forward by at least two places every year.  So from 2011 to 2015, did PNG jump some 10 positions? No, it stayed exactly in 154th position by 2015 (the latest available data).  Indeed, it is now in equal 154th position as Zimbabwe has moved forward and it now ranked exactly the same at PNG.  PNG is in the bottom 20 per cent of countries and not moving forward.  This is not good news.

Vision 2050 also focuses on measuring changes in household disposable income – a good measure of economic progress according to Sarkozy/Stiglitz Commission.  The best available proxy for this is tracking changes in real non-resource GDP per capita – see here and here. As shown in the graph below, this has actually fallen by over 40 per cent since 1980.

Clearly, something is wrong.  PNG’s development is going poorly relative to other countries and its own history, and has gone backwards very significantly in key indicators such as household incomes.

So what can be done?

There are some positive messages from the new government that they are looking for more inclusive growth. There is growing recognition that more work is needed in growing the agriculture sector and other non-resource sectors such as tourism. The resource sector needs to contribute more and PNG has to stop giving such significant tax, land and other concessions to big resource companies (including in the forestry sector).

However, the new government has one hand tied behind its back because of the poor foreign exchange policies imposed by the BPNG Governor, Loi Bakani, which are killing imports, exports and foreign investment.

The best hope at this stage, and it is my hope for PNG on this independence day, that PNG’s leaders reach out to the international community for help. Other countries such as Mongolia – see here – in very similar circumstances have been able to receive $US440 million in IMF funding and an estimated additional $US5.5 billion in additional cheap loan and grant assistance (much cheaper and transparent than Credit Suisse). A similar $US6 billion assistance package for PNG could become a vital bridge to help adjust the budget for the dramatic falls in revenues, to move away from central bank deficit financing, and to deal with the crushing foreign exchange shortages. The policy conditions around these packages are now very different from the more austere approaches of the late 1990s – the Asian Financial Crisis and the Global Financial Crisis have taught the IMF some lessons.

Trying to do it alone will only cause much greater pain for the people of PNG.  PNG should approach the international community at this time of economic and social difficulties for a $US6 billion birthday present.

PNG has such tremendous potential and opportunities. It needs to tap more into its leading strengths in areas such as cultural diversity, bio-diversity and the extraordinary strengths of its people, including its women.

May the next five years be better than the last five for true inclusive growth, and not just a big GDP number.

Happy Independence Day PNG!

 

Alotau II Agrimen – Abrusimol lain PNG

Agrimen Alotau II (long hia) i no soim gutpela lukluk long bihain taim bilong PNG. Alotau II i abrusim ol meri PNG, ol lain long bus insait long PNG, na tu i bagarapim lukluk bilong bisnis bilong PNG.

Alotau II i no mekim gut long ol meri PNG olsem , “ikonomik pawa bilong ol meri” i kamap namba 89 insait long list long “90 praioriti”, na tu em i kamap ananit long “PNG Imigresin na Kastam Sevis”.

Na tu, insait long dispela Agrimen Alotau II i nogat tok olgeta long “sosol pawa bilong ol meri”, olsem lukluk insait long paitim meri na kilim ol lain ol i kolim sangumah. Alotau II tu i abrusim olgeta “politiks pawa bilong ol meri”. PNG parlamen i gat 111 MP,  olgeta ol man tasol, olsem pepa bilong ol, Alotau II, i save abrusim ol meri PNG.

Alotau II em i abrusim planti manmeri PNG, olsem em i no toktok long agrikaltja – olsem 80% long ol manmeri PNG i wokim garden na kisim sampela mani long dispela wok.  Ripot i toktok long “e-agrikaltja” ( praioriti 80), na emi tok long mekim ol plentesin i kamap gen ( praioriti 15); dispel tupela i no inap long givim inap gutpela kaikai long ol lain PNG.  Planti wok i stap yet, long sait long prodiusim planti moa kaikai, na tu makim wanem ol plant na diwai bai i kamap gut long taim bilong drai na long taim bilong kol.

Na tu, expot maket insait long Asia-Pacific i wok long kamap bikpela hariap, na i gat planti niupela sans long expot ( bai yu ridim blog i toktok long vanila ) , tasol i luk olsem PNG i wok long abrusim ol dispela niupela sans long kam insait long bikpela IndoPacific maket.

Alotau II i makim praioriti namba 6 “kamapim gold bullion bank long  i stretim sot bilong exchange”: dispela tingting bai i mekim liklik long save bilong ol lokol bisnis na intenesonol investa.  Ol gold main insait long PNG, yupela lukaut nau! Dispela tingting i nogut – na tu dispel tingting em i longlong- na em bai i bagarapim konfidens. Na tu “bullion bank” i no inap stretim sot bilong foren exchange. Em bai i mekim ekses likwiditi insait long PNG ikonomi ( wanem maniol intrest reit i kalabusim insait long PNG)  i kamap bikpela  moa.

Insait long Agrimen, namba 4 i “gro i kamap long reveniu”!? Tex, em i tex tasol, na tu planti taim, tex em bai i bagarapim gro.  Mi klia olsem gavman i nidim moa reveniu long stretim fiskol mismanadgen ol i bin wokim, na tu long putim mani long ki eria long expenditja. Tasol  i no gutpela long soim tex olsem rot long ekonomik gro.

Alotau II i tok olsem, agrimen bai i kamapim gro long olgeta hap, “inklusiv long olgeta”; tasol i luk olsem ol disisin insait long Agrimen i nogat klia politik o ikonomik tingting long mekim dispela i kamap tru.  Long nau i gat planti polisi ol i save agenstim agrikaltja na smol bisnis na graun; insait long Alotau II i luk olsem ol dispela polisi bai i stap yet. Agrimen i not toktok long praivet-pablik wok wantaim.

Na tu insait long Agrimen i luk olsem i gat planti gavman eksin, tasol i nogat planti eksin long helpim praivet sekta wantaim sampela pro-maket polisi.

Gutpela hap insait long agrimen em i olsem Namba 1 em i Nesonol Populesin Polisi. PNG em i nidim planti wok long dispela hap. Tasol, riserch i sowim olsem, best rot long dispela “demogrefik transisin” em i olsem, givim pawa long ol meri -na ki long dispela , em i strongim agrikaltja.  Olsem, tingting em i gutpela, tasol Alotau II i no sapotim tupela bigpela rot – olsem sapotim ol meri na sapotim agrikaltja.

Narapela gutpela hap insait long Agrimen, em i , mekim edukesin i kamap beta moa – olsem gavman i bin lainim  gut olsem em mas wokim strongpela wok long dispel hap.

Long sait long helt, giaman toktok bilong “fri helt” i stap yet; na gavman stil em i giaman olsem K20m em bai inap long trutru wokim  fri helt long ol lain PNG, na tu olsem inap mani i stap wantaim gavman long em bai i givim long helt. Long taim bilong ileksin, Helt Minister i bin givim kontrakt long medikol saplai. Gutpela olsem Agrimen bai i lukluk insait long dispela kontrakt gen.

Gavman i bin katim badget bilong infrastraktja . Long 2017, badget bilong transpot K1,481m i go daun long K897m  – trutru katim long 52% bihain kauntim inflesin – lukim hia. Na tu badget 2017 i toktok long sampela narapela katim long 30% moa (dispela nius yumi bin ridim bifo long toksave long defisit). Kwestin bilong mi olsem, hau gavman bai i wokim longpela list bilong olgeta wok infrastrukta long taim badget i kamap liklik ( olsem Tresarai bin tok) ?

Agrimen i soim sampela senis insait long federal straktja bilong PNG. Wanpela bikpela senis i olsem proposol long nau reveniu bilong ol main bai i  60% i go long nesonol gavman, 30% i go long provinsol gavman, na 10% i go long ol papagraun. (Dispela i bilong oil na gas tu)  Mi laik askim: dispela senis mekim olsem Sir Julius Chan i kam insait long gavman – olsem rot long moa otonomi i kam long New Ireland wantaim bikpela Newcrest main?  Dispela senis tu em i bikpela samting long 2019 Bougainville referendum.

Mi soim olsem Agrimen i no lukautim gut pawa bilong ol meri PNG. Dispela tu i soim olsem aid program bilong Australia i no wokim gutpela wok tumas. Foren Minista bilong Australia, Julie Bishop, i bin tok olsem pawa bilong ol meri PNG em i nambawan praioriti bilong aid bilong Australia i kam long PNG.  Sampela lain insait long Australia Hai Kom, ol bai i traiim explein hau aid program trutru i no helpim gut givim moa pawa long ol meri PNG. (Alotau I tu i no bin tok long dispela, tasol em i bin tok long ol mama i dai long taim bilong karim pikinini) .

Tru, i gat planti program i stap, tasol wanpela gutpela test long skelim pawa bilong ol gender program bilong Australia, em i olsem , niupela gavman em i givim tingting long dispela program o nogat. Long sait long pawa bilong ol meri, i luk olsem nogat.

Em i gutpela long komperim Alotau II wantaim Alotau I (lukim long hia).  Long tingting bilong mi, Alotau i em i beta moa. Dispela Agrimen tu em i bin laik wokim planti olgeta samting tumas, tasol  em i bin makim olgeta taim long wokim beta moa, nae m i bin givim gutpela viu long bigpela piksa bilong PNG.  Insait long Alotau II, yumi luk beta ol challenges long sait long ekonomik, tasol i no luk olsem gavmani em klia long aksonim .

Charles Abel i bin promisim 110 De Plan; yumi bai i weitim na hopim olsem dispela plan bai i lukluk gut long ol chalendge  bilong PNG.

Dispela ol chalendge bilong PNG, na tu hau PNG i stap namel long ol neiba kantri,  dispela mi laik raitim long nekst atikol bilong mi.  Na tu bai mi raitim long tupela rot long divelopmen PNG i wok long lukim nau.