All posts by pngeco5_wp

PNG’s cash confusion – K570 million lost opportunity

PNG is reported as having a cash crisis. A leaked central bank email in late February highlighted the difficulties in having the cash to pay public servants. The response to PNG’s recent earthquake has been hampered by a lack of cash going out to relief operation centres.  Departments are being locked out of offices due to non-payment of rents.

In the context of this cash crisis, there is the extraordinary fact that the PNG government turned down K300 million in cash offered to it by the private sector on 7 March. It then turned down K270 million on 14 March. These amounts were the level of funds offered through the weekly Treasury Bill auction less the amount actually accepted by the Government.

This K570 million level of excess funding (or over-subscriptions) by PNG’s banks, financial institutions and superannuation is unprecedented. It represented an opportunity to collect some scarce cash to pay down bills and help meet the needs of the PNG’s disastrous earthquake.

This opportunity possibly has been squandered. Someone should be held accountable for such decisions – probably the Secretary of the Treasury, and if he informed the Treasurer, then the Treasurer himself.

And what will the government do on 21 March if the opportunity is offered again?

Details

A normal part of government is managing cash flows.  Tax receipts can come in at times different to when bills have to be paid. Indeed, in PNG, with company tax coming in relatively late in the year, and the desirability of paying some bills towards the start of the year (such as payments to schools and to provinces) there is a need to raise some extra cash earlier in the year. In addition, the O’Neill government has been running the largest deficits in PNG’s history, and these have been primarily financed by short-term domestic debt raised through the weekly Treasury Bill auctions. Over recent years, the share of this short-term debt has increased from 19% of reported public debt in 2011 to 39% in 2017 and now totals at least K9.4 billion based on 2018 Budget figures (of course, there are large debts that are being hidden off-budget). The problem of short-term debt is that the government has to roll it over regularly depending on the term (usually between 3 and 12 months). Combining these three elements (differences between revenues and expenditure, financing the deficit, and rolling over debt from previous deficits) while keeping interest lows and avoiding too much bunching of previous debt becoming due is the standard challenge of cash management.

In PNG, there is a weekly meeting of the Public Debt Committee to determine cash funding needs. This PDC includes key government agencies such as Treasury, Finance, the Internal Revenue Commission and the Bank of PNG. Each week, they determine how much should aim to be raised during the weekly auction managed by BPNG. The following graph indicates the level of these cash requests (or government offers of Treasury Bill securities) from weekly auctions over the last 15 months.

(Source: BPNG website on Treasury Bill auction results as well as Kina Securities Weekly Investor Updates – data is missing 7 data points out of 62 possibilities due to non-reporting of information)

On average, the weekly auction has aimed to raise K225 million Kina. The actual weekly amounts requested vary considerably, from slightly under K100m to over K350m. These offers are made to PNG’s major financial institutions (there is a very small investor market but this operates at only around K1 million per auction). On 60% of occasions, PNG’s financial institution do not offer as much cash as the government through the PDC is requesting.  This is called an under-subscription. The average under-subscription over the last 15 months has been K59m. On 40% of occasions, PNG’s financial institutions offer more than is requested. On average, this has been K55 million. Sometimes this over-subscription is taken up, depending on the interest rates being requested from the private sector.

However, something extraordinary happened over the last two weekly auctions. The level of over-subscriptions has jumped dramatically.  The details of the latest weekly auction result is copied below as an example:

The government sought funding for a mix of 182 day (six month), 272 day and 364 day  (one year) Treasury Bills totalling just under K300m. The private sector offered K535m, a massive level of over-subscription. Then two things happened. First, the government rejected this K235m extra cash that was being offered by the private sector. Second, the government dropped the level of funds it was raising down to K265m, so effectively rejecting a further K35m that was being offered. A similar things happened at the 7 March auction – K357m was initially sought, the private sector offered K587m ( an over-subscription of K230m), but the government dropped the level of funds being raised down to K287m, thereby effectively rejecting another K70m that was being offered. The extra-ordinary nature of these over-subscriptions is shown in the following graph.

This was an amazing opportunity to help meet some of the backlog in legitimate bills that the PNG government owes as well as meeting the needs of earthquake victims. Possibly, if the first K300m was taken up, there may have been less available the next week but that is unknown. The reasons for the rejection may because of a refusal to allow average interest costs to increase at all, and a fear of future bunching, but these are very difficult judgement calls given the cash needs within PNG. Surely a better decision would have been to accept the cash even if this pushed interest rates up slightly and any bunching issue was handled with forward planning.

Conclusion

My view until March 2018 was that the O’Neill government was facing a major cash crisis. This was caused by poor fiscal policy with a continuation of the worst deficits in PNG’s history. His way out had been a compliant central bank governor that was generally willing to print money (through the ‘slack arrangement’). This was a very dangerous course for PNG.

Then the last two Treasury Bill auction results indicate that the private sector was offering a partial way out of PNG’s cash crisis without printing money. For reasons that should be provided, the O’Neill government decided to not accept up to K570m in extra cash financing. Of course this cash should not be used just to finance some further “big man” projects or funneled into questionable and corrupt contracts. However, there are some very legitimate cash financing requirements that could have been met – including providing a better response to the earthquake. The big questions are whether anyone will be held accountable, and if the opportunity arises at the Treasury Bill auction on 21 March, what will the government do?

PNG IMF Article IV – Profligate 2018 Budget fails IMF expectations

Summary

The 2017 Supplementary Budget was a good start for PNG’s O’Neill/Abel government, but it then stumbled badly. Politics and presentational games have overtaken good economic policy.

The PNG Government has gone on an unsustainable spending binge in 2018 – expenditure is K2 billion higher, or 16 per cent, than the IMF was hoping.

The fiscal implications of this unsustainable spike in expenditure is hidden through misleading revenue games. The 2018 Budget assumes revenues K1.5 billion higher than the IMF’s optimistic scenario.

The IMF estimates PNG will break the 35% limit on the debt to GDP ratio, both because it has a lower baseline for revenue estimates and because it has much lower GDP estimates.

The IMF also estimates that the deficit to GDP ratio will exceed 3%. Looking at the experience of the 2016 budget, including on-going revelations about payment arrears, the risk is that the deficit will end up being closer to 5% of GDP.

Details

The IMF released its annual review of the PNG economy in late December – see here. In an earlier article, I covered some of the economic implications of the analysis – primarily that the IMF estimated PNG’s GDP would be some 10% lower in 2018 than forecast by the government. This article focuses on the budget elements of the annual Article IV review by a relatively independent economic commentator.

The IMF Article IV review of PNG was broadly positive of the 2017 Supplementary Budget. Indeed, it noted the Supplementary Budget contained “bold measures to ensure a narrowing of the fiscal deficit.” However, it immediately went on to say “Nonetheless, on unchanged fiscal and monetary policies, PNG faces several more years of economic stagnation with a growing risk of fiscal and financial instability as the debt-to-GDP ratio continues to rise and financing of deficits becomes increasingly difficult.” (IMF Press Release 17/523 3rd para).

So what were the “unchanged fiscal” policies that the IMF feared, and what alternative path was the IMF suggesting?

The IMF’s report was completed on 17 November 2017, 11 days before the release of the 2018 Budget  So the IMF had no opportunity to comment directly on the 2018 Budget. However, the IMF did set out what it regarded as a “passive” scenario which would continue economic stagnation – this is the business as usual case. The IMF also set out a more optimistic or “active” scenario of better fiscal settings.

This post analyses the 2018 budget relative to these two scenarios included in the IMF report. The IMF’s analysis was based on shares of GDP. The following table converts these percentages into actual Kina billions (by simply multiplying the percentages with GDP) to allow a comparison with the 2018 budget.

IMF relative to PNG 2018 Budget figures (Kina billions)

2017 2018 2019 2020
Passive IMF Revenue 10.5 10.9 11.4 12.0
Active IMF Revenue 10.5 11.2 12.5 14.0
PNG Government Revenue 11.0 12.7 12.6 13.6
2017 2018 2019 2020
Passive IMF Expenditure 12.8 13.2 14.1 14.8
Active IMF Expenditure 12.8 12.7 13.4 14.2
PNG Government Expenditure 12.9 14.7 14.5 15.2
[Source:  Text Table 1 on page 12 of the report. IMF GDP figures drawn directly from the Article IV report for the “business as usual” passive case. For the “active” case, these nominal GDP figures are adjusted upwards slightly as the IMF estimates  in Text Table 1 that nominal GDP will be slightly larger as the higher inflationary impacts will be larger than the smaller real growth impacts -so net increases in nominal GDP of 1.4% in 2018, another 2.6% in 2019 and another 2.7% in 2020.]

 

The key conclusion is that the IMF 2018 Budget’s expenditure is an extraordinary 16% – or K2 billion -greater than the IMF was hoping for. Indeed, 2018 expenditure is 12% – or K1.5 billion – greater than the assumed “business as usual” scenario. Clearly, the IMF did not expect the blow-out in government expenditure that occurred in the 2018 budget. If it had done so, one would have expected much sterner warnings about the actual fiscal risks now facing PNG.

Equally extraordinarily, budget revenue forecasts were much, much greater than expected by the IMF. The PNG government is expecting 1.5 billion Kina in extra revenues even beyond the IMF’s most optimistic “active” policy scenario. This is the case even after allowing for K0.6 billion in once-off “sweep” revenue – mainly from the National Fisheries Authority. Given the amount of assistance the IMF has given in the areas of revenue forecasting and the new medium-term revenue strategy – so they would have had excellent access to the latest information and modelling from the PNG Treasury – the gap of K1.5 billion is very concerning for 2018 budget credibility.

The very unusual nature of the PNG government estimates for 2018 are shown in the following graphs. One would usually expect a steady increase in both revenue and expenditure, not sudden bumps unless there were clear reasons for their being so.  It is extremely hard to understand the massive revenue spike upwards in 2018 and then a fall in nominal terms in 2019. This is also the case for expenditure. There are once off costs for APEC, but these are shown  in the budget as totalling only K0.3 billion, slightly up from 2017 (clearly an unrealistically low estimate based on previous APEC’s and earlier IMF estimates). Expenditure and revenues have very suspicious spikes in 2018. They were not expected by the IMF under either of its scenarios. And the drop back to more realistic figures from 2019 suggest there is something very fishy, indeed something potentially fraudulent, in the 2018 budget numbers.

 

Medium-Term Revenue Plan

A positive of the budget is that it recognised the dramatic fall in revenues in recent years and set out a medium-term revenue plan to address these issues. As noted in the new strategy, revenues (excluding donor grants) have fallen from around 20% of GDP from 2012-14 down to below 13% of GDP in 2017.

However, it is interesting that by 2020, the planned revenues are below the levels that the IMF considers possible under an active policy strategy (see LHS of chart above). Indeed, a revenue to GDP target of 14% appears too low given PNG’s development challenges. The revenue plan also is not explicit enough that the level of taxes on the resource sector should be increased. Economic theory suggests that the average tax rate in the resource sector should be higher than the non-resource sector, so a target tax ratio closer to 30% for the resource sector would seem appropriate (which is close to its average levels in the 1990s and 2000s). In addition, although it is positive that a revenue crisis has been acknowledged, the O’Neill/Abel government has not acknowledged the underlying issue of poor economic performance – see here.

One positive element of the plan is that the revenue forecasts from Treasury now form the basis for the new Medium-Term Development Strategy. This will remove the tendency for National Planning to use questionable models that generate unrealistic expectations about likely revenue flows which in turn opened an unmanageable gap between annual budgets and medium-term expenditure planning.

A particularly negative element of the plan is the foolish decision to “increase tariff rates to assist adjustments in the manufacturing sector”. This is protectionist fiction and simply indicates the increased power of the manufacturing sector relative to consumers and the overall health of the economy. PNG is not focusing on its areas of comparative advantage needed for sustainable development.

Conclusion

The IMF Article IV report was complimentary about Treasurer Charles Abel’s first budget – the 2017 Supplementary Budget. It had hopes for an active fiscal policy continuing into the 2018 Budget. They would have been sorely disappointed.

The extraordinary blow-out in expenditure, backed by very unrealistic revenue expectations for 2018, severely damages the credibility of the new Treasurer. The politics of protecting constituency funding, the need to be seen to at least reverse the massive cuts in infrastructure, health and education in recent years, as well as the high costs of hosting APEC, contributed to this unexpected blow-out in expenditure.

The sacrificial lamb in this political budget process was revenue credibility. As PNG’s shadow Treasurer Mr Ling-Stuckey has pointed out, the revenue estimates seem significantly inflated in terms of compliance cost returns, dividends and GST revenues – see relevant parts of budget reply speech here.

The 2018 budget figures are very similar to the 2016 budget – K12.7 billion in revenue and K14.8 billion in expenditure. Actual revenues in 2016 ended up being K10.5 billion – an extraordinary shortfall of K2.2 billion – see here. There is a fear that this experience is about to be repeated with probably around K2 billion in unrealistic revenues as even higher oil prices will take considerable time to flow into higher revenues. Large revenue shortfalls means large expenditure cuts and even more difficulties financing the deficit. With O’Neill and his advisors dominating government economic policy once again, no lessons appear to have been learnt. The people of PNG will be the ones that will eventually pay the price.

Depressing start to 2018 – K7 billion less than promised

Summary

If you’re looking for a Happy start to the 2018 New Year, don’t read the depressing review of the PNG economy just released by the IMF.

  • The 2018 economy will be K7 billion less than promised by the O’Neill/Abel government
  • Growth rates will be just over half the levels   (and there was a recession in 2015 in the non-resource economy)
  • The debt to GDP ratio already exceeds the higher limits set in the 2017 Supplementary Budget – and are expected to exceed 40% by 2020.
  • The deficit to GDP ratios will be larger than promised in the 100 day plan
  • O’Neill/Abel economic policies are the greatest barriers to private sector development.
  • PNG is facing a much greater risk of a fiscal crisis.

Details

The new Treasurer is to be congratulated for releasing this annual IMF assessment of the PNG economy. The attempts to bury last year’s report were hurting PNG’s credibility – see here. Transparency and openness are crucial first steps in addressing PNG’s difficult development challenges.

The IMF’s 2017 Article IV Review was written during the more optimistic days of August/September 2017 with Charles Abel becoming the new Treasurer, the promises of the 100 day plan and the positive early expenditure shifts in the 2017 Supplementary Budget. Economic policy has gone badly downhill since then as the influential advisers in the Prime Minister’s Office took over the 2018 Budget. The politics of holding together a fragile coalition took precedence over good development policy with major increases in expenditure driven primarily by the return to fully funded local constituency funds (some extra K1 billion) and meeting some of the costs of the foolish decision to host APEC later in 2018.

Contrary to Prime Minister O’Neill’s New Year message, there is no sign that PNG has turned a corner. Indeed, the IMF now confirms that there was a recession in the non-resource economy in 2015 (-1.2%). Since then, growth rates have been anaemic, and unfortunately the prospects are for little improvement. The Government estimates growth in the non-resource sector of the economy will move to 3.5% in 2018 – the IMF says a more realistic estimate is 2.1%. The Government says the growth rate will stay at 3.5% in 2019 – the IMF says it will be 1.9%. With an official population growth rate of 3.1% per annum, this means that the economy will continue on its backward path of falling incomes per person. Indeed, the latest IMF report makes a slight downward revision to the GDP growth forecasts in 2019 – confirming that PNG has the extraordinary distinction of being the worst forecast performing economy in East Asia for all three years from 2017 to 2019 – see here.

[Source – 2018 PNG Budget Volume 1 Annex 3 Table 9 and IMF Table 5]

The clearest sign of the gulf between what the O’Neill government is promising and the best judgement of a relatively independent, international umpire is in estimates of the size of the economy in 2018. There is a K7 billion chasm between the government’s optimistic claims of a K80 billion economy in 2018 and the IMF’s estimate of K73 billion. This is an extraordinary difference in forecasts for such a key variable in 2018. This K7 billion gulf of expectations in 2018 continues to increase in future years so by 2020 the IMF’s estimates the economy will be K11 billion smaller than the PNG government’s forecasts.

[Source – 2018 PNG Budget Volume 1 Annex 3 Table 15 and IMF Table 5]

So why such a large difference? The major reason is the O’Neill government’s failure to recognise that its economic policies are seriously damaging growth in the economy. Specifically, the IMF states “The main impediment to private sector development is macroeconomic policies”. O’Neill was slow to respond to the fall in commodity prices. He denied the severity of the drought, and the failure to request any international assistance during this period may have cost up to 10,000 lives. He has failed to do enough to address foreign exchange shortages – indeed, there are reports that it was his key advisor that started his slippery slope downwards in 2014 with a foolish 17% appreciation of the Kina that pushed possibly another 130,000 people into absolute poverty – see here.  PNG government forecasts have moved to a business as usual estimate of 3.5% per cent growth per annum. However, it is not business as usual at all – foreign exchange shortages are damaging growth and business uncertainties are undermining investment. As the IMF notes, private sector credit growth is negative in real terms. PNG has not faced such dire economic mismanagement since the 1990s.

The IMF also considers PNG’s budget deficits will be larger than the official PNG forecasts. Specifically, rather than the 2.5% deficit to GDP ratios for 2017 and 2018, the IMF forecasts 3.2% and 3.1% respectively. The IMF estimate for 2017 already seems much more plausible than the claims by Charles Abel as he rather deceptively refused to acknowledge the K408 million revenue shortfall in his recent Budget Speech even though the PNG Treasury budget documents indicated (see here). While there is some additional revenue from scraping the bank balances of some statutory authorities (K575m in 2017), the expected increases in revenue in the 2018 budget simply are not realistic (see here).

The combination of higher deficit projections and lower GDP figures means that the IMF’s estimate of the debt to GDP ratio is significantly higher than the O’Neill government’s estimate. Indeed, the international umpire estimates that the government will breach even the 35% maximum figure in 2017 and 2018 (with estimates of 35.4% and 37% respectively). Indeed, the IMF estimates that the debt to GDP ratio will reach 40.3% by 2020. And they also note the true figure would be much greater if superannuation liabilities and off-budget debt is included.

Future articles will examine in greater detail the reasons why the IMF considers “the overall risk of public debt distress is high” (page 3 of Debt Sustainability Analysis) – polite language for PNG’s greatly increased risk of a fiscal crisis because of its poor policies as well as the linked issue of failing monetary and exchange rate policies.

2018 Budget: Nice Words Poor Numbers

The new Treasurer released his first budget on 28 November. This was an opportunity to demonstrate the second term of the O’Neill government would help turn the corner on PNG’s economic mismanagement. So how did it do?

Overall, there are some wonderful sentiments in this first Abel budget. My sense is that he is very genuine in what he is trying to achieve. But he seems to be let down by the realities of PNG politics. Protecting  politicians electoral funds, finding money for APEC, trying to regain the upper-hand on the rhetoric of protecting health and education – all within the confines of fiscal responsibility – was simply too much. What has given way in this equation of  trying to be responsible while dealing with the political spending pressures has been revenue credibility.

Ultimately, he fails in his attempts to explain why we should believe his claim that revenues will suddenly jump by over 20 per cent in 2018. This is an increase of over K2.2 billion and an extraordinary reversal of collapsing revenues in recent years (see graph below).

Usually, such an increase can be justified by a major tax increase (there isn’t one), a major new project starting which actually produces revenue (there isn’t one in 2018), or a rapid expansion in economic growth (2.4% real growth is not rapid growth).

For me, Abel’s Achilles heel on his budget’s revenue credibility is his deceptions in the Budget speech. The new Treasurer is so wedded to the claims of his 100 Day Plan that he hides from numbers that show he is failing.  Specifically, he continues to claim the deficit will not go above 2.5% of GDP. This is the first point in his 100 Day Plan, so it is understandable he is sensitive on this one.

But throughout his speech, he uses old 20117 revenue numbers when his actual Budget documents show an inconveniently lower number.  2017 revenues are now forecast, according to his budget but not his speech, to fall by K408 million from K10,979m at the time of the Supplementary Budget to the 2017 Revised Estimate of K10,571m (see Table 11 below from 2018 Budget Volume 1).

And with this official revision to revenue forecasts, and no indication of changed expenditure, then the deficit also increases in 2017 by K408 million.

PNG’s forecast fiscal deficit for 2017 is now 3.1% of GDP. The new Treasurer has failed to meet both elements of the very first point in his 100 day plan – deficits are bigger and debt is higher than he promised less than 100 days ago.

In many ways, K408 million is an understandable revision. Indeed, my view is that the actual revenue outcome will be some K500m lower than even this figure as the assumptions on dividend payments are still unrealistic. However, the point here is one of credibility.

And the games played by the Treasurer in his speech on hiding the real state of the budget does not inspire confidence.

Future blogs will provide a more detailed analysis of the 2018 Budget. A key issue with any analysis of the budget is that as revenues are unlikely to be anywhere near their claimed levels in 2018, then the rest of the budget begins to unravel.

One cannot spend what one doesn’t get.

So there will be real decisions ahead on which pet projects will not be funded. And my fear is that if there is a choice between APEC funding and electoral funds vs health and infrastructure spending, the latter will be the losers in the inevitable 2018 Supplementary Budget.

Can we Trust PNG’s Budget Numbers?

Tuesday, 28 November. The day for finally delivering PNG’s 2018 Budget.

Some boring people (like me) will spend today and tonight going through the fine detail of PNG’s budget numbers.  As we battle to stay awake with too many cups of coffee, I thought it might be useful to have a quick reflection on the likely accuracy of the big picture budget numbers we will see today.

A good test case for accuracy is the 2016 Budget. This budget was released in November 2015, one year after the fall in international commodity prices. So international commodity prices can’t be blamed for any big drops in revenue.

2016 is also good because we may have numbers of the actual outcome. We certainly don’t have all these numbers for the 2017 outcome as yet.

2016 is also an interesting year to examine because the starting numbers are almost exactly the same as the estimates in this month’s 2018 Budget Strategy.  Both 2016 and 2018 have revenues of K12.7 billion expected.  Both have expenditures of about K14.7 billion. So 2016’s experience may provide a preview of the 2018 budget experience.

The key starting difference is that the 2016 revenue numbers were much more conservative. They expected almost exactly the same level of revenue as expected would be collected in 2015. Extraordinarily, the 2018 Budget Strategy’s starting point for revenues is 18% higher than the expected 2017 revenue figure of K11.0 billion.

So how did the accuracy of the 2016 Budget numbers go?

Unfortunately for PNG, not very well. The pattern of change is set out in the detailed table below. Essentially, it tracks the updating of key budget numbers from the 2016 Budget document itself (2nd column), then the 2016 Supplementary Budget (3rd column), then the 2016 Final Budget Outcome (4th column), and then some more recent BPNG reporting.

The biggest budget error is that revenues were over-estimated by K2.2 billion –  a 17% inaccuracy. Once again, it is interesting that the 2018 Budget Strategy revenue figures are assuming an 18% increase (not very realistic).

With the collapse in revenues, it looked like the government was taking some corrective action and reducing expenditure (in the wrong areas such as health, education and infrastructure but that is another story). The 2016 Supplementary Budget aimed to cut expenditure by around K1 billion, and the FBO indicated that expenditure ended up some K1.2 billion lower than the original 2016 figures.

But then comes along PNG’s central bank’s (BPNG’s) latest Quarterly Economic Bulletin released late last week. On top of page 8 of that report, it explains the on-going rapid increase in public debt in 2017 with this extraordinary explanation “and the encashment of presented cheques from the previous year, totalling K829.4 million”. So actually, BPNG is admitting that there was another K829.4 million in unpresented cheques from 2016, and these are only now being paid.

In any decent accrual system of accounting, these cheques should be allocated to when the expenditure obligation arose – back in the “previous year” – that is 2016. This extra K829.4 million in expenditure needs to be added to reported expenditure in 2016. This then lifts the deficit from K3.1 billion at the time of the FBO up to K3.9 billion.

The deficit to GDP ratio then lifts from the claimed figure of -3.1% at the time of the 2017 Budget to -4.6% at the time of the FBO to the best estimate now of -5.8%.

Deficits of 5.8% of GDP simply are not sustainable when PNG’s growth rate is back at around 2%.

In economic terms, that is a huge difference.  K1.8 billion –  a near doubling of the original budget deficit estimate.

And of course, we still don’t know if more  “cheques from the previous year” will be presented.

On other figures, the 2016 Budget assumed real GDP growth would be 4.3 per cent but the outcome more than halved to 2.0 per cent. Many consider the figure was actually negative based on falling sales, falling employment, falling credit, falling imports and falling tax receipts in 2016.

The GDP measure was a bit of a farce in 2016, in part reflecting the National Statistical Offices changes to GDP methodology. At the time of the 2016 budget the Treasury estimate for GDP was K43.3 billion. This increased by the time of the 2017 budget to K51.4 billion, and then up to K67.8 billion by the time of the FBO. So a 53% increase in the size of the GDP estimate for 2016, even though the real GDP growth estimate halved.

There were also serious games with the reported debt to GDP ratio. The legislative limit for this ratio was 30% in 2016. So you could have expected some horror in the Prime Minister’s Office when the budget said it would be exceeding this limit. The fixers went in, and suddenly the debt to GDP ratio dropped from 35.8% to 29.4%. By the time of the often more independent FBO document, this figure had moved back above 30%.

Conclusion

For those examining the details of the 2018 Budget, with starting numbers almost identical to the 2016 Budget, there is a need to be very careful. Games have been played in the past. There is a need for a detailed and realistic examination of  budget assumptions to determine if they are credible.

Frankly, the reported started point of an 18% increase in revenues in 2018 when the economy is struggling is a very, very worrying starting point. If the updated 2017 revenue estimate is even lower, then the 2018 will lose all credibility.

Given the similarities with 2016, I fear the people of PNG already need to get ready for some big expenditure cuts in the near inevitable 2018 Supplementary Budget along with a blowout in the budget deficit and public debt levels.

 

PNG Baset streteji ino yet soim trutru piksa

[This is a Tok Pisin translation of an original post that appeared on 9 October 2017. Thank you to the translator – it is a good public policy contribution to make such information available to a wider audience.]

Wol Benk em i nau tasol rilisim apdet bilong ekonomik prospeks bilong ol kantri insait long Ist Esia na Pasifik rijin – lukim long hia. Dispela em namba tu pat bilong wanpela tu pat pepa we i lukluk stron long dispela Wol Benk ripot.

Dispela baset – nid long soim samtin trutru

Bihain lon lukluk long sapplamentri baset, Wol Benk i ges olsem defisit em bai i nonap stap long mak bilong 2.5% bilong GDP long 2017, tasol em bai stap long 3.2%. Dispela em i stap klostu long mak we pastaim yet,IMF i bin tok defisit bai stap, klostu  nambaut long 3%.

Em luk olsem pablik dinau to GDP resio bai stap aninit tasol long 35% long pinis bilong 2017.

Lukuk go pas, Wol Benk estimetim olsem defisit bai pudaun liklik igo daun long 3.1% bilong GDP insait long 2018, na bihain inkris igo antap long 3.5% insait long 2019 na 2020.

Ol ekspektim dinau tu GDP resio long kalap igo antap long 40% bilong GDP (lukim ol orenj ba long graf tamblo we het bilong em i soim olsem pesentes bilong GDP long left hen sait eksis – graf ikam long p134 bilong ripot).

Nau ino gat planti intanesinol konfidens long rot bilong PNG igo bek gen long baset seples na long yumi daunim ol lewel bilong dinau.

Taim yu lukluk long ol bifo eksperiens, dispela toktok em tru.

Em i hat tru long mekim sevings long baset bikos long ol politikol interest i stap strong insait long ol ki eria, olsem ol elektoret moni we igo long ol politisen stap long haus paliment. Long ol yia igo pinis, PNG em i feil tru long traim long mekim kamap wanpela effisien na effektiv pablik sevis. Nau yumi bai gat ol bikpela pablik dinau lewel na ol interest kosts tu bai kontinu long go antap moa.

Ol kat long baset ekspendisa long ol dispela yia igo pinis, em ol i bikpela moa den ol kat IMF na ol lain i putim long dispela kantri Gris. Na ripot em i soim olsem PNG em i nid long spendim planti moa moni long ol besik sevises long impovim bagarap retin bilong PNG insait long rijin long Humen Developmen Indeks (lukim tebol B1 C 4.1 long p67)

Igat planti moa samtin ol mas mekim long sait bilong revenu. Gutpela we long mekim revenu igo antap, em i long traim kirapim growt gen. Moa yet long ol growt polisi, ol mas nid long lukluk long apim ol takis ret or kamapim ol niupela takis.

Konklusen

Yumi nau lukim olsem wanpela moa autsait referi em i wari tu long helt bilong PNG baset..

Yumi nidim sampela strongpela marasin.

Dispela 2018 baset ol bai kamautim long dispela mun ikam, bai mas traim long rausim ol nogut tok piksa yumi woklo lukim nau. Tasol, dispela kain wok bai nidim gavaman long wok bung wantaim moa den yumi lukim long saplamenteri baset – lukim long hia. Mi stil hop olsem Charles Abel, niupela tresera na Deputi Praim Minista, bai inap long mekim wanpela mirakel na kisim Praim Minista long lukim olsem yumi nidim trupela senis long kamap, bihain long ekonomik mismenesmen bilong faifpela yia igo pinis.

PNG – Lukluk long bihaintaim bilong PNG ikonomi, em I Moa Nogut insait long olgeta kantri bilong Ist Esia

World Bank em I bin givim niupela updet long lukluk long bihaintaim bilong ikinomik bilong ol kantri insait long Saut-Ist Esia na Pasifik – lukim hia. Dispela pepa em I namba wan pepa long tupela bai I lukluk long dispela updet bilong World Bank

Stori bilong tingting long gro

Dispela stori, I luk olsem I no gutpela stori ol manmeri PNG bai I harim.

Ripot bilong World Bank I soim olsem, olgeta yia 2017 I go 2019, ol I ekspektim PNG bai kamap long las ples insait long olgeta kantri, daunbilo stret –( bai yu lukim tebol long p 30 insait long World Bank ripot. Lukim yelopela kala I soim ol namba bilong PNG I daunbilo stret. PNG bai I kam las wan stret )

 Tebol I.B.1 Ist Esia na Pasifik: tingting long gro long GDP

(% senis long yia bipo)

EAP – Ist Esian kantri I wok long divelop

EAP- Ist Esian kantri I wok long divelop, tasol China I no stap insait

ASEAN –  Asosiesin bilong ol kantri Saut Ist Esian

 

Ikonomik gro em bai  2.1 I go 2.5%, na gro bilong populesin em bai 3%, olsem ikonomik I wok long go bek, sapos yu lukim long wanwan man na meri PNG.

Las ripot World Bank i bin givim long April 2017, sixpela mun pinis. Taim yumi lukim dispela ripot na niupela ripot, yumi lukim olsem olsem, insait long niupela ripot, ol I makim gro bilong PNG I go daun long 0.9% long 2017, na go daun gen long 0.7% long 2018.

Dispela bikpela pundaun I kamap bihain long niupela O’Neil gavman I bin givim ripot long bung Alotau II , long 100-de plen bilong ol, na long Saplementari Badget.

Taim World Bank I kisim ol namba bilong PNG I go daun, ol I soim olsem ol I nogat gutpela tingting long dispel ol niupela polisi bilong niupela gavman.

Ol I tok olsem dispel “namel” gro bilong PNG insait long non-risos sekta, em I kam long sot bilong foren ekschenge, na tu olsem I kam long “fiskol konsolidesin”, olsem gavman wok long stretim hevi bilong planti mani ol I spendim na liklik mani tumas I kam insait.

Insait long nekst blog bilong mi, bai mi lukluk long niupela BPNG Moneteri Polisi stetmen, na bai mi toktok long nogut impekt bilong ol restriksin long foren ekschange ( na tu hau BPNG I laik haitim dispela).

Wanpela narapela samting olsem, taim engin bilong gro is bagarup,  inflesin tu em bai I go daun. World Bank nau I ekspektim inflesin bai I go daun long 4.1% tasol long 2017. BPNG em I tok inflesin bai I 6.0%.

2015 PNG LNG project I bin givim PNG namba wan ikonomik gro insait long Pasifik. Nau I luk olsem nogat moa gutpela win bai I givim pawa long PNG ikonomi.

PNG ikonomi I depend tumas long risos tasol. Sapos ikonomi bai I bes long planti narapela narapela sekta, olsem agrikaltja, grona divelopmen bai I gutpela moa long olgeta man na meri PNG.

Konklusen

Yumi lukim olsem wanpela narapela referi gen bilong ikonomik, World Bank, em tu em I wari long ikonomi bilong PNG.

PNG I nidim niupela daireksin long polisi bilong ikonomik divelopmen. Wanpela artikol I bin lukim long last 40 yia na I givim sampela sadgestin – lukim long hia, na tokples Inglish long hia.

Wanpela sadgestin mi givim insait long dispela analisis, em I olsem, yumi mas sanapim ol man na meri PNG namel stret long divelopmen. Tasol I no long agrikalja o turism tasol. Wei long wokim gutpela divelopmen, em I mas bungim na lukautim ol manmeri PNG.

Ol tred na sektorol polisi nau , ol I soim olsem gavman I save lukautim ol wantok bilong em yet, tasol I no save lukautim gut olgeta manmeri PNG. Olsem eksempol bilong banis long impot – olsem PNG I bin wokim long Ramu Sugar-  em I save bagarapim olgeta konsiuma. Dispela kain polisi I save bagarapim gro bilong ikonomik.

Charles Abel, niupela Tresara na depiuti Praim Minista em bai I mas makim gut wanem kain advais em bai I harim, olsem em I ken painim gutpela rot long ol manmeri PNG.

Yumi mas hopim olsem, 5 yia taim, PNG bai I gat ol namba wan namba bilong gro insait long Ist Esia-Pasifik, na ol namba bai I kam long narapela narapela sekta, I no mainim na LNG tasol.

 

 

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.