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PNG Economic Statistics Corrupted – Responses to Treasurer

The PNG Treasurer has provided inadequate responses to recent coverage of the corruption of PNG’s economic statistics.

Late on Saturday evening I was surprised that PNG Treasurer Charles Abel was responding directly on Facebook to my recent blogs on this issue. The front page of PNG’s weekend paper, the Sunday Bulletin, which featured with the heading “Economic Statistics Corrupted”, possibly contributed to the direct Facebook comments from the Treasurer. Later Facebook coverage highlighted an earlier response from the Treasurer.

Democracy thrives on discussion and debate. I congratulate ‘The Sunday Bulletin’ for being brave enough to cover the issue. The story is not “fake news” and the report from PNG Economics covering the issue, supported by analysis from other independent think tanks and universities, was worthy of a news article. However, in an environment where there is clear pressure on the PNG press not to cover unfavourable stories about the O’Neill/Abel government, I can imagine the ferocity of the phone call from a certain advisor in the Prime Minister’s office and the threats that could be made.

Following are the two responses I have from the PNG Treasurer, and my responses provided on Facebook over the weekend. Putting these in a single article will hopefully allow the discussion to continue – possibly allowing for some honest reflection on how to make for better statistics to inform better policy in PNG.

The two key elements of my responses are:

  1. As the Treasurer indicates, the rules for calculating the size of the economy (GDP) were significantly changed. However, these changes occurred in 2017 and the government was very happy with these new rules covering the first eight years (2007 to 2014) which led to major increases in measured GDP. They immediately built the new figures into their economic policies. However, using the same rules, the 2015 figures published in March 2018 were politically inconvenient for they showed the non-resource economy in a severe recession (negative growth) and risked breaking the legislated debt to GDP target. The Treasurer only cries foul and sends the rules off for further examination when they don’t suit his political story. If the 2015 GDP numbers was the first release under the new rules then I could understand the argument. But to only object to the ninth year indicates other motives.
  2. The Treasurer tries to validate his approach by referring to the support from the IMF and ABS, and implying that they agree there is a major problem. However, the ABS has quietly walked away from the fiasco and latest reports indicates it has suspended its technical assistance report. The IMF continues to release the original numbers from the NSO/ABS/IMF March 2018 report despite requests from the government not to do so. The Treasurer’s international friends have left him on this issue. They don’t like getting involved in what amounts to the corruption of PNG’s statistics.

Following are the two complete Facebook discussions covering the statistics. I’ve included comments from others that also participated. The first response was immediately following my fourth blog exploring the four motives behind the corruption of PNG’s economic statistics. The response covers two paragraphs and I respond separately to those. The second response from Abel was included as as “conversation starter” on Paitum Garamat on Sunday 3 February. It included the front page of the Sunday Bulletin. I’m not sure when Treasurer Abel made the specific comments or which article he was responding to – but they have been relayed to me from several sources.

1. Treasurer Abel’s response on Facebook (Sharp Talk Saturday 2 February).

Charles Abel Paul there is no deliberate attempt to manipulate numbers. In fact we are working closely with the IMF and the World Bank in many dinancial reforms. This has resulted in a graduation back to budget support modality funding and a successful inaugural sovereign bond issue.

The IMF has changed the method of GDP calculation. Preliminary application of this method by the NSO has created a discrepancy with the Central Bank and Treasury numbers. Queries of the application by NSO have lead to acknowledgement by the IMF and ABS that the queries have basis and proper consultation is required before rule changes like this are finalised. The NSO results are preliminary and final numbers will be published in February with the support of the IMF and Australian Bureau of Statistics.

Paul Flan Dear Treasurer. Thank you for responding as an exchange of ideas and perspectives is good for democracy. With the utmost of respect, your opening paragraph fills me with concern (I will comment on the second paragraph shortly). Of course, there have been attempts by the IMF, World Bank, ADB and others to try and reverse the decline in PNG’s economic management – a decline documented in ratings over recent years that have moved PNG into being classified as the only APEC “fragile situation” state. However, it would seems as if this assistance is being given lip service at one level, but then ignored when faced with the realities of politics. The clearest example of this was your change to the Fiscal Responsibility Act in 2017 to move the primary budget deficit target to an average of zero (over the medium-term) of the non-resource fiscal balance as a share of non-resource GDP. Agreement was given to the budget support loan on the basis of this target being included in your 2019 Budget Strategy – and before your 2019 Budget figures were actually released. However, your 2019 didn’t deliver on this commitment. This was not a slight deviation – it was close to a billion Kina of additional expenditure over what you had committed to as the first priority when PNG received the assistance. There appears to be a track record for asking for assistance, accepting it when convenient, but then over-turning it during the rigour of the budget process. I discussed this characteristic of your last two budgets in a recent edition of the East Asia Forum.

Nelson Kopunye I heard about this on Radio Australia the other day

Paul Flan In response to your second paragraph, I just highlight that three earlier articles (see pngeconomics.org as well as on Sharp Talk) have gone into some additional background. When responding to a similar explanation as provided in your 2019 Budget, I asked the question as to why the Treasury and Central Bank where happy with this changed methodology which covered 2007 to 2014? Why were they happy with the first eight years of changes, but unhappy with the ninth? Yes there was an updated methodology and this had dramatic impacts in portraying the government’s performance – the move from the orange line down to the red line. Everyone seemed happy with this massive initial change. However, when the same methodology produced an inconvenient number, it is not used, a committee is set up to examine the issue six months after the draft release, and it seems possible that updated numbers will be released nearly one year after the initial draft was released. Anyway, your last sentence indicates that the ABS has returned to help with the updated figures. Could you please just confirm that the ABS has lifted its suspension of working with the NSO which the IMF documented as recently as December? With respect and always happy to discuss further.

2. Treasurer Abel’s response copied on Facebook (Paitim Garamat Sunday 3 February)

 

Cent Marak shared a post.

Conversation Starter · 4 hrs

Trex Kalik‎ to Alotau District

Wehley George Kanari Wow Incredible Stats

Aloysius Maneo Not surprising though ..its a fact.

Matthias Lasia ValeRius I hope UnABel and PO will not say Fake News ✌✌😜😜😜

Cent Marak I’ve responded to this many times already. Its a claim by Paul Flanagan in Australia. IMF changed the ground rules for calculation of GDP recently and the NSO rushed to publish some preliminary numbers showing a discrepancy with the numbers from BPNG a…See More

Daoni Esorom Cent Marak . It just shows yet again the lack of coordination and communication between key government departments and institutions on key issues so pertinent to the management of the country’s economy. This time key government departments not communicating on key economic formulas. This time NSO gets the blame. Next time it will some one else. So damaging though. And it’s certainly won’t be the last. Expected in governments with weak systems like ours where blame and lieing is the norm. So typical of PO-Abel government.

Cent Marak Daoni Esorom that’s the response from our DPM

Daoni Esorom Cent Marak. The DPM response does not reflect the realities and the truth. I will believe an economist and not a singer cum MP. You take your pick.

Paul Flan Hi Cent. Thanks for posting – as I’m banned from the country by the Prime Minister for suggesting that the fall in oil prices in late 2014 would affect the budget (that was met with accusations of fake news, LNG contracts were at fixed prices and there would be no impact on the budget – unfortunately, I was right again on that one) I don’t get to see the Sunday Bulletin anymore. Anyway, I had a similar discussion with the Treasurer on Sharp Talk late last night. I am copying that below and will post also on the pngeconomics website and facebook page:

[Complete copy of the first conversation was placed on Facebook – not repeated here for the sake of brevity – except that I included an introduction to the extract from the IMF report indicating the ABS had pulled out]

Paul Flan This is an extract from the latest IMF report – it indicates the ABS is no longer supporting preparation of a response to new GDP numbers. This was probably the final straw, along with the very poor attempted explanation in the 2019 Budget, for deciding to call the GDP games as a corruption of PNGs Statistics.

Paul Flan And Cent, if you want to use a football story, the facts are that the rules were changed and accepted by the O’Neill/Abel team for the eight years 2007 to 2014. The O’Neill/Abel team really liked the new rules and quickly scored eight tries as it made their economic management look better. Then the other team scores two tries under the same rules and the O’Neill/Abel side now decide to dispute the rules in a show of bad sportmanship. One umpire, the Australian Bureau of Statistics, has left the field in disgust. The other umpire (the IMF) is still saying the 2015 and 2016 numbers are valid in all of its publications. O’Neill/Abel have now gone to the video referee – and we all know what pressures and incentives that can bring. All other economic indicators for 2015 indicated there was a severe recession in the PNG economy outside of the resource sector – employment was falling, business sales were falling, tax collections were falling (due to falling incomes, profits and consumption), imports were collapsing, private sector investment was suffering and there was the worst drought in 20 years. Just accept the facts based on new rules that everyone accepted because the new rules were actually better in measuring the size of the economy. The government shouldn’t cry when the new rules don’t bring the facts that they want – just accept the new facts and try and create better economic policies for the people of PNG.

 

Matthias Lasia ValeRius Paul Flan thank you Paul 👍😀

Cent Marak Thanks Paul… Taxpayers deserve to know the truth

Daoni Esorom Cent Marak ..And politicians must not lie to the masses including those who know more than them.

Soctinec Sophin Malakhu Wow, very brave reporting.

Vincent Agi Omi Wow… The mysterious mysteries..

James Masa Tell the truth! People are dying because of lack of medicines. Hiw dare you ride on people’s suffering?

The motives: Why would the O’Neill/Abel government want to manipulate economic statistics (4)

Earlier articles have covered the facts around the corruption of PNG’s GDP statistics and found a false alibi for this economic crime. So what are there possible motives? Four motives are explained below.

The first and primary political motive is the inconvenient fact that the updated PNG National Statistical Office (NSO) figures, supported by the Australian Bureau of Statistics and the IMF, show the non-resource parts of the economy had been in recession in 2015 and 2016. As well over 90% of the PNG population derive their livelihoods from the non-resource sector (especially agriculture), it is vital to focus on the non-resource sector when determining how things are actually going for the people of PNG. So a recession extending over both 2015 and 2016 in the non-resource sector is a major issue, including a political one. While much of the economic decline was the inevitable end of the construction phase of the PNG LNG project, admitting a severe recession extending over two years would hurt the government’s economic credentials and leave it open to further charges of economic mismanagement.

Second, economic growth rates have become a political issue in PNG – the Opposition is calling for a commitment to move to a 5% non-resource GDP growth target. One easy way to manage such a call is to take control of the growth statistics and simply boost them up.

Third, there are more subtle impacts from using a higher GDP number, even if a fraudulent one. This is illustrated in the following chart. The chart uses official GDP debt levels contained in the 2019 and earlier budgets for all three lines – so the only variation is disagreement about GDP levels. The top orange line shows the situation using the original PNG Treasury numbers – so before the 2017 NSO update. Projected debt levels were going to keep the debt to GDP ratio above the limit set in the law of 35% (under the Fiscal Responsibility Act). This would have been politically embarrassing. Holding the debt to GDP down would have required a lower budget deficit, requiring less spending or more taxes. Since the 2017 election, there has been little appetite for constraining expenditure – there have been very large increases in expenditure in Treasurer Abel’s first and second budgets.

With the initial 2017 NSO update, PNG’s debt to GDP ratio almost magically resolved itself, falling to the red line. Lifting the nominal GDP figures means the debt to GDP ratio decreases – one is dividing by a bigger GDP number which allows for more debt at any particular ratio. There was now the option to spend more without breaking or amending the law. This was a very convenient solution for the government and avoided immediate pressure on the PNG Treasury to cook the GDP books – they could use the NSO figures up to 2014 and then grow GDP forward at reasonable rates to solve the debt to GDP – shown by the red line.

However, the subsequent March 2018 figures from the NSO put an end to this easy solution – with the new situation shown by the green line. The new figures for 2015 lifted the debt to GDP ratio from 29% to 32%. But an even greater worry was that the lower base and realistic growth rates meant that from 2016 onwards that the government had been breaking the law with a debt to GDP ratio exceeding the 35% limit. Although the government has the numbers to simply lift the ratio higher, this could reflect poorly on its international reputation. It could also lead to calls for better indicators for debt fragility such as looking at debt interest costs to revenue ratios (PNG’s are very high for developing countries while its debt to GDP ratio is relatively low).

In summary, the orange line was a problem. The red line was an initial solution – both more accurate figures from the NSO/ABS/IMF, and very convenient for dealing with the debt to GDP ratio. The new green line is now the problem – the updated figures from NSO continued to be accurate, but they were no longer politically convenient.

Fourth, higher nominal GDP figures have other indirect gains. In the same way as they lower the debt to GDP ratio, they also lower the budget deficit to GDP ratio. This gives the impression the budget is more under control. The GDP ratios can also be useful when making historic comparisons to economic performance prior to 2006. This is because the NSO update in 2017 lifted the nominal level of GDP by nearly 50% for 2006 and at least 30% through to 2014. However, it didn’t update its pre-2006 numbers. So debt to GDP and deficit to GDP figures look much, much worse in the times prior to 2006 simply because GDP estimates have not been updated, and this helps make the current government look better. Higher GDP figures are also likely to feed into higher estimates of government revenues as many GDP elements such as wages and profits and consumption are directly linked to tax collections.

Conclusion

Pushing the 2018 NSO/ABS update off to a committee and using the government’s own GDP numbers is hard to interpret as anything other than corruption of PNG’s most basic economic measure. The ABS appears to have walked away from the issue – an understandable response to help protect its professional integrity.

The final sentence in the “explanation” for the difference in GDP figures (discussed in the third article in this series) concludes:

In the meantime, all stakeholders including donors are urged to use official estimates of the National Accounts produced by Treasury especially for the years 2015 to the current year and until the new 2015 National Accounts are released.

Hopefully, this will not be done. There is a pretty clear truthful statistic for nominal GDP in 2015 – and that is not the one being used by the PNG government. There are very limited channels to try and limit the level of growing political corruption in PNG. There was a chance to make a more forthright set of comments about the 2017 election, but Australia clearly failed in that area.

Hopefully other donors can follow the lead of the IMF and other independent commentators in not simply accepting the economic narrative from the PNG government which is increasingly being based on manipulated economic and budgetary statistics. PNG’s institutions will struggle to turn the economy around when it is so far off course and its economic compass of genuine statistics has been so seriously corrupted.

The false alibi: the government’s lamentable explanation for its false GDP figures (3)

This is the third of a four part series covering the corruption of PNG’s economic statistics. The government has failed badly in trying to explain why they were using false nominal GDP numbers. They blame a change in a “Price Index”. But this excuse is farcical because you don’t even use a price index in determining nominal GDP.  A price index is used in measuring real GDP – but even then the NSO/ABS/IMF new price index was accepted for all the years 2007 to 2014. The price index was only questioned when the facts didn’t suit the economic narrative of the O’Neill/Abel government.

This article sets out in full the government’s attempted explanation for the mismatch in the PNG’s GDP numbers – I didn’t want to be accused of not fully representing the government’s excuse. Assessments are then made of the key arguments. This makes for a long article but some detail is required to justify why it is the final straw for judging that PNG’s economic statistics unquestionably have been corrupted.

The 2019 Budget included a very interesting box on the GDP figures (Bottom of Box 2, 2019 Budget Volume 1 pp 27-28). The following paragraphs provide the full government explanation in italics followed by a response.

The National Statistical Office (NSO) is the agency responsible for the collection and compilation of statistics including economic data and the compilation of PNG’s National Accounts. The office is currently in the midst of a reform period (2015-2019) with assistance from the Australian Bureau of Statistics (ABS) providing the Technical Assistance following NEC Dec 162/2014 for the overhaul of NSO. Several milestones have been achieved from this reform program, including the timely release and update of the National Accounts 2007-2014 in 2017 which updated the outcomes of GDP for that period which had remained outdated for more than a decade. While this demonstrated much of the progress emanating from the reform activities, more needs to be done before NSO can fully function on its own. In this regard, Treasury and the BPNG have been continuously supportive of the reform process by providing timely assistance in terms of data validation based on economic data provided by NSO through constant collaborations since the start of the reform process.

This background information includes a dangerous half-truth. The latest IMF Article IV report released in December 2018 indicates that the ABS is no longer providing technical support: “however, the ABS recently suspended its program due to increasingly uncertain NSO leadership and management, which threaten its current operations” (IMF 2018 Article IV p10). The ABS has walked away.

According to the 2019 Budget, what now is the problem with the NSO update?

“In 2018, NSO, Department of Treasury and BPNG, continued this process during the preparation of the 2015 National Accounts. During this stage, Treasury and BPNG observed a major change or shift in the methodology of compiling the national accounts. This included the use of a Composite Price Index as the new deflator replacing the Consumer Price Index (CPI). This caused a significant variation in the 2015 National Accounts prepared by the NSO compared with the official estimates produced by the Treasury (see below): 

Because the change in methodology was something new and since it caused some anomalies in the accounts, the Treasury and BPNG advised NSO to refrain from publishing the 2015 National Accounts until it was comprehensively understood and all associated anomalies from it were reconciled. Unfortunately, NSO proceeded to publish the 2015 National Accounts during the year without addressing the outstanding issues.

This is an absolutely extraordinary explanation.

First, yes, the table above does show the difference of K5,021 million between the “NSO Composite Price Index” and the “Treasury Consumer Price Index”. But a price index has no impact on nominal Gross Domestic Product – it is a total non-explanation dressed up in technical jargon. In basic economics, one learns the clear difference between “nominal” and “real” GDP. Nominal GDP does not take into account price changes through time while real GDP does. So a difference between price indexes (composite vs consumer) can affect measures of real GDP, and especially real growth rates. However, by definition, they have no impact on nominal GDP figures. The K5,021 billion gap is a nominal GDP difference. Price indexes do not change nominal GDP calculations. This attempted explanation is farcical.

Second, any concerns about the price indexes did not apply to the NSO 2017 release of updated information. The complete set of those tables, from 2007 to 2014, were immediately incorporated into Treasury’s GDP tables (although with some technical glitches, but there was no discussion of problems with any of the new methodology). So there was quick action in accepting the first eight years of updated information (2007 to 2014). The issue only occurred for the ninth year (2015) and probably 2016.

Third, going beyond the vital but simple technical issue that nominal GDP is not affected by price indexes, could there be a significant difference between a composite and a consumer price index? Short answer is that the PNG Treasury doesn’t actually use a “consumer price index”, and the NSO change is unlikely to have a significant impact on the deflators used in PNG’s national accounts. More specifically, PNG Treasury had been using for many years several deflators depending on the sector of the economy (which is what should happen). So the mining sector had its own price index to reflect changes in international minerals prices as did the petroleum and gas sector. The agriculture sector also had its own price index to reflect changes in international agriculture prices such as coffee and oil palm and forestry. All three of these price indexes are dominated by changes in international prices, not changes in the consumer price index. As these sectors together accounted for over 40% of GDP, it is difficult to describe the Treasury index as just a “consumer price index”. It clearly is a composite index of the CPI and international price movements. There is not much information on the other “composite price index” produced by the NSO. The original NSO update talked of using “constant purchaser prices”. Unfortunately, there is no public information on this index including on the NSO website. However, as mentioned above, this NSO index has been used by the PNG government for all of its GDP figures over the previous eight years and is the basis for the PNG Treasury numbers in the 2019 Budget from 2008 to 2014 – the deflators for each of the sub-sectors in Table 1 of Appendix 3 of Volume 1 of the 2019 budget are identical to those of Table 15 in the NSO publication PNG National Accounts 2007 to 2014. And as stated at the beginning, the key issue is that these price indexes do not affect nominal GDP anyway. They could affect real GDP growth calculations – but generally only by a small amount. The baby was thrown out with the bathwater in a very convenient outcome for the government.

The final element of the official explanation is below.

In view of this, Treasury and the BPNG, including the NSO, established a working committee in September to evaluate the 2015 National Accounts and address all the anomalies before releasing the final accounts again. This work is in progress and will also assist to establish the foundations for the publication of the 2016 National Accounts and the forward years national accounts projections.

It seems extraordinary that it took six months to decide to form a committee to try and resolve this massive difference in GDP estimates (9 March 2019 for the initial NSO release and September before the committee was formed). The PNG Opposition was querying the GDP figures by this time, along with the UPNG/ANU economics update (see here and here), so presumably there was some demand for action.

Sir Humphrey Appleby from “Yes Minister” fame would be pleased that the resolution to this political issue was to call for a committee!

Conclusion

This article goes through in considerable detail the full government’s explanation of the GDP figures mis-match. However, as assessed above, this attempted explanation fails miserably. Indeed, it is so filled with half-truths and blatant errors that it is the final straw in the formation of the view that PNG’s economic statistics have been corrupted. It is one thing to make an extraordinary technical error in the employment figures in the 2019 Budget (see here). But there is such a clear pattern of convenient erroneous numbers that one can only conclude PNG’s statistics are now being manipulated for political purposes. This pattern of corruption is likely to continue to slowly seep through other statistics, especially as there do not seem to be any good governance checks on what is published. My next article will explore in greater detail the possible motives for the corruption of PNG’s economic statistics.

PNG’s GDP facts – the economic corruption (2)

This is the second of a four part series covering the corruption of PNG’s economic statistics. A summary of the analysis was released yesterday. This section covers in detail the facts around the corruption of PNG’s estimates of Gross Domestic Product (GDP) – the measure of the size of the economy. Tomorrow’s section will cover the government’s false alibi, and the final section will cover the government’s motives for this economic crime.

The following graph provides the latest economic forecasts of GDP by the PNG Government (sourced from the 2018 and 2019 Budget documents), the National Statistics Office (for 2013, 2014 and 2015) and the International Monetary Fund (from its latest economic survey of the PNG economy published just last month).

There are several features of these figures.

Historical agreement

There is complete agreement on GPD measures from 2007 to 2014 estimates – so although the graph only shows from 2013 onwards, the agreement goes back to 2007. The NSO produced in 2017 up-dated GDP reports covering the period from 2007 to 2014 for all sections of the economy providing nominal estimates, and relevant price indexes to determine real growth patterns (an earlier release covered the period 2006 to 2013 but didn’t include price indexes). The PNG Treasury and BPNG fully agreed with the NSO’s update of GDP statistics from 2007 to 2014 including the new price indexes (this is an important fact for the next article covering the government’s “alibi”). This NSO work was important for understanding the actual performance of the PNG economy. The NSO’s economic section had not produced any GDP figures since 2006 – bad for economic policy in PNG and in breach of PNG’s formal obligations for being a member of organisations such as the World Bank. Fortunately, back in 2016, the NSO agreed to partner with the Australian Bureau of Statistics (ABS) and the IMF to start producing this most basic economic statistic once again . This new collaboration also allowed better methodologies to be used. With the agreement from all for the figures from 2007 to 2014, things were once again on track and going well.

The 2015 divergence

The columns only begin to diverge in 2015. The NSO released a report on the measure of GDP for 2015 on 9 March 2018. This NSO report calculated nominal GDP had grown by 0.7% in 2015, well below the 9.8% estimated by PNG Treasury. The NSO’s lower figures were no surprise. Other economic measures clearly indicated PNG’s non-resource sector was in recession in 2015 – PNG was in its worst drought since 1997 which was hurting both the agriculture and mining sectors; businesses were reporting sales down 10 to 20%; employment levels were dropping; tax collections from wages and profits were in decline; and the value of imports was plummeting to levels of a decade earlier.

The graph indicates the IMF accepted the new NSO figures for 2015. However, the PNG Treasury broke with tradition and refused to accept the NSO numbers. They refused for the MYEFO update in July 2018 (without explanation), the 2019 Budget Strategy in September 2018 (without explanation), and in the 2019 Budget itself (with an unbelievable explanation discussed in the next article). The Treasury is still claiming the economy is 9% larger in 2015 than its own NSO office, with the assistance of the ABS and IMF, has calculated. The next article will cover the ABS recently walking away from this mess.

Growing divergence from 2016

There are no publicly available official numbers from the NSO after 2015 – although they had apparently nearly completed the 2016 update (the IMF reports the figures had been “drafted but not published”). The IMF would have had access to the NSO’s /ABS’s 2016 estimates, and it is likely they are included in the IMF figures. Once again, PNG’s non-resource sectors (which include agriculture, construction, wholesale and retail trade, finance, government, community services, transport, communications – so the vast majority of the economy on which the economic welfare of PNG citizens depend) is estimated to have been in a mild recession in 2016 with a negative growth rate of -0.1%. Building on a non-resource recession in 2015 with a negative growth rate of -3.1%, this was clearly going to be embarrassing for the O’Neill government, highlighting that it had not put in place a continued growth strategy following the inevitable end of the PNG LNG construction phase. The government’s response was that in addition to the 9% over-estimate in 2015, another 5% over-estimate was added in 2016 – lifting the overall gap between the government’s figures and the IMF (likely NSO/ABS figures) to 14%.

The gap continues to grow as the PNG Treasury has also broken with tradition and is now including into its forecasts assumptions that particular resource projects will go ahead even prior to a final investment decision being made. Such an approach is known to be dangerous – it is called the “presource curse” (see here) where assumptions about unconfirmed future resource projects are built into government models, thereby generating assumptions about increased revenues, which are then often spent. This phenomena is also known colloquially as “counting the chickens before the eggs are hatched”. The O’Neill/Abel government is also forecasting very, very strong economic growth rates in future years. For example, for 2022, the IMF estimates growth will be 3.3% in real terms for the non-resource economy. This is the same figure used by the PNG Treasury in the 2018 Budget. 10 months later, the PNG government forecast the growth rate would be more than double this rate at 6.9%. Only two months later, the government’s growth rate forecast increased even further to an extraordinary 9.7% – nearly triple the IMF rate and triple the rate included in the 2018 Budget of Treasurer Abel.

These assumptions about much higher growth rates build on the earlier “base” issues for 2015 and 2016. By 2023, the difference between the O’Neill/Abel 2019 Budget estimates and those of the IMF have risen to K31.8 billion, or 34% of the economy. The build-up of these differences is shown in the graph below, with the percentage gap shown in the blue columns and left-hand axis (identical to the graph shown in the executive summary) and the gap in Kina billions shown in the orange line relative to the right-hand axis.

Conclusion

Such massive differences in understanding how the economy is performing is not just a simple difference in statistics. Good statistics can help better understand what is going on, and possible good policy options – they provide an economic compass. For example, by acknowledging the economy was really struggling in 2015 and 2016 might have encouraged a faster response in dealing with the 2015 drought as well as earlier action to correct the foreign exchange problems. There were other indicators of these problems, but admitting that there is an actual economic recession can galvanise government action faster and in a more focused way. Unfortunately, PNG has thrown away its economic compass. Without a good compass, it will be much harder for PNG to turn the economy around from current mismanagement. And as poor economic management costs lives through lower wages, higher prices, and fewer basic services, such a blatant corruption of the figures is an economic crime.

The corruption of PNG’s economic statistics – Summary

Summary

PNG’s economic statistics have been corrupted.
Even the most basic economic statistic of “how big is the PNG economy” has been manipulated to tell stories convenient to the O’Neill/Abel government.
An extra-ordinary gap of 18% (so nearly one-fifth) has opened between the PNG Government’s measure of the size of the economy (economists call this “Gross Domestic Product” or GDP) and independent outside observers led by the International Monetary Fund. Half of this gap emerged in 2015 when PNG’s own National Statistics Office (NSO), with assistance from the Australian Bureau of Statistics (ABS), said the economy was actually 9% smaller than claims by the PNG Treasurer.

The gap in this most basic economic measure is 34% (or one-third) by 2023. Specifically, the PNG Government claims the PNG economy will reach K125 billion while the IMF estimates it will more realistically reach 93 billion in 2023. The difference is driven by the IMF using the actual NSO GDP estimates for 2015, and doubts about the O’Neill/Abel governments claimed rate of PNG’s economic growth.

The NSO 2015 GDP figure was released on 9 March 2018. This date marks the clearest point from which the government started manipulating statistics – although there have been questionable practices in the past. The initial NSO release only included high level GDP information but indicated more details would be provided shortly. This never happened. Apparently, also with ABS assistance, 2016 GDP data was also prepared. This also has not been released.
The official attempt to explain the 9% difference in 2015 is lamentable and filled with basic errors. The blame is put on a new “price index”. However, one does not even use a price index when determining nominal GDP and the 9% gap is in nominal GDP. A price index is used for determining real GDP and differences in price methodology can have an impact. However, the government had been happy to use the new NSO price index for the eight years 2007 to 2014 when it was politically convenient. They just didn’t want to use the same price index for the ninth and tenth years of 2015 and 2016 when the results were politically inconvenient (details below).

The government has used the involvement of the Australian Bureau of Statistics (ABS) to boost its own economic credibility – and it did so again in the 2019 Budget. However, when discussing ABS support for better GDP figures, the IMF notes “however, the ABS recently suspended its program due to increasingly uncertain NSO leadership and management, which threaten its current operations” (IMF 2018 Article IV p10). Given recent practices over the last year, this would seem a sensible approach from the ABS – there was a need to walk away to protect its own integrity. The International Monetary Fund is using the NSO figure for 2015 and presumably for 2016 – a fact that must greatly irritate the O’Neill government.

So why would the O’Neill/Abel government want higher GDP figures than those provided by the NSO and ABS? Higher GDP figures are extremely convenient for the government. Specifically:

  • • A higher GDP figure avoids the embarrassment of admitting PNG had a serious recession in the key parts of its economy in 2015 – and a mild recession in 2016;
    • A higher GDP figure hides the fact the government is breaking the law by having a debt to GDP ratio higher than 35%; and
    • A higher GDP growth figure in the out-years counters the PNG Opposition’s call for an improvement in PNG economic growth rate.

The growing errors and half-truths in PNG’s economic statistics can no longer be explained away simply by technical errors. The pattern is now clearly one of manipulating figures to fit the government’s economic narrative. The credibility of PNG’s economic statistics – whether the size of the economy, economic growth rates, employment levels or budget outcomes – has plummeted. Let’s now call a spade a spade – the corruption of PNG’s political system has spread to its economic statistics.

The more detailed analysis will be published over the next three days in three articles:

  1. The GDP facts economic corruption;
  2. The false alibi; and
  3. The motives.

I now predict that official PNG government figures will indicate, no matter what the actual truth, that the 2018 budget outcome exceeded its targets and that growth will become more positive. The government’s internal, overly optimistic narrative based on false figures will limit action on underlying economic issues such as a mis-priced exchange rate, poor micro-economic policies such as growing protectionism, dangerous approaches towards increasing foreign commercial debt to over 50% of its public debt, and ignoring business concerns about the 23 January anti-investment business regulation.

Greece went down a similar path of manipulating its economic statistics to hide growing budgetary and other problems from Brussels. It did not end well. Given its current leadership, possibly it is not that surprising that PNG is heading down a similar slippery slope where statistics give way to political convenience. I fear the outcomes will be worse than the Greek experience. PNG’s institutions will struggle to turn the economy around when it is so far off course and its economic compass of genuine statistics has been so seriously corrupted.

 

1. Technical errors and convenient political claims – Employment

Executive Summary

The 2019 Budget is scattered with factual errors. This note covers employment.

The 2019 Budget claims total employment grew by 1.6 per cent in the last year. In fact, it declined by 2.9%. This significant error was repeated in double page ads promoting the government’s economic performance, with a graph showing employment increasing strongly from 2014. The fact check indicates that total employment has fallen by 6.6% since 2014.

So why do the graphs in national papers and in the budget itself show employment has been increasing since 2014?

Absolute technical incompetence in understanding the difference between an index of numbers and the numbers themselves is probably the most likely answer. However, as there is a pattern of these convenient statistical mistakes, possibly there is a more Orwellian pattern emerging in the details of PNG budgets?

Details

The following information was included in double page ads taken out by the Government on 20 November promoting the 2019 Budget in both national dailies – conveniently on the day the Opposition was providing its budget response. Over coming days, I will provide some analysis of all the points made over the double page spread.

The graph already had confused myself and other researchers familiar with trends in employment in PNG. It first appeared as Chart 16 on page 32 of the 2019 Budget. It was one of those PNG budget anomalies that one let’s go through to the keeper. (For some unusual reason, a phenomena repeated across many countries I understand, not many people actually read the detailed budget documents?!). However, when the graph was highlighted in a double page add by the government to a much wider audience in PNG, it needed closer examination, especially when the heading for the graph was the misleading “The trend for employment growth is positive”. And even more so when it is set directly next to an upbeat message from the Treasurer – how can one “fix lingering issues from our past” if that past is being mis-represented? “Building a broader economic base” risks building on some pretty unsteady foundations if the employment situation is so badly misunderstood.

The underlying source for the graph is Table 9.7 of the Quarterly Statistical Bulletin available on the BPNG website. This provides quarterly changes in the index – annual figures are available from page 172 in Table 7 Annex 3 Volume 1 of the 2019 Budget Papers. The graph below shows those indexes from June 2010 (to match the starting point shown in the ads). The bottom blue line is the index for the non-resource sectors, the red line indicates the resource sector. Clearly, looking at the graph, the non-resource sectors of the economy had been declining since 2014 in what looks like a rather flat blue hill. On the other hand, the resource sector had gone through a steep climb and then descent, before a strong recovery, so it looks more like a red mountain.

Then I did something really stupid – just checking – I know that you just don’t add indexes together without checking their respective weights. You’re taught this in basic statistics. However, when doing the crazy thing of adding these indexes together – so giving them equal weights – I ended up with the green line (called “Government Botched”). And the green line is exactly the same as what appears in the 2019 Budget as well as the newspaper ads spruiking the budget. And to confirm this absurdity, it did indeed produce a “total” employment growth rate of 1.6%.

Why is this stupid? One index was based on 351,721 jobs in 2011, the other index was based on 9,011 jobs. By simply adding the two indexes together, you ignore that one index is 40 times more influential in determining total formal employment trends. Is this just technical incompetence? Or a search for a convenient political number pretending there was employment growth in the economy?

So what is the actual situation? Not surprisingly, given that the blue index line for the non-resource sector represents 40 times as many jobs as the red line, the overall trend closely follows the blue line. The following graph converts the indexes to actual numbers using the 2011 Census estimate of 360,000 formal sector jobs. Actual non-resource estimates are shown by the blue column, and the resource sector is shown by the red bit on the top. The data is extended back to prior years to give a longer perspective.

This is such a different story that the newspaper line “The trend for employment growth is positive”. This claim only results from a massive statistical error and misunderstanding of indexes. The actual employment trend since 2014 has been very poor. Since 2014, there has been an encouraging increase in formal resource sector employment of 2,787. However, non-resource employment has dropped by over ten times this amount with a loss of 28,676 jobs, leading to an overall fall of 6.6% in formal employment. The figure should have shown an increase of over 40,000 new jobs just to keep up with population growth.

Indeed, these on-going falls in formal employment is one indicator that the PNG economy is very sick – much sicker than being admitted by the government. And on that issue, I’ll do another blog covering similar technical errors in the 2019 Budget and its GDP figures – including another extraordinary statistical incompetence story of why the PNG government is not using its own National Statistics Office figures.

Even more technical details

An index converts actual figures back to a common reference point. In the case of BPNG, the reference point is set as 2002 = 100. The index then shows percentage changes from this index point. If one wants to combine different index series, one needs to determine a weight (or the share of the total) to apply to each index before adding them together. This is also usually determined from the base year. So what is called in the ‘non-resource’ sector above is actually the weighted average of seven indexes for different industries – specifically: Retail; Wholesale; Manufacturing; Construction; Transportation; Agriculture, Forestry and Fisheries; and Financial, Business & Other Services. In some unfortunate language, the combined index of these sectors is then titled “Total”, but a footnote indicates that “Total excludes mineral sector”. Table 7 on page 172 in the 2019 Budget Volume 1 describes it as “Total Non-Mineral”. The BPNG Table 9.7 also uses the older term “Mineral” for the column covering all of the resource sector – now including LNG. For the purposes of this explanation (as it will link with a forthcoming discussion of GDP), the combined index is called “Non-resource sector” and the “Mineral” index is called the “Resource sector”. The best recent summary of PNG’s overall employment picture was provided in the PNG Institute for Public Affairs June 2015 publication by L.T. Jones and P. A. McGavin and titled “Grappling afresh with Labour Resource Challenges in Papua New Guinea: Discussion Paper No. 96”. Figures for the structure of the labour force are provided in their Table A8.2.1 which shows the Census estimates of 360,732 formal sector jobs with 9,011 of these being in the “mining and quarrying” sector. Using the “Mining and quarrying” sector, 9,011 formal sector employees in 2011 is linked the BPNG mineral employment index for that year of 163.6. The remaining 351,721 formal sector employees are linked to the “Total non-mineral” index of 159.4. The employment index figures are available from BPNG QEB Table 9.7 and movements in actual numbers can then be mapped to movements in the indexes shown in the “Employment – Indexes” graph above using the simple formula “Current time employment index divided by 2011 employment index times 2011 actual employment figure”. BPNG has had some concerns about the detailed accuracy of the Census results, so has been reluctant to put its indexes into specific job number terms. They were much more confident about mapping employment trends rather than specific numbers of jobs. While understanding these concerns given the difficulties of getting good statistics in PNG, possibly the PNG Treasury would not be making such fundamental errors in assessing employment trends if actual figures were used rather than indexes – at least you can add actual figures together. And putting these figures into a similar simplified graph over the same time frame as the original PNG Treasury chart, the overall result (using year figures where available to help smooth out trends) we get the following graph. This is the same data as presented above, except the resource and non-resource sectors have been combined and the time period only starts in 2010.

This looks very different than the economic graph provided to the papers.

 

 

 

PNG and LNG – remembering the costs

PNG gave PNG LNG a tax subsidy of at least K504.3 million in 2017. I nearly choked on my breakfast when I came across that number on page 126 of the 2019 Budget Volume 1 produced by the PNG Treasury. It is the conclusion of a section described as “briefly summarizes the tax expenditures provided to the PNG LNG project and the estimated revenue foregone” – see here with the budget paper available here.

I remember the difficulties I had in explaining the low tax revenues received from the PNG LNG project in a major report I prepared earlier this year (see here).  PNG’s Institute of National Affairs had similar difficulties – see here. The quantification of these tax subsidies by the PNG Treasury and IRC helps explain some of the gap between the promise of PNG LNG and its realities.

This was a very timely reminder of the enormous importance of getting a good return for PNG from its resources. For at about the same time that I was choking on the K504.3 million number, PNG was signing another deal for another major LNG project.

This morning, before the start of the APEC CEO summit, PNG signed an MOU with Total, Oil Search and Exxon Mobil for a new Papua LNG project – see here.

Without having access to the details of the MOU, my great hope is that it will work to get much better fiscal returns than PNG LNG. There is no doubt that the PNG Prime Minister and Treasurer are aiming for a better deal. Indeed, it is positive that the agreement signed this morning was only an MOU and not the Final Investment Decision, as there were fears that wanting to have an ‘APEC announce-able’ could have rushed PNG into another poor deal.

The tax expenditure analysis  of the PNG LNG project is extremely useful in highlighting how even the smallest details of negotiations can have enormous impacts.  For example, the thin capitalisation rules allow resource companies to have a maximum debt to equity ratio of 3 to 1 for interest deductions, when normal companies have a 2 to 1 limit. Sounds boring and technical. But the cost from this single tax incentive in 2017 for the PNG LNG project was K170.1 million. And these are annual figure costs – the estimate was a tax subsidy under this single provision of an additional K153.2 million in 2015 and K108.9 million in 2016. The PNG LNG resource companies are exempt from “interest withholding tax”. Once again, sounds rather technical and not necessarily that significant. The cost in 2017 was K304.6 million – half the entire cost of tuition-fee free education for this single tax concession for a single project.

The analysis included in the 2019 Budget also highlights that the K504.3 million tax subsidy in 2017 is the absolute minimum estimate. The report goes through 10 possible tax incentives, and concludes that it only had enough information to cover 4 items with a fifth (infrastructure tax credits) covered elsewhere. The most significant of these would be the “dividend withholding tax exemption” where PNG project partners do not have to pay the normal dividend with-holding tax of 15%. A back of the envelope calculation gives a likely cost of around another K600 million. This is based on the 2019 Budget estimate of a K800 million payment from Kumul Petroleum Holdings – KPH – in 2019, allowing for KPH only having to pass on 70% the dividends it actually receives from the PNG LNG project – let’s be generous and say they pass on 80% which implies KPH gross dividend of K1 billion –  KPH having around a 20% share in the PNG LNG, implying around K4 billion in dividends to other project partners – almost all of which are non-residents – and applying a 15% DWT tax to K4 billion implies foregone revenues of K600 million.

Adding this to the earlier K500 million figure implies tax revenue losses of over K1 billion per year from the PNG LNG project.

Inclusion of more tax expenditure data in the budget was a prior action required for PNG receiving budget support from the World Bank (see below). Having been responsible for the production of Tax Expenditure Statements in Australia, I know they can be extremely valuable in informing policy and budget decisions. An explicit expenditure subsidy is essentially the same as a tax expenditure when it comes to resource allocation. However, tax expenditures are often hidden from public view, and don’t face the scrutiny of an annual budget process. The increased transparency on estimating tax expenditures is a very welcome development.

Given today’s events, its publication could not have been more timely. We do need to remember the costs of providing tax incentives – and forgoing revenue means forgoing possible funding for PNG’s development challenges.

I wish the PNG negotiators the best in securing a better financial deal on future LNG and other resource projects. Hopefully, I won’t have trouble eating my breakfast when the 2029 Budget provides details on the size of any tax concessions provided for Papua LNG!

 

PNG 2019 Budget – Health cut despite polio and drug shortages, Administration big winner but political

Summary

The 2019 PNG Budget is an expansionary one. The biggest sectoral feature of the budget is a transfer of K1,080 million in expenditure responsibilities from the Provinces sector to the Administrative Sector. The political ramifications of this will be interesting as it implies a transfer of power to the central government,  away from Provinces and Districts, and allows more administrative control over parliament by the Executive. The big funding winners were the transport and utilities sectors. Despite medical shortages, the health sector was cut by 2 per cent after allowing for inflation. Education received only a 1% increase despite the Medium Term Planning requirements for a massive increase in teachers. Taking a longer-term perspective (from 2015 to 2019), there have been real cuts in transport of 36%, education of 30%, in health of 17%, in law and justice of 17%. The big longer-term winners have been utilities, debt service, the economic sector and administration.

Details

Methodology

Language in budgets always talk about supporting the so-called development “enablers” of health, education, infrastructure and law and order (the economic sector currently makes this list but it didn’t in some earlier plans). However, actual expenditure patterns have often not matched the policy language.

Below are tables providing sectoral expenditure figures from Budget documents covering 2015 to 2019. Adjustments have been made to debt service expenditure figures to match those in other tables in budget documents. As a word of warning, there is some judgement in determining if a particular item fits in one sector or another – the following tables draw on PNG Treasury’s assessments (presumably working with the Department of National Planning and Implementation). However, their information systems are imperfect.

The first table includes all figures in nominal values (so not allowing for inflation) – they come straight out of official budget figures. However, when doing comparisons over time, it is important to allow for the fact that a Kina in 2015 could buy more than it could today. Wages have gone up. Many goods and services cost more, although some could cost less due to technology improvements. Ideally, each sector should have its own price index but these are not available. Readers can use their own understanding of a price index for each sector if they wish. The approach used in the table below is to rely on the best available price index – PNG’s average inflation rate from its Consumer Price Index prepared by the National Statistics Office. The second table includes price changes by putting converting budget expenditures into 2019 values using the CPI. Specifically, allocations back in 2015 are now considered to be worth 26% more – a Kina in 2015 could, on average, buy 26% more things that it can now. 2016 items are on average worth 19% more, 2017 11% more and 2018 5.6% more. Readers can use their own price indexes if they wish.

As price changes through time are included, the second table is the better one for comparison through time. The table includes changes between the 2018 and 2019 budgets in the seventh and eighth columns, and between the 2015 and 2019 budgets in the ninth and tenth columns.

Provinces to Administrative

For the 2019 budget, by far the biggest change is the cut in the Provinces allocation by K1,072 million, or some 26%. This reflects shifting responsibilities for the District Services Improvement Program (DSIP) and the Provincial Services Improvement Program (PSIP) – worth a total of K1,080 million – to the Administrative sector. In the 2019 Budget documents, it is explained that the funding has been transferred to the Department of Implementation and Rural Development (DIRD). From a budgetary perspective, this is just a transfer of funds. From a political perspective, there are more significant implications. In Australia, such as transfer would cause a massive rift in Commonwealth and State relations. The large increase in local member and Governor constituency funding was a signature policy of the new O’Neill government  in 2011 – a promise to provide K10 million to local members and Provincial Governors reflecting O’Neill’s earlier views on increased decentralisation. There have been serious doubts about whether K10 million was too much, whether it has been well spent, and whether there has been enough accountability for this expenditure. Possibly the major transfer could be seen as a good administrative move for fiscal accountability given poor reporting under previous systems, but it is likely to be a politically sensitive change.  It is known that these constituency funds are highly political and are withheld or delayed from opposition members and used to increase the numbers on the government’s side of parliament. This practice is probably illegal under the constitution, and the opposition has threatened to take the government to court. By moving these funds under the control of a Minister, there is probably a way around this legal challenge by saying the relevant Minister has made an administrative decision not to release funds, for example because not enough detail had been provided in the quarterly report. If this was done in a consistent and transparent way, this could be an improvement. However, there clearly is scope for inconsistent treatment for political objectives. Given the importance and power of constituency funds, this appears to be a major shift in power from the Legislative to the Executive. Possibly expect fireworks behind what otherwise appears as a simple funds transfer.

Health

The 2019 Budget has a 2% real cut in health funding despite reports of major basic medicine shortages. It is hard to reconcile this real cut with the proposed massive increases in the number of health workers. Of course, the 17% real cut in funding over the last five years is also of concern and may have contributed to the outbreak of polio and increasing incidence of TB and Malaria. Talk of “free health” has always been a fiction with an allocation of only K20 million a year since 2012. Recent reports indicate parliamentarians have suffered from this deception when seeking even basic anti-malarial drugs.

Education

Education did slightly better with a 1% increase in real funding. Education was initially a big winner in 2011 with the introduction of Tuition-Fee Free Education at a cost of K600 million. This K600 million actually didn’t increase funding for the education system in terms of better schools and more teachers. Rather, it was primarily a cash transfer to parents as they no longer had to pay school fees. Education funding has been cut in real terms by 30% since 2015. There are reports that education standards have been declining – indeed, this has been acknowledged in the latest Medium-Term Development Plan.

At this stage, I have not gone through the detail of the significant funding for infrastructure and utilities. On the face of it, this would be welcome. Possibly, most of this funding could be from donor sources given recent announcements and the proposed shift in external funding towards infrastructure. The economic sector has held onto its large increase in 2018. The direct support for commercial equity in private operations has not worked in the past. Much more could be said – but to get this blog out quickly, just the numbers are provided in the following two tables:

 

 

 

PNG’s 2019 Budget – Loss of Fiscal Discipline

This is the first of a series of articles that analyses the 2019 budget primarily through its numbers rather than its words.

Summary

The 2019 PNG Budget moves away from fiscal discipline, and potentially towards yet another boom/bust cycle for PNG. The 21 per cent increase in expenditure from 2017 is risky and depends on high oil prices and GDP growth rates. The fiscal anchor for 2019 has been severely breached due to spending almost all of the K1 billion bonus from higher oil prices – this is probably illegal under PNG’s Fiscal Responsibility Act. The sudden reversal in fiscal policy towards a loose setting is probably the major short-term policy concern from the 2019 Budget.

Details

The 2019 Budget Strategy released on 29 August indicated expenditure in 2019 was expected to be K14,955.6 million. This was a modest increase from the expected expenditure in 2018 of K14,718 million.

On 13 November, the 2019 Budget was for expenditure in 2019 of K16,133.5 million, an increase of K1,415.6 million or 9.6 per cent in the course of just under 3 months. One would have hoped that the usual reasons for expenditure growth between years had been fully built into the 2019 Budget Strategy (payment of any wage increases, plans for the Medium Term Development Plan which is entirely based on the 2019 Budget Strategy). The quality of this extra K1.4 billion in expenditure may need close scrutiny.

There has been a significant reversal in fiscal policy. There was a major reduction in budget expenditure from K15,454.1 million in 2014 (actual) down to K13,319.7 million (actual) in 2017. In nominal terms, this has now been entirely reversed with 2019 budgeted expenditure of K16,133.5 million – representing an increase since 2017 of 2,813.8 million or 21.1% (a future article on the sectoral composition will analyse the pattern of expenditure changes).

This represents a significant loosening in fiscal policy. Indeed, beyond these nominal changes in expenditure, the 2019 Budget Strategy estimated that the deficit would be K442 million in 2019 or 0.7% of non-resource GDP. Instead, the 2019 Budget lifted this deficit to K1,743 million or 2.7% – an increase of K1,301 million. Given the high non-resource primary deficits from 2016 to 2019 (specifically, -4.6%, -1.7%, -2.2% and -2.7%), it is virtually impossible to reach an average zero balance in the medium term, especially given current directions in fiscal policy. This would be a breach of PNG’s Fiscal Responsibility Act agreed by Parliament in only September 2017.

This is a very different fiscal story than the one included in the 2019 Budget Speech.

The fiscal expansion and loosening of fiscal policy is the key short-term policy concern of the 2019 Budget.

Specifically, although the traditional PNG budget deficit slightly decreased, PNG agreed as part of its 26 October budget support loan from the World Bank that it would use a new fiscal deficit measure – the non-resource primary balance. Legislation was passed in the PNG Parliament in September 2017 to make this the new fiscal measure, indicating that it should average zero over the medium-term. This was the first condition for the $US150 million in budget support from the World Bank (called “Prior Action 1”). Changing the legislation and incorporating this measure as the key for its Medium-Term Fiscal Strategy was the key condition for releasing the first tranche of World Bank budget support. Current figures indicate that PNG will not receive the second release of the budget support assistance.

Extracts from the World Bank documentation (page 22) dated 26 September 2018 go into detail below.

The extra revenue derived in 2018 flowed mainly from high oil and gas prices. It is unclear how long these will continue. Going forward, the revenue estimates are based on very high GDP growth rates. A future analysis will look at the GDP figures. On balance, there is a distinct risk that PNG is heading back into a boom/bust budget cycle.

2019 PNG Budget Analysis Guide

There will be hundreds of people looking to do an analysis of the budget and what it means for the future of PNG.

Following is a 10 point guide from someone that started analysing PNG’s budgets back in 1978 and once used to be able to get into the media lock-up (but can’t now as I’m banned from the country).

1. Be prepared

The 2019 Budget needs to be looked at in comparison to recent budget documents and reports. So bring along at least electronic copies of the 2018 Budget, the 2018 MYEFO, the 2019 Budget Strategy (all available from the Treasury website) as well as the 2018-2022 Medium Term Development Plan (available from the National Planning Website). This is just useful for checking if the budget is doing what the government said it would be doing.

Also bring along the latest figures from respectable outsiders – so the latest figures from the IMF and World Bank are probably most pertinent. The latest World Bank and IMF’s analysis of the PNG economy is included in the following document as part of its assessment for providing budget support, including the agreed actions for the $US150 million in support – available here. The latest IMF Article IV report is also helpful, as is the UPNG/ANU PNG draft economic survey – available here.

2. Don’t start reading the words – start with the numbers.

This may sound strange, but I always recommend that you start with Budget Volume 1, go to the last Annex (about page 120 or so) and begin with Table 1 titled “Gross Domestic Product by Economic Activity” – or GDP for short. It is an attempt by economists to measure the size of the economy.

This is the first fundamental test of the credibility of the budget, and therefore any of the words in the budget speech and Executive Summary. Table 1 has lots of interesting information for economists and industry analysts, but for budget analysis the key figures are at the bottom of the table – what is the government saying is the size of GDP and how quickly is it growing?

Following is a quick table with recent previous estimates of GDP – this guide will have some tables where 2019 Budget figures can be inserted (usually in the green sections) and then compared with what the outside experts are saying (and these experts get to have a good look and sometimes actually even operate the relevant background models in PNG Treasury).

Nominal GDP (Kina Billions) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
IMF – bottom of page 54 except for 2013 figure from 2017 IMF Article IV) 47.7 56.8 57.1 59.3 63.8 68.0 71.7 75.5 80.5 85.9
PNG National Statistics Office 47.7 56.7 57.1 na na na na na na na
2018 Budget 47.7 56.6 62.2 67.8 73.9 80.1 85.9 92.2 99.1 107.0
2018 Budget Strategy 75.6 81.9 86.9 92.9 100.2 108.9
2019 Budget

First, it can indicate if some games are being played – especially if there are big differences between what the PNG government says, and what its own National Statistics Office and outside agencies say. For example, we know that everyone agreed essentially on the size of the PNG economy in 2013 and 2014. There has been agreement that the NSO figures once produced are the most accurate available and should be used (they actually work with the Australian Bureau of Statistics to produce these figures). However, the National Statistics office released in March 2018 a new estimate for the size of the economy in 2015 which was substantially lower than the PNG Treasury’s. The World Bank and IMF use this new NSO estimate. This new GDP estimate for 2015 should have been used in the 2019 Budget Strategy but it wasn’t. This then produces very big gaps between what the IMF and World Bank estimate as the likely size of the economy, and what the PNG government claims – a gap that continues to grow. Hopefully, the 2019 Budget will use the 2015 GDP figure estimated by the National Statistics Office. If not, the budget fails the first sniff test.If there are big differences between what the IMF/World Bank estimate – top line – and the 2019 estimates, why does this matter?

GDP ends up affecting the budget in three important ways.

First, many of the fiscal responsibility ratios are based on GDP as the base. For example, the debt to GDP ratio is not supposed to exceed 35%. If you have a bigger GDP number, it means you can have more debt without breaking the law. Likewise, the fiscal deficit number is expressed as a share of GDP – so a bigger GDP means your deficit figures look better when put in terms of “% of GDP”. Big increases in expenditure look more reasonable if expressed as a percentage of rapidly growing GDP. An example of this effect is given below which provides the level of public debt, and then expresses it as a percentage of GDP.  The bottom row using current 2018 Budget and 2019 Budget Strategy figures for public debt, and dividing them by the World Bank/IMF/NSO GDP estimates, shows the Fiscal Responsibility Act actually has been breached since 2016 (so figures greater than 35). This is a very different result than the figures used in the 2018 Budget and 2019 Budget strategy. Will this change in the 2019 Budget?

Government Gross Debt Kina Billions 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Implied figure from IMF’s GDP and debt to GDP ratio – interestingly a bit lower govt 11.9 15.4 18.4 21.9 23.5 24.5 25.8 27.0 28.6 30.2
2018 Budget Vol 1 Ann 3 Table 15 18.0 21.9 23.8 25.8 27.7 29.4 30.8 32.1
2018 Budget Strategy Table 3 p13 25.8 27.4 29.1 30.5 31.8
2019 Budget
Government Gross Debt Share of GDP 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
IMF/World Bank page 54 for 2014-22 and IMF Article IV for 2013 24.9 27.1 32.2 36.9 36.9 36.1 36.0 35.8 35.5 35.2
2018 Budget Vol 1 Ann 3 Table 15 29.0 32.4 32.1 32.2 32.2 31.9 31.1 30.0
2018 Budget Strategy Table 3 p13 32.2 31.8 31.6 30.8 29.5
2019 Budget
Memo item – implied debt ratio using PNG govt debt figures and IMF/WB GDP figures 31.5 36.9 37.3 37.9 38.2 38.5 37.9 37.0
Re-calculate new 2019 Budget Public Debt Figure using NSO/IMF/World Bank GDP numbers (so public debt figure divided by actual GDP figure as a percentage)

Second, revenue forecasts depend critically on nominal GDP forecasts. This is because the major sources of tax revenue are linked to parts of the measure of GDP – so wage income (the personal income tax), business income (company tax), the level of consumption (the GST) and various import and export taxes. Without changes in tax policies, there is often a near direct link – so assuming wage income is 20% higher probably means personal income taxes will be 20% higher (and possibly a bit more given bracket creep). So if the GDP number is too big relative to realistic forecasts, it probably means that revenue forecasts are also too high. If expenditure stayed at the same level, then we would expect that lower revenues would then lead into bigger deficits. So getting the GDP number seriously wrong probably means your entire fiscal strategy over the next few years will also be seriously wrong. So over-estimating GDP can lead to much bigger deficits and loose expenditure policy; under-estimating GDP can lead to smaller deficits and paying debt off more quickly.

Third, the GDP growth figures can provide another benchmark on how the economy has been going and the expectations of the government on how growth will perform in the future. Clearly, a negative number indicates a recession, and things are going badly. A very high number can also indicate excessive optimism. If there are very high growth numbers, are there very sound reasons for them? The usual approach, based on the experiences of PNG’s history and those of other countries, is not to bet on extremely high growth rates. For high growth rates push up the expected levels of revenues, which means that government’s can be tempted to plan to spend too much, which then pushes up debt and can trigger a boom/bust cycle. The best measure of PNG’s economic living standards are based on non-resource GDP (as most of the resource sector is foreign owned) after allowing for inflation – this is called “real non-resource GDP”. Real GDP figures are also useful. Negative numbers indicate a recession. Figures for both measures are shown in the following tables. The 2019 Budget Strategy growth figures started pushing the edges of credibility, especially by 2022 for non-resource growth. Will the 2019 Budget use more realistic growth assumptions?

Real Non-Resource GDP growth rates 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
IMF/World Bank page 54 for 2014-22 and IMF Article IV for 2013 3.6 7.0 -3.1 -0.1 1.9 1.4 1.9 2.3 2.8 2.9
2018 Budget Vol 1 Ann 3 Table 1 3.6 3.3 0.7 0.7 1.9 3.5 3.5 3.6 3.3 3.3
2018 Budget Strategy Table 2 p11 0.2 2.8 2.9 4.2 5.0 6.9
2019 Budget
Real GDP growth rates
IMF/World Bank page 54 for 2014-22 and IMF Article IV for 2013 3.8 15.4 5.3 1.6 2.5 -1.6 3.5 3.1 3.4 3.5
2018 Budget Vol 1 Ann 3 Table 1 3.8 12.5 10.5 2.0 2.2 2.4 2.2 2.0 2.5 2.8
2018 Budget Strategy Table 2 p11 3.0 1.0 2.3 3.0 4.3 4.5
2019 Budget

3. Stick with the numbers – you can tell I’m a number person!

Have a quick look at Table 7 in this back of the budget annex on formal sector employment.  Hopefully the non-mineral employment index would have moved back to at least its level of 172.2 in 2013 – its been falling in recent years.

Have a quick look at Table 8, especially the line on “Credit to the Private Sector”.  This hopefully will be well above the expected rate of inflation – otherwise a sign of a lack of investment in the economy. Unfortunately, this went backwards even before inflation in 2017, and the World Bank and IMF expect it will go backwards again in 2018 by another 4.3 per cent before a modest recovery in 2019. This is hard to explain as the earthquake would have been expected to increase investment rebuilding, as well as some APEC-related work.

Now to Table 10 called “Statement of Operations for General Government”. This table is absolute gold! As long as it is accurate (there were big errors in the 2018 budget between Annex Table 10 page 138 and Table 6 on page 33 but hopefully this won’t be repeated in 2019).

It gives you a wonderful overview of how things have been going on revenues, expenditures, key fiscal deficit ratios, financing and even a double check on the GDP numbers (the latter can vary between the various tables – Table 1 is the best source)

Actually, you almost don’t need to read anything else in the entire budget except for key announcements about any tax changes, expenditure initiatives and sectoral spending composition!

Given the boom in oil/LNG prices, it will be interesting to see how much of a tax windfall has been received from the resource sector in 2018, and if this is expected to continue. This is combined in the lines under ‘resource revenue’. Revenue as a percentage of GDP is also interesting, although World Bank will be looking more specifically at the tax to GDP ratio. The figures on Compensation of employees (payroll for public servants and teachers) is vital for seeing whether this largest category of expenditure is being bought under control. The line on interest costs is also interesting – has this been bought under control? There are then five measures of the difference between types of revenues and types of expenditures.  Sounds boring, but this is actually the key budget policy reform that has been introduced by Treasurer Abel. So the focus used to be the “Net Lending/Net Borrowing” line. This is the difference between all revenues and all expenditures – it is the same number  you need to borrow and impacts directly on public debt levels. It used to be the focus of looking at the fiscal deficit.

However, that is now old hat. The Treasurer has committed to the focus being on the “non-resource primary balance”. Indeed, the PNG Parliament agreed that this would be the new “fiscal anchor” for PNG’s budget strategy and has legislated that the aim is to have a zero non-resource primary deficit over the medium-term. So what is this new measure? Essentially, the aim is to de-link budget spending from the ups and downs of volatile commodity prices. This is done by excluding all resource revenues. The aim also is to focus on the current situation rather than problems from the past, so all interest costs are also excluded (this is the “primary” reference).

This then gets to probably the key issue in the entire 2019 budget in terms of fiscal policy. When the new government came to power and moved to this new fiscal anchor in late 2017 including having Parliament incorporate it under changes to the Fiscal Responsibility Act, interest costs were higher than resource revenues. This meant that the ‘non-resource primary balance’ was lower than the old fiscal deficit definition. This could give the impression that the government was planning to return to a budget surplus earlier than if the old measure was used.

However, and this is interesting, there is talk that resource revenues have absolutely boomed over the last few months. The government then had a choice. One option was to keep to the new fiscal anchor and save the boom in resource revenues by reducing public debt. That’s what they promised the World Bank and IMF when they received the budget support – it is the first point in their agreement. It’s what they indicated would happen in the 2019 Fiscal Strategy released just over two months ago. The other option was that they would spend the extra resource revenue. On the old measure, that would mean the fiscal deficit would stay about the same. On the new measure, it would mean the fiscal measure would blow out.

So in the middle of this table is actually the key story for the budget – continuing fiscal discipline around the new fiscal anchor, or spending as much as possible using the old definitions. Fiscal discipline or big spending – this will be revealed in this line on “non-resource primary balance”. The following table allows figures to be entered for both the level in millions of Kina, as well as percentage of non-resource GDP.

Key Figures for 2019 Fiscal Policy Stance 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Non-resource primary balance Kina Millions
IMF/World Bank – don’t give actual figures, just implied percentages
2018 Budget Table 6 p33 -3253 -665 -592 -442 -193 -10 98
2018 Budget Strategy Table 3 p13 -592 -442 -193 -10 98
2019 Budget
Non-resource primary balance (% of non-resource GDP)
IMF/World Bank page 16 for 2014-22 -8.7 -4.7 -4.7 -1.9 -0.3 -1.1 -0.9 -0.6
2018 Budget Table 6 p33 -4.6 -1.2 -1.0 -0.7 -0.3 0.0 0.1
2018 Budget Strategy Table 3 p13 -1.0 -0.7 -0.3 0.0 0.1
2019 Budget

The fiscal discipline/fiscal big spending outcome can also be confirmed by looking at the total expenditure figure between 2018 and 2019. The 2019 Budget Strategy said there would be an increase of a modest 2% or K238 million. How does the 2019 Budget actually perform relative to 2018? Is the expenditure increase more or less than K238 million?

4, Gauge the government’s spending priorities

Part of this comes from looking at growth in expenditure on Compensation of Employees and Interest costs mentioned in step 3. There should also be a table that shows the break-up of expenditures between different sectors. Hopefully this is provided back in the Expenditure chapter – previously Chapter 6. The 2018 Budget didn’t have a good table comparing this expenditure through time – it only provided 2018 estimates. However, for the keen, here is a table that can be completed. This provides sectoral expenditure before inflation is taken into account (so nominal values) and one where inflation is included (real values). Taking inflation into account is important as the Kina can buy less in 2019 than it could back in 2015.

PNG Budget Sectoral Analysis
Sectoral in Nominal Values
2015 Revised Allocations 2016 Sup.
Budget
2017 Budget 2018 Budget 2019 Budget
Administration                      3,086                2,219                2,732                3,042
Community & Culture                         146                   150                   225                   102
Debt Services                      1,070                1,248                1,616                1,865
Economic                         486                   452                   398                   666
Education                      1,554                1,243                1,163                1,293
Health                      1,492                1,537                1,222                1,506
Law & Justice                      1,244                1,233                1,125                1,064
Provinces                      4,138                3,566                3,990                3,925
Transport                      1,586                1,025                   897                   937
Utilities                         268                   372                   216                   318
Grand Total                    15,069              13,044              13,583              14,718
Source: Dept. of Treasury. Budget documents 2015, 2016, 2017 (Table 12 ) and 2018 budget text except for interest costs based on actuals
Inflation (latest figures from BSP) 6.0 6.7 5.4 5.9
Inflation index 2019 = 100 126.2 119.1 111.6 105.9 100
Sectoral after allowing for Inflation 2019 prices
2015 Revised Allocations 2016 Sup.
Budget
2017 Budget 2018 Budget 2019 Budget
Administration                      3,895                2,643                3,050                3,221                      –
Community & Culture                         184                   178                   251                   108                      –
Debt Services                      1,351                1,486                1,804                1,975                      –
Economic                         613                   539                   444                   705                      –
Education                      1,962                1,480                1,298                1,369                      –
Health                      1,884                1,830                1,363                1,595                      –
Law & Justice                      1,571                1,468                1,255                1,127                      –
Provinces                      5,224                4,247                4,453                4,157                      –
Transport                      2,003                1,221                1,001                   992                      –
Utilities                         338                   442                   241                   337                      –
Grand Total                    19,023              15,535              15,161              15,586                      –

5. Actually start reading some words!

The Foreword at the start of Volume 1 of the budget tends to include the key announcements and the budget “narrative” in only three or four pages – so much shorter than the typical waffle of the budget speech. It starts to become very interesting to compare the words in the foreword with the analysis of the tables covered in steps 1 to 4.

  1. Announcements.

Most of the big capital works programs should have been included in the 2018-2022 Medium Term Development Plan. So often the main announcements are actually around tax changes – and this often features in the write-up of the budget by the large accounting firms.

  1. Check on consistency between 2019 Budget and MTDP III

For the keen, you can attempt to compare the plans contained in MTDP III with some of the detail in the tables. The capital works programs contained in Volume 2 of MTDP III should match with the programs in Volume 3 of the 2019 Budget. A key issue is the link between the operational costs of the MTDP III and the 2019 Budget. This involves some hard work going through Volume 2 of the 2019 Budget which is huge – so large it has traditionally been printed in four separate volumes.

  1. Optimize food location

Stand close to the left hand side back door of the parliamentary lock-up when the nibblies come out – or at least that was the case several years ago. But possibly they have gone as a sign of budget austerity?

  1. Manage the volumes

The stack of budget volumes then somehow have to make it onto over-crowded library shelves. And on that note, if anyone has some old budget volumes (especially prior to 1990) which they not longer want to keep, please let me know! The only thing I like better than numbers is the history of numbers.

  1. Good luck and good night

Good luck! And I hope some of those hard-working PNG Treasury and National Planning Officers will be able to get some sleep with the 2019 Budget finally out of the way. Now just to get ready for the close of accounts, and then the process of monitoring. However, many in the private sector now have a long day ahead going through the numbers and reporting their analysis to their customers.