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World Bank PNG Economic Update – Jekyll and Hyde

Executive Summary

The World Bank’s PNG Economic Update released on 7 February is a Dr Jekyll and Mr Hyde act for the PNG government.

The front macroeconomic part is undoubtedly very kind to the PNG government – it resembles the friendly support of Dr Jekyll in the famous Robert Louis Stevenson novella. There is much praise for the government and any criticism is buried away in the middle of paragraphs or implicit in graphs and specific numbers in tables – one must work hard and read between the lines to find what is really going on. One example of the friendly treatment is the very conciliatory discussion of the K3.4 billion breach (“policy deviation”) of the medium-term fiscal deficit targets agreed in the 2018 Budget and made the first condition of the World Bank’s budget support loan in only September 2018. Even allowing for expenditure arrears of nearly a billion kina, K2.5 billion (or 72%) of this massive deficit blow-out from 2018 to 2022 is left unexplained. Overall, what is remarkable in the January 2019 Update is the lack of reference, yet alone analysis, of the seven key issues identified by the World Bank in its own December 2017 Update. In the detailed analysis below, the PNG government has failed to implement its fiscal strategy, revenue strategy, wages strategy and measures to disentangle PNG’s budget fortunes from the whims of international commodity prices. In just over a year, the World Bank has retreated from its own benchmarks.

The second part of the report has a “special focus” on the private sector, and the tone is very different. This is the Mr Hyde part of the report – the local business sector will like it but the government’s efforts over the last seven years are found seriously flawed. Especially under the heading “Removing constraints in the business environment to boost private sector investment”, the government gets a hammering for “a largely unfavourable business environment”. One section is particularly tough on the government’s proposed reserved activity list concluding “the level of business environment risk has been dramatically increased”. The detailed analysis of this second part of the report will be covered in a later article.

As an analyst of these World Bank reports on PNG for over 40 years (my first policy paper in the public service in 1978 was analysing the first World Bank report on PNG after Independence, and my career included some 7 years working in AusAID or Treasury on the World Bank/IMF desk and attendance at many, many World Bank/IMF annual and Spring meetings) this is an unusual report. The current Economic Update must be read in a historic context. The World Bank’s relationship with the PNG government was essentially broken during the structural adjustment assistance of the early 2000s, especially due to the failed land reform program. The World Bank has been slowly rebuilding this relationship through normal project funding, although at a much lower level than the Asian Development Bank. This is the first PNG economic update since the budget support loan taken out in September 2018. There was a need for a public report (indeed, the initial undertaking when the first update was produced in December 2017 was for six monthly reports). The big picture is that the World Bank is extremely worried about PNG’s declining standards of macro-economic management – that is why PNG’s economic management has been seriously downgraded in recent years to a “fragile situation” country according to the World Bank’s governance indicators. So how does the World Bank try to maintain influence in encouraging better policies especially with a history of essentially being kicked out of the country? Its main stakeholder in PNG is Treasurer Charles Abel. One does not publicly criticise his macro-economic performance at this stage if seeking to maintain influence. However, it is quite possible that Treasurer Abel also has some concerns about the extremely nationalistic and anti-business policies of Minister Maru. I suspect the World Bank knew it had a green light to be discuss more openly the challenges facing PNG when talking about the private sector.

In this historic context and seeking policy influence in a country with declining economic management, the report is possibly less surprising. At this new stage of the PNG Treasurer/World Bank relationship, the politics probably meant that a Dr Jekyll (nice to the government on macro-economics) and Mr Hyde (willing to publicly criticise the government on private sector policies) character was inevitable. Much of the rest of this article highlights the chasm between the macro-economic priorities set out in the first World Bank Update and the scant coverage of those issues in the second, presumably because things are not going well. The longer-term requirement, however, is that the World Bank must not only keep the PNG Treasurer happy, it has to maintain its own professional standards around analytical rigour and honesty for on-going policy credibility. In the modern era of geopolitics, one would hope that a distinguishing feature in the value sets being offered between a one-party state political system and a democratic political system is frank, public assessments of what is going on. That is why democracies have (or should have) Auditor-General offices and Public Accounts Committees with public reports. These internal institutions should be re-enforced by independent international institutions such as the World Bank. Looking forward, the World Bank should be more open and balanced in its assessments to support both its international policy advisor role as well a role in encouraging accountable democracies.

Details

The friendly Dr Jekyll – Macro-economics

One would have expected the second World Bank PNG Update to reflect on the key priorities set out in its first Update of just over a year ago. So how did things go? The following paragraphs are straight out of the press release for the last World Bank PNG Update in December 2017.

“The government has initiated efforts to stimulate the economy and inclusive growth through its 100-Day Economic Stimulus Plan. The 2018 Budget, in conjunction with the Medium-Term Fiscal and Revenue strategies, provides further evidence of the government’s intent to strengthen the fiscal framework,” said Michel Kerf, Country Director for Papua New Guinea & Pacific Islands. “Commitments to reinforce resilience to fluctuating commodity prices by disentangling government spending from volatile resource revenues, and plans to establish the sovereign wealth fund are particularly encouraging. Strong efforts must be made to contain wage bill costs, which are straining funds available for key public services”, he added. – https://www.worldbank.org/en/news/press-release/2017/12/05/png-taking-steps-to-reinforce-economic-resilience

Looking at this, there would seem to be seven key elements for a subsequent assessment:

  1. How has the 100 day Economic Stimulus Plan gone?
  2. How has the 2018 Budget intent gone?
  3. How has the Medium-Term Fiscal Strategy gone?
  4. How has the Medium-Term Revenue Plan gone?
  5. How have plans to disentangle government spending from volatile resource revenues gone?
  6. How have plans to establish the Sovereign Wealth Fund gone?
  7. How have efforts gone to contain wage bill costs?

What is remarkable in the January 2019 Update is the lack of reference yet alone analysis of these key issues identified in the December 2017 Update. In just over a year, the World Bank has retreated from its own benchmarks. The next section provides some analysis which should have been incorporated into the January Update.

  1. 100 Day Plan

The 100 day plan is mentioned in one footnote reference (footnote 13 on page 9). Of course, even the PNG Government now calls this the “25 point plan” as the 100 day target set by Treasurer Abel was unrealistic. Did the World Bank analyse progress on the 25 points of this plan? Short answer is no. If it had done so, the answer would have been a very mixed bag indeed. Partly this reflects poor fiscal performance (for example, the plan aimed for a 30% debt to GDP ratio in 2017 but that has now been put off until 2021 and the 2.5% deficit was only achieved by not paying some wages and public works bills in 2017), an excessively ambitious timeframe (for example, it was expected that early works would have commenced on Wafi-Golpu, PNG LNG, and even Western LNG), partly that elements of the initial plan were bad policy (such as the rice import quota scheme) and partly this reflects poor governance performance (such as audited accounts from SOEs not being available and lack of wage controls). There were some achievements, such as securing foreign exchange financing, publishing plans (although issues with quality and implementation), temporary reduction in DSIP and PSIP (then over-ruled by the Prime Minister) and solid progress on a number of donor-funded proposals. More analysis would have been appropriate.

  1. 2018 Budget Intent

The 2018 Budget fiscal target was 1% (using the new measure put forward by Treasurer Abel of the “non-resource primary balance as a share of non-resource GDP”) but this blew-out to 2.7% (or 2.9% using IMF GDP numbers). The 2018 Budget displayed the new Treasurer’s planning heritage as it included three medium-term planning elements (fiscal strategy, revenue strategy and debt strategy). These looked fine on paper, but the challenge in PNG has always been about actual implementation. Assessing implementation against the plans should have been a feature of the report. As it did not do so, the following analysis covers some relevant issues.

  1. The Medium-Term Fiscal Strategy

The Medium-Term Fiscal Strategy (MTFS) is discussed in the January Update including a summary of the 8 key targets. As stated in the latest report “As part of the MTFS framework, the fiscal rules were specified….These fiscal rules were built around a new fiscal anchor, the non-resource primary balance (NRPB) which the government targets to bring to a zero-average balance over the medium term.” So how has the government gone against this new “fiscal anchor”? Short answer, and an uncomfortable one for the World Bank, is that it has not been going well. This is probably best illustrated in the following “Figure 9” from the report. From 2014 to 2017 expenditure has been cut faster than falling revenues so the fiscal deficit had been reduced from an unsustainable 6.6% of non-resource GDP down to 1.6%. The new strategy – as set out in the 2018 Budget and confirmed in the 2019 Budget Strategy released in September 2019 was that this solid black line was going to fall to 1.0% in 2018 and 0.7% in 2019. The graph shows the 2019 Budget estimates those figures have increased to 2.8% and 2.7%, a massive turnaround of K1 billion in 2018 and K1.3 billion in 2019. Remembering that total estimated expenditure in 2019 is just over K16 billion, these are major expenditure blow-outs relative to fiscal targets. When judging how the government was performing against the actual intent of the 2018 budget and actual progress against the MTFS, there is little doubt there has been a major breach of intent. Showing a dotted trend line going down, and not showing the original targets in Figure 9, is another example of the Dr Jekyll, nice person World Bank in this report.

So what possible reasons did the World Bank give for this major breach of 2018 Budget intent and the MTFS? The World Bank’s discussion of this “policy deviation” is possibly most rationally explained by “the renewed focus on fiscal consolidation resulted in a sharp contraction in the fiscal deficit in 2017. However, this drove an increase in arrears, which necessitated a correction in the 2018 Budget”. The figure on these estimated arrears is K948.1 million by the end of October 2018 (a figure provided to the World Bank from the PNG government). Is this a credible explanation? Probably for 2018 – the government received nearly an extra K1 billion from the unexpected increase in LNG prices in the first 10 months of 2018. It is reasonable that unpaid contractor, wage, school, Provincial, District and other bills left over from 2017 received priority call on these windfall funds. This is a feasible explanation for the K994 million blow-out in the MTFS deficit target for 2018. But it does not explain at all the K1,301 million blow-out in the deficit target for 2019, or the K1,106 million blow-out in the following three years.

If this was Mr Hyde (the nasty one) writing this part of the report, they might have stated “The 2017 Budget outcome hid a significant build-up in arrears. Even after allowing for these arrears being repaid in 2018, there has been a slowing in the fiscal consolidation effort under PNG’s new Treasurer Charles Abel. The 2.1% of GDP fiscal consolidation from 2014 to 2016 (6.6 minus 4.5) was greater than the 1.8% fiscal consolidation effort of the new government from 2016 to 2019 (4.5 minus 2.7). From 2018 to 2022, the government has breached its 2018 Budget MTFS targets by K3,401 million. Official PNG government figures on expenditure arrears explains only 28% of this policy deviation.”

This extraordinary and unconvincing discussion of the fiscal consolidation concludes with the following very trusting statement: “The indicative medium-term budget framework for 2020-23 indicates that the government is committed to its MTFS targets for bringing the NRPB to a zero-average level”. Of course, the 2019 Budget Strategy commitments did not last for even two months. And getting the average to the zero level by 2025 (the MTFS target) would just require budget surpluses of K3.6 billion in 2024 and K4.0 billion in 2025 – levels never achieved in PNG’s history. “Now that sounds likely to me” says Dr Jekyll. “Get your head out of the sand” says Mr Hyde.

  1. Medium-Term Revenue Strategy

Given the importance of the Medium-Term Revenue Strategy (MTRS), there is very little analysis of progress. However, Figure 8 from the Update indicates things are not improving as hoped – indeed, the actual non-resource tax effort continues to decline rather than increasing strongly. This is shown by the figures in the yellow parts of the following figure – falling from 15.2% of GDP in 2015 to 13.0% of GDP in 2019. Declining non-resource tax revenues are one of the greatest economic challenges facing PNG. The lack of discussion of this failure, even to acknowledge that the original targets were unrealistic and that these institutional issues take a long time to turnaround, is a major omission. One can only assume this was a deliberate choice.

  1. Disentangling government spending from volatile resource revenues

This objective is strongly linked to items 3. and 6. The reason for moving the main budget deficit target to the “non-resource balance” is exactly this objective of disentangling expenditure from the resource volatility. This new objective excluded resource revenues from the base – they would go into the Sovereign Wealth Fund (SWF) or used to repay debt. However, as covered in item 3, the government has completely abandoned this objective for 2019 and spent all of the expected windfall LNG revenues. With oil prices now well below their level at the time of the 2019 Budget, the government has likely gone and spent money it is now unlikely to receive.

  1. Sovereign Wealth Fund

How have plans to establish the Sovereign Wealth Fund gone? Badly. In part this is because the government has spent the LNG revenue windfall of 2018 (and expected for 2019). The only mention of the Sovereign Wealth Fund in the entire report (apart from it being mentioned three times in the reproduction of the MTFS) is in the discussion of “downside risks” where the World Bank simply states “To strengthen fiscal and debt sustainability the government should adhere to the adopted non-resource primary fiscal balance as a fiscal anchor and operationalise the established sovereign wealth fund”. Bottom line is that it has not been operationalised.

  1. Public service wage costs

Public service wage costs are taking an increasing proportion of the government’s budget. In 2016, there was a K470.1 million over-expenditure. The 2017 FBO released in March 2018 indicated the over-expenditure had dropped to only K113.2 million relative to the 2017 Supplementary Budget, and an overall K354.8 million (or 8.8%) higher than the 2016 actual. However, the 2018 MYEFO indicated the government had carried forward excess wage costs from 2017 of at least a further K417m (paid on 4 January 2018 and described as “to offset salary overrun” – p93) – so the 2017 wage over-run was in fact worse than 2016, a fact hidden by the 2017 FBO . In addition, the major expenditure increase in the 2018 Supplementary Budget was an extra K0.6 billion in wage costs – lifting 2018 wage costs estimates from K4.1 billion to K4.7 billion. Even then, the PNG opposition claims the K4.7 billion figure is understated by K0.4 billion based on the government’s own public service expenditure review committee. This is not a picture of wage costs being brought under control. There are some positive signs that some agencies are finally being amalgamated, but overall, there remains a huge gap between the rhetoric in this area and action.

APEC costs – An aside

The friendly Dr Jekyll characteristics of the first half of the report extends to comments on the costs of APEC. It uses the formal budget figures for APEC of K715 million, adds in the APEC Haus tax credit of K120 million, then notes some extra bilateral support, and concludes using the Post Courier as the authoritative source that “the total cost for hosting APEC events is estimated to be about K1 billion”. The basic arithmetic suggests the total level of external bilateral support for hosting APEC was K165 million (K1 billion less 715m less 120m).  Mmmm, all those Chinese funded roads. Australia says its spent AUS130 (K310 million) on security support alone. Add US, New Zealand and other support. Add the various infrastructure facilities upgraded for APEC such as the international airport. Add in all of the other costs carried by usual departmental budgets. Given sensitive political perceptions around “Maseratigate”, the World Bank should not have put its name to such an inaccurately low figure. This is one of the clearest signs of the World Bank being focused on relationship building with the Treasurer, and possibly to help correct some of the political pain caused to the Government with an earlier IMF report simply reporting an initial PNG government estimate that APEC costs would exceed K3 billion.

Debt strategy

The PNG Government is in breach of its debt strategy. The World Bank report includes figures showing gross public debt to GDP will exceed the ceiling of 35% of GDP from 2017 to 2021. This is part of the game being played around GDP figures – discussed in greater detail in earlier articles.

5% growth rate – statistical bounce vs underlying performance

The World Bank is predicting a GDP growth rate of 5.1% in 2019.  In understanding this figure, one needs to understand three characteristics of GDP growth rates. First, and this is the key issue in understanding what is happening in PNG’s dualistic economy, it is vital to separate out how the non-resource sector is going (this is the part of the economy which employs over 95% of the population) from how the resource sector is going (of most relevance to overseas investors apart from tax revenues). The non-resource sector is expected to grow at 2.4% in 2019, essentially the same as in 2018 (2.3%). This is less than the official population growth rate – so incomes will continue falling in real terms per person. Second, growth rates are an annual measurement. So 2018 was a bad year for the resource sector because of the tragic earthquake – and non-resource growth was minus 2.0%. Simply getting back to where things were in 2017 would have meant a positive growth figure of over 2% – but this simply reflects the statistical “bounce” from an annual growth figure. If a two year time horizon is used, the resource sector has grown by 0.3% per annum since 2017 and the non-resource sector has grown by 2.3% per annum. So the underlying growth path is still low – the 5.1% figure is the inevitable statistical bounce. Third, some commentators have suggested the increase is due to higher commodity prices. This is a common mis-perception.  Real GDP aims to take out all price effects – so the increase in oil and LNG prices is actually taken out of the real growth in underlying production levels. There can be second round effects (such as higher commodity prices increasing government revenues which increase expenditure which can lift GDP growth rates).

Conclusion

As noted above, the January 2019 World Bank Update is remarkable in its lack of reference yet alone analysis of the seven key macro-economic issues identified in the December 2017 Update. In just over a year, the World Bank has retreated from its own benchmarks. APEC cost figures add to this picture of the World Bank being at worst a spokesperson for the O’Neill government, at best simply being a friendly Dr Jekyll. The historic context suggests this Update is primarily about building a positive relationship with PNG’s Treasurer, Charles Abel. It certainly is not a report carrying the policy judgements and analytical rigour one would expect from the World Bank. A short-term focus damages the World Bank’s longer-term credibility.

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.