All posts by pngeco5_wp

Benefiting from Hindsight

The recent APNGBC meeting concluding in Brisbane this week was an interesting experience for the co-author of the “Double or Nothing – The Broken Economic Promises of PNG LNG” report that raised questions about the overall benefits of the PNG LNG projects – indeed, its potential costs.

In his keynote address to the APNGBC conference, PNG’s Prime Minister Peter O’Neill made clear he considered an analysis of the PNG LNG project as utter nonsense and being fake news.  It was surprising that the Prime Minister mentioned the report. Once mentioned, the dramatic nature of the attack was not unexpected. Unfortunately, I’d been down that road before – so a quick history of “fake news”.

In December 2014 I dared suggest that the fall in oil prices would have adverse impacts on PNG’s budget, balance of payments and economy (see the ANU Discussion Paper here). This immediately led to a media release from Prime Minister O’Neill’s office by his then Chief of Staff (now the Chief Secretary for PNG’s public service) Isaac Lupari denouncing the analysis in the following terms:

“Importantly, Ambassador Lupari said, despite claims by Polye and Flanagan, PNG is largely protected from oil price fluctuation because forward contracts were signed before the recent change in oil prices.

“Their [Flanagan’s] argument is based around the claim that PNG will receive substantially less income from LNG sales and this is simply not true,” Ambassador Lupari said.

“PNG LNG exports and prices are predominantly locked into long-term forwards sales contracts. In simple terms this means that Papua New Guinea will receive the same price for LNG.

“Mr Flanagan should know that LNG prices are locked in but he continues to play politics with business perceptions and the Opposition is going along with this nonsense.

“Polye-Flanagan appear to have no conscience when it comes to talking down the economy for their own political self-interest, and do not care of harm this could cause to small business and jobs in PNG.”’

If this analysis, contained in a thorough and peer-reviewed ANU Discussion Paper, had been listened to and considered when the analysis was made, PNG would have been in a better position to quickly respond to the emerging crisis of falling oil prices. There would have been less harm to small businesses and jobs in PNG. Of course PNG was not protected through LNG contracts and I was not working for Polye (I did as a public servant reporting to him as the then Treasurer until leaving PNG in August 2013 – so sixteen months earlier – in the same way as I did in Australia reporting to Treasurers Costello or Swan). When the PNG Treasury budget update (seven months later) confirmed the loss of revenue was even more devastating than I predicted, then I was banned from the country by the Prime Minister.

Speaking truth to power hurts. I miss seeing my friends in PNG.

Treasurer Abel’s response in welcoming the Jubilee Australia report on the same day was more measured. Presumably, he could see that the report actually strengthens the hand of PNG in its fiscal negotiations over the foreshadowed LNG project expansions – the second recommendation of the report for PNG to receive a fairer and earlier return on its LNG resources. He is also a supporter of the Extractive Industries Transparency Initiative and likely would be supportive of the third and fourth recommendations which focus on better transparency. I still consider that as Treasurer he has more work to do on the first recommendation concerning better policies – especially the foreign exchange crisis.

The Jubilee Australia report numbers will be reviewed by an accounting firm with the support of the LNG industry. PNG’s National Research Institute will also present a different and likely defensive viewpoint given the serious concerns about its model (PNGGEM) that informed the misleading ACIL-Tasman analysis. I look forward to engaging with these subsequent reports, including learning from them where appropriate.

As the coverage of the report has not focused much on the actual recommendations for the PNG government (there were also recommendations for the Australian government on Efic, improved transparency and better modelling), I include the PNG recommendations below to highlight the report aimed to present positive suggestions for PNG handling its resource wealth in a better and more balanced way:

  1. PNG should return to more inclusive development policies while better managing the resource curse. There is a need to address the overvalued exchange rate, ensure the new medium-term fiscal plans are implemented in a transparent fashion, and re-design the SWF to ensure all resource revenues flow to the budget.
  2. PNG should establish a clear policy framework for all future resource projects (and extensions) that ensures PNG gets a better and earlier share of the resource pie than current agreements. No new resource projects should be approved until this framework is completed and publicly released.
  3. Projects should not be approved without the production and release of transparent, verifiable, contestable and independent economic modelling by the government; this modelling should include a completely new independent model that includes net costs to the budget.
  4. PNG should urgently clarify some of the confusing figures in the most recent EITI reports that royalties and development levies paid by ExxonMobil are not being received, and explanations provided as to why the level of what should be identical payments are so different.

The report does not in any way deny the many direct benefits that have flowed to many from the PNG LNG project. For example, it notes that the number of jobs that have been directly created of some 2,500 is greater than the 800 to 850 initially estimated. The benefits to landowner and other companies are also acknowledged. However, the report is a helicopter view – looking at the economy as a whole rather than specific communities or companies or localities. With a starting approach of examining ACIL-Tasman predictions, the report focuses on how things were going in 2016 – two years after the production phase.  The high level, helicopter view of 2016 says that when looking at the economy as a whole, on most economic indicators, PNG has fallen below PNG’s underlying growth path from the late 2000s. The only feasible explanation for this poor performance is policies associated with PNG’s return to the resource curse, and many of these key policy shortfalls are linked to the PNG LNG project. If there was no PNG LNG project being discussed in 2008, then the government and businesses would have been looking at growing the economy in other ways – and hopefully more inclusive ways.

As the report states in its conclusion “The potential benefits of PNG’s resource wealth could in theory be able to be tapped without damaging the rest of the economy. But it would require very different choices by the PNG’s policymakers.”

As the government considers this report, there are potential benefits for PNG in terms of encouraging public discussion about PNG’s future options and even supporting PNG’s negotiating hand with the LNG companies. Hopefully, with the benefit of hindsight, “fake news” comments will fade and true benefits will be understood.

PNG LNG – Failed predictions and the resource curse

Summary

“On almost every measure of economic welfare, the PNG economy would have been better off without the PNG LNG project”.

A major study is being released today by Jubilee Australia titled: “Double or Nothing: The Broken Economic Promises of PNG LNG”. This report, co-authored by myself and Dr Luke Fletcher, compares the projected economic benefits of the PNG LNG project with actual outcomes.

The new study uses PNG Government data to examine the predictions of the 2008 project report commissioned by ExxonMobil and promoted by Oil Search. This examination finds that the very positive predictions for the PNG economy were largely incorrect. Specifically, growth in the resource sector has matched the confident predictions even with the fall in oil prices in 2014. However, all other parts of the PNG economy have not done as well as predicted. This is a major “broken promises” gap. This is the basis for the title of the latest report – the PNG LNG project promised to double GDP, but the outcome of 10% is close to nothing (especially when the size of PNG’s GDP is facing a major downgrade in the latest NSO 2015 update). Revenues to the budget are only one-third of expected levels, and after allowing for project costs, will continue having a net negative impact on the budget (so below nothing) until around 2024.

Of even greater concern, the examination finds that the PNG economy, apart from the resource sector, has actually gone backwards relative to its underlying growth path. The most likely explanation for this sad outcome is PNG has slipped again into poor policies associated with the resource curse. The temptations of the rosy PNG LNG promises were too strong for politicians despite warnings from PNG Treasury, BPNG and outside academics. During the O’Neill/Dion government, PNG descended into very damaging economic policies of a bloated budget and PNG’s largest deficits ever, fixing the exchange rate at an over-valued level, making foolish investments in areas such as Oil Search and harming the independence of PNG’s economic institutions. With the focus being so strongly on getting the PNG LNG project operational, there was a lack of policy emphasis on other parts of the economy. This is the “resource curse” gap.

PNG needs to learn the lessons from this experience. This is the third time that PNG has suffered from the resource curse: the first was with Bougainville Copper and the experience of the late 1980s; the second was the Kutubu/Porgera expectations that crashed so badly in the mid-90s; and the PNG LNG period is the third resource crisis.

The benefits of PNG’s resource wealth could in theory be tapped without damaging the rest of the economy. But it would require very different choices by PNG’s politicians. PNG probably lacks the strong governance and institutions required to deal with the powerful resource sector lobby. Even in Australia, the power of vested interests around the resource sector is blocking sensible options for sharing resource benefits more equitably and efficiently. Aggressive tax minimisation is practiced. Until PNG has stronger governance arrangements, there is a high risk that major new resource projects will simply repeat this cycle of falling into the resource curse, and damaging the rest of the economy.

Fundamentally, PNG needs a new development path – one that is more inclusive and delivers greater benefits to the people of PNG. A resource-led path is clearly failing – in terms of economic welfare, most people in PNG are one-third worse off now than in 1980. PNG’s comparative advantage is not in oil and minerals. Rather, it is the richness of its peoples’ cultural diversity, its extraordinary beauty and biodiversity, the wealth of its soils. PNG has better development options.

Details

This is the first of several blogs covering  the PNG LNG report. This blog provides some of the key numerical findings of the “Double or Nothing” report. The complete report can be accessed here – it is the third report

Future blogs will cover in more detail the current elements of PNG’s resource curse, the analysis of revenue gaps, and more technical issues not suitable for a general report, including a more detailed examination of the failed PNGGEM model and a sensitivity analysis.

Key Numerical Findings

The key macro-economic findings are covered in the following graph.

The key sectoral findings are covered in the following graph

 

The specific figures for the above graphs are provided in the following table:

The predictions from the ACIL-Tasman model were not specific figures such as the Kina size of GDP or the actual number of jobs generated across the entire PNG economy. If they were, they could be directly compared to actual figures from PNG government data. Rather, the ACIL-Tasman predictions from their CGE model are described as “Values expressed as percentage changes from the underlying growth path.” These are the percentages shown in the middle column of the table above. As just percentages were provided, work was required to estimate the “underlying growth path” and what value this would have been in 2016. Fortunately, this type of trend analysis is relatively simple.

Government data was used covering the late 2000s period before the PNG project commenced. Averages were taken of this data including underlying growth rates for each sector and indicator. These figures were projected forward to 2016 – the underlying growth path. These figures were then compared to 2016 actuals. This is just a simple form of trend analysis.

The gaps between the PNG LNG predictions and 2016 outcomes are generally extraordinary – there is a yawning chasm between spruiked expectations and outcomes. The only areas where there are not significant gaps are in the resource sector itself. The PNG LNG model analysis was based on the assumption of a 440% increase in the value of oil and gas exports. This was an accurate prediction and not affected by the 2014 fall in oil prices. This is because oil prices in 2008 (when the prediction was made) were also suffering from the global financial crisis and were based on oil prices of $US65 per barrel. In 2015 and 2016, although oil prices fell lower, this was offset by  production output being about 25% higher than predicted in 2008. The 440% jump in the value of these gas and oil exports led to a positive outcome for exports as a whole.

However, outside of the resource sector (which feeds into a slightly positive GDP figure growth of 10%, but 87 percentage points less than the PNG LNG prediction of a 97% gain), all other economic indicators are lower than the underlying growth path. This is shown by all the numbers in red in the right-hand column above.

On every other measure of economic welfare (household incomes, employment, government expenditure, imports and every non-resource sector of the economy), the PNG economy currently would have been better off without the PNG LNG project, often drastically so.

Details for the trend analysis to determine the underlying growth path are in Appendix 2 of the “Double or Nothing” report, with a worked example on how GDP was calculated in Section 2.2 of the report.

Shared Business Messaging – Opportunities for the APNGBC

There will be a meeting of PNG’s and Australia’s business leaders in Brisbane from 30 April to 2 May 2018 – the APNGBC.

The context for the meeting is pretty tough. PNG’s credit rating has just been down-graded by one international credit ratings agency and put on negative watch by another.  These are pretty rare events – only once a decade for an actual ratings downgrade. This is a tough backdrop for the Eurobond being suggested.

The PNG National Statistics Office recently indicated it was downgrading the estimated size of the economy in 2015 by an extraordinary 10% – from the previous questionable PNG Treasury estimates of K62 billion down to K57 billion.  This simply  confirms what businesses have known for the last several years – outside of the resource sector, PNG has faced a very serious recession.

The recent ANZ review has some very sensible suggestions on getting fairer returns from the resource sector but it also highlights the reality that PNG’s exchange rate should be some 20 to 30% more competitive than currently (the other side of a currency depreciation). This gets to the heart of the foreign exchange shortages undermining growth and investment in PNG. But talking about the need for a depreciation is not popular in PNG. Indeed, there is an unusual fracturing within the business community on this issue from the perspective of an economist. Certainly, within Australia, it is the manufacturing and agricultural industries that are strong advocates for a more competitive exchange rate – lamenting the adverse impacts  when the Australian dollar is driven higher by the minerals sector. So it is confusing when those that would gain most from such an improvement in competitiveness are opposing it? A 20% depreciation is economically identical to a 20% tariff on all imports, a 20% subsidy for all net exports, a 20% subsidy on all foreign investment and a 20% penalty on all external flows. The real losers from the lack of Kina competitiveness are the  entrepreneurs, many of them young and female, being denied  business opportunities for higher exports from PNG and higher investment into PNG.

PNG is starting to move down a more protectionist path with the suspension of the tariff reduction program and the introduction of significant new tariffs. Even as it seeks to diversify away from the resource sector, the model is one of supporting “infant industries” and direct government participation that has so poorly failed in PNG and other countries.

The 2017 Final Budget Outcome raises serious questions of credibility. The most recent BPNG Monetary Policy Statement indicates bank lending for investment and housing fell by 3% in 2017 – the first decline since 2003.

PNG is slipping back into the resource curse – the widespread characteristic that country’s with significant natural resources do worse than many other countries. PNG has been there before – certainly in the early 1990s with the Kutubu/Porgera expansion and earlier in the 1980s associated with Bougainville Copper. The PNG LNG project has pushed PNG there yet again in the context of declining governance standards. Treasurer Abel appears aware of this but it is very unclear whether he has the influence to push back on some vested interests (both political and economic). There is some welcome cyclical recovery in commodity prices but this will not deal with the underlying challenges facing PNG which are tragically impeding its growth potential.

The following three outcomes from the meeting would be positive:

  1. A continuing commitment to working together to foster the opportunities of the PNG-Australian relationship.
  2. A quiet discussion of the actual realities facing PNG’s economy – something well known to businesses and more broadly. There is a need to push back on the “groupthink” and “being part of the PNG Team” language which can cloud clear analysis of the current situation and possible solutions. The responses by the Treasurer and the Treasury Secretary to the credit downgrades are likely examples of this.
  3. A quiet strategy on how best to engage different areas of the government to ensure the development opportunities of PNG are actually realised. While acknowledging current efforts, the joint PNG/Australian business community has been more vocal in the past in encouraging sensible policies.  Possibly the business community is more divided than in the past in understanding what should be done, and doing it together. A common view on the exchange rate would be a good start.

PNG’s cash confusion – K570 million lost opportunity

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

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

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

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

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

Details

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

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

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

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

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

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

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

Conclusion

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

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

PNG IMF Article IV – Profligate 2018 Budget fails IMF expectations

Summary

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

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

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

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

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

Details

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

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

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

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

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

IMF relative to PNG 2018 Budget figures (Kina billions)

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

 

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

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

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

 

Medium-Term Revenue Plan

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

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

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

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

Conclusion

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

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

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

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

Depressing start to 2018 – K7 billion less than promised

Summary

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

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

Details

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

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

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

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

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

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

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

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

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

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

2018 Budget: Nice Words Poor Numbers

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

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

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

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

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

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

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

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

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

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

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

One cannot spend what one doesn’t get.

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

Can we Trust PNG’s Budget Numbers?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

 

PNG Baset streteji ino yet soim trutru piksa

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

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

Dispela baset – nid long soim samtin trutru

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

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

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

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

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

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

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

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

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

Konklusen

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

Yumi nidim sampela strongpela marasin.

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

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

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

Stori bilong tingting long gro

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

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

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

(% senis long yia bipo)

EAP – Ist Esian kantri I wok long divelop

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

ASEAN –  Asosiesin bilong ol kantri Saut Ist Esian

 

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

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

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

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

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

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

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

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

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

Konklusen

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

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

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

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

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

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