This is the second of several posts on economic issues at the Australia PNG Business Forum being held in Cairns. Overall, it is a well attended conference which helps underline the importance of business ties between the two countries. This post provides comments on a key presentation titled “Managing Fiscal Challenges”.

Key points

• PNG should increase its levels of concessionary borrowings from sources such as the World Bank and ADB
• PNG is not over-performing – its deficit in 2015 was still a relatively high 5.0% of GDP making the last three years the highest deficits in PNG’s history
• Really managing PNG’s fiscal challenges requires
  • Dealing with the cash flow crisis
  • Ensuring expenditure goes to service delivery which appears to be suffering the largest cuts in expenditure
  • Supporting revenue collection
  • Re-doing the 2016 budget to adjust to lower revenue receipts and financing difficulties revealed in the 2015 Final Budget Outcome and K400m in cheques from 2015 being presented in 2016.
  • Improving microeconomic policy announcements – current policies on land registration, the reserve list and agriculture all risk lowering growth and adding to fiscal problems. The foreign exchange shortfall also needs to be addressed.

Details

One of the key papers at the conference was “Managing Fiscal Challenges by Professor Satish Chand of UNSW. This should be available on the conference’s website.

Overall, the paper made some good points, especially in encouraging greater use of concessionary borrowings in ways that improve the quality of spending such as using outside auditors.  These have not been used adequately as part of PNG’s development strategy.  Part of this is the difficulty of mobilising and drawing down these funds. For example, the 2015 Budget originally planned to raise K811m in net concessionary  borrowing. The outcome was only K521m. There are also lag times in building up concessionary loans – often measured in years. More could be done through providing adequate counter-part financing and meeting conditions for loans through good practices, but it is more a medium-term part of the solution to fiscal challenges rather than one for the next year or two. And the reality is that projects to be funded by government are often driven by political objectives rather than sound cost benefit analysis (as is the case often in Australia). An option is fast flowing concessionary financing but that would require an IMF program – and there appears little appetite for that by the government (even if it is now probably time to look for such assistance).

Possibly the paper should have covered a wider range of fiscal challenges facing PNG. Increased use of concessionary  resources is at best only a small part of the required solution.  Really managing fiscal challenges requires a broad suite of policies.

We know that the budget cuts aren’t actually occurring in what are claimed to be the government’s priorities (see here and here). Cuts in health and education of over one third do not sit well with the much smaller cuts in other areas such as “administration”.

More also needs to be done to shore up the revenue side of the budget. The continuing fall in revenues is the driving force behind the on-going massive planned cuts in expenditure. PNG’s revenue to GDP ratio is expected to fall to 24.5% by 2017 – well below the historic average of 30.7%. Much of this reflects the tax concessions provided to the resource sector. One risk to PNG’s longer-term fiscal situation is a continuation of these tax concessions to new projects. However, the political imperative before a 2017 election is to get these projects up and running. PNG taxpayers as a whole will have to pick up the tab.

The assumptions in the 2016 budget are now so compromised that a new budget is required. As discussed here, the revenue base is likely  to be some K800m lower than expected, and the financing shortfall is heading to around K1,300m. K400m in unpaid cheques from 2015 are also to be paid in 2016. Lessons should be learnt from 2015 when a new budget was delayed until the end of the year. Waiting just increases the pain of the adjustment.

Medium-term fiscal sustainability requires improvements in business confidence, and linked to that, economic growth. The foreign exchange shortfalls need to be dealt with – and that will involve a range of measures including a more rapid depreciation of the Kina to improve international competitiveness. Announced policies in areas such as banning foreign investment in land, strangling agriculture behind high tariff walls and implementing a reserve list all have an adverse impact on business confidence and foreign investment. This undermines PNG’s tax base which funds essential services.

A few of the figures in the presentation could usefully be updated. For example, PNG is not over-performing in the area of fiscal deficits. The PNG Treasury official Final Budget Outcome released at the end of March (so after the BPNG figures used in the paper) indicate the fiscal deficit was 5.0% of GDP. This means the last three years combined have produced by far the largest fiscal deficits in PNG’s history.