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2017 PNG Economic Survey
Rohan Fox (ANU), Stephen Howes (ANU), Nelson Atip Nema (UPNG), Marcel Schröder (UPNG and ANU)
Introduction
• Survey is written at the time of a new government and new 100-day plan
• Short-term challenges: recession, falling government revenue, foreign exchange shortages
• Long term challenges: low growth of economy and of government revenue
• How can PNG respond to current economic difficulties AND get on a higher growth path?
The long-term view of the economyIntroduction – Growth – Fiscal – Macro – Conclusion
Non-resource GDP per capita (adjusted for inflation; 1980=1)
0.5
0.6
0.7
0.8
0.9
1
1.1
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
The long-term view of government
Revenue and expenditure per person (adjusted for inflation)
Introduction – Growth – Fiscal – Macro – Conclusion
0
500
1000
1500
2000
2500
3000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017p
Kin
a(2
01
7 p
rice
s)
Real revenue per capita Real expenditure per capita
Structure
• Introduction
• Section 2 – Growth
• Section 3 – Fiscal
• Section 4 – Macro (exchange rate and inflation)
• Conclusion
Introduction – Growth – Fiscal – Macro – Conclusion
Economic growth
The official growth slowdown
Introduction – Growth – Fiscal – Macro – Conclusion
Real GDP and non-resource GDP growth (%)
0
2
4
6
8
10
12
14
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%
GDP Non-resource GDP
Has there actually been a recession?
• Official government data shows growth slowdown, but has there actually been a recession?
• Evidence of recession• Views of business: Drop in output and sales of 20-35% from the peak.
• Negative growth in economy-wide tax revenue every year since 2014 (25% after inflation for GST, income tax and non-resource corporate tax).
• Sharp contraction in imports since 2014.
• Small fall in number of formal workers, and of foreign workers, both since 2013.
• Graphs following provide the data
Introduction – Growth – Fiscal – Macro – Conclusion
Falling revenue from non-resource sector
Introduction – Growth – Fiscal – Macro – Conclusion
Revenue from economy-wide taxes, 2014-2017 (adjusted for inflation)
0
2000
4000
6000
8000
10000
12000
14000
2014 2015 2016 2017p
Kin
am
illio
ns
(20
17
pri
ces)
Historic contraction in imports
Introduction – Growth – Fiscal – Macro – Conclusion
Imports of goods and services
0
5
10
15
20
25
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Kin
a b
illio
ns
Moderate fall in formal sector employment
Introduction – Growth – Fiscal – Macro – Conclusion
Formal sector employment (March 2007=1)
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sharp fall in foreign employment
Introduction – Growth – Fiscal – Macro – Conclusion
Foreign workers arriving in PNG
0
10000
20000
30000
40000
50000
60000
70000
80000
2009 2010 2011 2012 2013 2014 2015 2016
Reasons for the recession?
• 1. End of stimulus caused by PNG LNG project
• 2. Sharp and sustained fall in commodity prices
• 3. Foreign exchange rationing and overvalued exchange rate have discouraged economic activity
Growth outlook
• Feedback from business that the recession is now bottoming out.
• Confidence going forward from future resource projects, but nothing in the next year (or two?), and mistake to wait for the next project.
Fiscal
Falling revenue; back to 2006 levels
Introduction – Growth – Fiscal – Macro – Conclusion
Government revenue, adjusted for inflation
4000
6000
8000
10000
12000
14000
16000
Kin
a m
illio
ns
(20
17
pri
ces)
Since 2014, falls in economy-wide taxesTax revenue by source (adjusted for inflation)
Introduction – Growth – Fiscal – Macro – Conclusion
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Kin
a m
illio
ns
(20
17
pri
ces)
Personal Income Tax Company Tax GST Mining & Petroleum Taxes
Compliance likely correlated to IRC budget
Internal Revenue Commission budget allocations 2012-2017
Introduction – Growth – Fiscal – Macro – Conclusion
0
10
20
30
40
50
60
70
80
90
2012 2013 2014 2015 2016 2017p
Kin
a m
illio
ns
(20
17
pri
ces)
Sharp falls in expenditure, but after a steep increaseGovernment expenditure, adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
0
2
4
6
8
10
12
14
16
18
201
98
9
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
p
Kin
a b
illio
n (
20
17
pri
ces)
Rising salary and interest bill
Salaries and interest bill, adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
0
1
2
3
4
5
6
Kin
a b
illio
ns
(20
17
pri
ces)
Real salaries Real interest
Discretionary spending back at 2006 levelsDiscretionary expenditure (total minus salaries and interest), adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
0
2
4
6
8
10
12
14
Kin
a b
illio
ns
(20
17
pri
ces)
Growth in provincial spending (DSIP etc) has also crowded out other sectors
Budget expenditure by sector, adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
ECONOMIC UTILITIES TRANSPORT COMMUNITY &CULTURE
EDUCATION HEALTH LAW & JUSTICE ADMINISTRATION MISCELLANEOUS SUB-NATIONAL
Kin
ab
illio
ns
(20
17
pri
ces)
2012 2013 2014 2015 2016
Decline in spending on hospitals and policePer capita spending on hospitals and police
Introduction – Growth – Fiscal – Macro – Conclusion
-
20
40
60
80
100
120
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017p
Kin
a(2
01
7 p
rice
s)
Hospitals Police
Big increase in deficits (borrowing) in recent years
Government expenditure minus revenue (borrowing)
Introduction – Growth – Fiscal – Macro – Conclusion
-2
-1
0
1
2
3
4
5
Kin
a b
illio
ns
(20
17
pri
ces)
Leading to rapid growth in debt
0
5
10
15
20
25
30
K b
illio
n
Foreign Domestic
Government debt (not adjusted for inflation)
Introduction – Growth – Fiscal – Macro – Conclusion
Debt-to-revenue back at pre-boom levels
0
0.5
1
1.5
2
2.5
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Debt to revenue ratio
Introduction – Growth – Fiscal – Macro – Conclusion
Macro and the Real Exchange Rate (RER)
Background - RER and TOT (terms of trade), 2000-16
Source: BPNG and WDI
Introduction – Growth – Fiscal – Macro – Conclusion
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
RER
an
d T
OT
Ind
ex (
20
10
=10
0)
RER TOT
PGK/USD Exchange Rate, 08/2012-08/2017
Introduction – Growth – Fiscal – Macro – Conclusion
0.3
0.35
0.4
0.45
0.5
0.55
10-Aug-12 10-Aug-13 10-Aug-14 10-Aug-15 10-Aug-16 10-Aug-17
• Theory: Sharp RER appreciation during resource boom and decline of tradable sector ("Dutch Disease").
• After the boom, RER depreciation needed to restore internal and external balance
• In PNG, RER continued to appreciate even after the boom (see previous Figure)
• Reserves declined from US$ 4B in 6/2012 to US$ 1.7B in 12/2016.
• FX restrictions since 2014: US$ 300M-1B excess demand.
• Fox & Schröder (2017): kina overvaluation = 22% in 2015.
• We update their estimate to 2016: kina still 20% overvalued.
• 2017: RER appreciation projected overvaluation likely to increase
Introduction – Growth – Fiscal – Macro – Conclusion
Macro-level consequences of FX restrictions
• Macroeconomic adjustment to end of resource boom postponed for years.
• RER overvaluation leads to resource misallocation lower output and productivity growth, and investment.
• Businesses have great difficulty to source intermediate and capital goods from the rest of the world.
Imports have collapsed to historically low levels.
Introduction – Growth – Fiscal – Macro – Conclusion
PNG Imports – 1980-2016
Soruce: BPNG and WDI
Introduction – Growth – Fiscal – Macro – Conclusion
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
19
80
19
81
19
82
19
83
19
84
19
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99
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00
20
01
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03
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06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Imports/GDP Imports/Non-resource GDP
Micro-level consequences
• FX has become number 1 issue for PNG businesses.
• Processing time of FX-orders: Currently 8-16 weeks.
• Invoices outstanding now 60-180 days vs. 14-30d credit lines.
• "Dollarized" debt piles up while kina is pressured to depreciate.
• Overseas suppliers may lose have lost their patience.
• MNEs cannot repatriate profits.
• Administrative burden of FX-crisis increases costs Inflation.
Introduction – Growth – Fiscal – Macro – Conclusion
Inflation
0
2
4
6
8
10
12
14
16
18
201
99
0
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
p
%
Introduction – Growth – Fiscal – Macro – Conclusion
Why is inflation high and accelerating?
• Inflationary expectations?
• Optimism about the future?
• Excess liquidity?
• FX rationing• Reduces competition
• Excess demand
• Increases supply costs
Introduction – Growth – Fiscal – Macro – Conclusion
Policy options
• Why does BPNG not devalue?• ”Fear of depreciation” (Inflation, loss in urban real income).• “Elasticity pessimism”.• ”Sit out the crisis: Next resource project just around the corner?
• Current situation has very limited benefits, only significant costs.
• Our policy recommendation: Depreciate the exchange rate. One option is to introduce a dual exchange rate for a limited time (up to 24 months)• Apply current appreciated rate for essential imports (rice, pharmaceuticals)• Depreciate kina by 20% and apply that rate to all other transactions.
Introduction – Growth – Fiscal – Macro – Conclusion
Conclusion
Reform challenges
• Twin reform goals:• Stimulating economic growth
• Restoring fiscal sustainability while protecting basic services
Introduction – Growth – Fiscal – Macro – Conclusion
Reforms to stimulate economic growth
• Interest rate: BPNG has limited influence on market interest rates
• Exchange rate: Case for depreciation already discussed
• Structural policy: Need to rebuild business confidence
• 100-day plan: Had some positive statements re business confidence and structural reform but nothing on exchange rate flexibility
Introduction – Growth – Fiscal – Macro – Conclusion
Reforms for fiscal sustainability
• Borrowing: Government already borrowing as much as it can; deficits need to fall as the economy recovers.
• Taxation: Focus on compliance – IRC funding and performance
• Expenditure: Protection of key services (health, education) will require salary restraint and cuts to MP funds (DSIP etc).
• Supplementary budget: Step in the right direction (cuts to DSIP, focus on tax compliance), but real test will be 2018 budget in November
Introduction – Growth – Fiscal – Macro – Conclusion
