Record growth forecast for PNG

ASIAN Development Bank economic experts are forecasting record growth for Papua New Guinea’s economy with gross domestic product expected to peak at 21% next year, driven by the country’s thriving LNG sector.
Record growth forecast for PNG Record growth forecast for PNG Record growth forecast for PNG Record growth forecast for PNG Record growth forecast for PNG

The bank's Asian Development Outlook 2014 report predicts GDP growth of 6% in 2014 - picking up to a record 21% in the following year.

Leading this growth is the oil and gas sector as the PNG LNG project comes onstream, with production of first LNG expected to commence mid-year, and its first full year of production in 2015.

The rebound in the mining and quarrying sector is also expected to continue as new operations further expand production levels, boosting real growth in the sector to 14% in 2014 before tapering back to 3.1% in 2015.

Compiled by a team of experts, the ADO provides a comprehensive analysis of macroeconomic and development issues for the developing member countries of ADB.

But while the annual economic report says PNG's GDP growth is expected to be at record highs in 2015, the immediate impact of the GDP growth on the broader economy and for expanding income earning opportunities for local people will be limited.

And while the PNG LNG project is approximately 80% owned by international investors, ADB said the majority of earnings would remain offshore as a result.

Asian Development Bank Papua New Guinea country economist Aaron Batten said the PNG chapter of the report focused on the progress made in the economy during 2013.

"What that reflects is the commencement of LNG exports and that 21% figure represents the first full figure of LNG production for PNG," he said.

"At the same time, it's very important to remember - and what this report seeks to highlight - is that the impact of the PNG LNG exports on GDP is very different to the impact on gross national income.

"The difference there is that gross national income is a domestic income whereas GDP includes foreign income as well.

"With about 80% of the PNG LNG project being owned offshore, a large part of that additional wealth will remain out with the country.

"The forecast for the non-mineral parts of the economy is actually a lot slower with growth of just 1.6% forecast in 2014.

"That's a prudent forecast of significant slowdown in relevant economic activity locally at the same time as a huge boost in output coming from the LNG project."

As the project comes onstream, employment under LNG related activities will drop dramatically, from a peak of about 16,000 workers during construction to a reported few hundred once the project is fully operational.

While the ADO states the impact of the project on gross national income will be far lower than on GDP, experts have forecast the key transmission mechanism for the project to the domestic economy will be through dividend and taxation payments to the national government, which are expected to peak in the early 2020s.

During the initial years of production it is likely that the majority of these revenues will be used to service loans that were taken out to fund the state's equity holding in the project and possibly investments in further resource developments.

"What the report seeks to highlight too though is the employment generation effects during the construction phase of the PNG LNG project," Batten added.

"There was a lot of additional employment created, up to 16,000 workers at its peak and that is still adding to the domestic economy now. As construction winds down naturally that effect will ease off."

The 2014 national budget remains expansionary with a planned fiscal deficit equivalent to 5.9% of GDP.

Despite the dampening effect of lower global commodity prices and a slowdown in non-mineral growth, total revenue collection is forecast to grow by a record 23% in 2014, underpinned by planned improvements in tax compliance and enforcement.

Meanwhile, the ADO report states central government debt is expected to reach 35% of GDP in 2014.

ADB experts said while this level of public debt was broadly sustainable and in line with the limits established in the government's medium term fiscal strategy (2012-17), a number of additional liabilities raised fiscal risks.

Unpaid superannuation arrears as well as the financing of the government's equity stake in the LNG project brings gross public debt to approximately 56% of GDP.

In addition, the inclusion of public enterprise debt of about 7.5% of GDP (2010 figure), would bring this figure to 63.5%.

The report noted that reining in expenditure growth and restoring fiscal space would be vital in the coming years to maintain macroeconomic stability.

Inflation is also anticipated to pick up to 6.5% in 2014, as public investments originally planned for 2013 take place and as a result of the delayed pass through of the exchange rate depreciation in late 2013.

Towards 2015 inflation is expected to return to its long run average of around 5% but this is conditional on the government reining in expenditure growth and the Central Bank continuing with prudent monetary policies.

Batten affirmed that maintaining a lid on expenditure growth and addressing the perceived shortfall in service delivery were key factors for government efforts to achieve macroeconomic stability.

"That rate of expenditure growth now needs to slow significantly in order to keep public debt below a sustainable level," he added.

"It will also be important for the government to continue work to establish a stabilisation fund.

"As PNG becomes more heavily dependent on mining, oil and gas revenues their exposure to the volatility of those commodity prices will increase, so having a stabilisation fund will be increasingly important."

Moving forward, the ADO emphasised policy challenges around addressing sub-national fiscal inequality for inclusive growth.

The report warns that as a result of royalty payments from resource projects and larger value added tax collections in major urban centres, PNG's 22 provincial governments have large inequalities in their own-source revenue raising abilities.

In 2009 the PNG government undertook a series of reforms to address the fiscal inequality, creating a pool of national funds totalling 5.6% of non-mineral revenue to adjust the payment of grants from the national to provincial government.

Yet while sub-national fiscal reforms have helped to equalise the financial capabilities of provincial governments, issues including poor utilisation of provincial government's own source revenues, the slow and unpredictable timing of function grant release and weak implementation capacity at sub-national levels of government continue to pose problems.

"The policy challenge which we highlight in this edition of the ADO is on the importance of the government continuing to reduce sub-national fiscal inequalities," Batten said.

"What this does is highlight the significant inequalities which exist between the different provinces in PNG and their ability to raise own-source revenue.

"The government has undertaken some very important reforms to try and address this and it's made a very big impact in reducing the inequalities across PNG's poorer provinces with its richer provinces.

"While the financial capacity of the provinces has been equalised, the underlying systems and implementations haven't been.

"Improving service delivery will rest as much on improving the financing as strengthening the accountability and implementation structure at a sub-national level of government."

Published in the April 2014 PNG Report magazine

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