PNG's debt conundrum

THE period from 2003 to 2011 has been exceptional in PNG’s modern history. Various records were set to make it the longest period ever of sustained economic growth.

Many commentators attribute this success to the commodities boom and the record levels of company tax paid, in particular by two resources companies - Ok Tedi Mining Ltd and Oil Search Ltd.

The key multilateral development and aid agencies have made it clear the successes that have been notched up could not have occurred if not for the prudent policies of the government of the day, especially in terms of its macroeconomic management.

The past year has been something of an aberration.

The newly-elected government of Prime Minister Peter O'Neill has declared his intention to throw out all the controversial legislation drawn up under the previous regime he headed following the parliamentary coup of 2 August 2011.

This is an attempt to wipe the slate clean for the sake, it seems, of reconciliation. The way things are heading the public will never formally know whether the previous O'Neill-Namah was truly legitimate. This is especially so in the face of two Supreme Court rulings to the contrary.

All this will now be brushed under the carpet, so to speak, in order to put aside past confrontations and conflicts. In their place is a new coalition headed by O'Neill himself and Leon Dion, the former governor of East New Britain, who has become the new deputy prime minister.

The O'Neill-Dion government has promised everything a new government can be expected to want to deliver - a big attack on corruption, better public service delivery in education, health and other areas and the pursuit of major development projects, including a second LNG project.

Promises come cheaply. Most Papua New Guineans will be looking for meaningful results, as would international agencies such as the World Bank, International Monetary Fund, Asian Development and key bilateral partners such as Australia.

Already there has been a shaky start with many schools almost threatened with closure because funds for the "free education" policy had not been forthcoming. Most have since received this funding, though media reports suggest some may still be left in the cold.

There have been suggestions also of the delivery of a "free primary health" service at hospitals and aid posts but at this point in time this still appears a pipedream.

The post-independence history of PNG is notable for the volatile nature of its political system - no government managed a full term from 1975 until the 2002 national election - and this has been matched by the volatility of the country's economic performance.

It is in the latter area that clues may already be provided about the potential impact of the O'Neill government, particularly in the face of a long history where good times are almost always followed by bad.

It was this economic volatility that eventually led to per capita incomes in 2002 being lower than it was at independence.

At the heart of this problem has been the way governments spend money and a steeply rising level of dependence on debt that part of the fiscal story prior to 2002.

This is also where a chink may be showing in the armoury of the O'Neill regime, along with clues provided by the choice of key people for various ministries and ongoing speculation about individuals that may win roles in management of the proposed Sovereign Wealth Fund.

These are not subjects Wantok wishes to delve into at this stage. Instead, we focus on the warnings given by Opposition Spokesman on Finance and Treasury, Joseph Lelang, a former secretary of the department of national planning, that the O'Neill government was threatening sound economic management by unsustainable levels of public sector borrowing.

Lelang's warning may have been somewhat overdramatic, given his comparison with past economic crisis such as 1994, but it does bear a grain of truth in terms of what the public record is showing.

Alarming increase in debt levels

The increase in public, or government, debt levels in the December quarter last year and the March quarter this year have totalled K869.1 million ($A392.4 million). This took overall public sector debt to K7,495.3 million ($3.38 billion) - the highest it has been since 2004.

That may seem a scary statistic and, indeed, it would have been if not for the solid growth in gross domestic product between 2003 and 2011, which still leaves total debt at around 24% of GDP compared with levels in excess of 30% in earlier years.

In the latest quarter the stronger kina has helped external debt fall by K440.7 million to K1.67 billion compared with K3.6 billion in 2006, but the rise in domestic debt has more than made up for this drop.

In the March quarter domestic debt rose K696.1 million to what is an all-time high of K5.8 billion, following an increase of almost K1 billion in 2011.

In overall terms total public sector debt - foreign and domestic - stood at K7.49 billion at the end of March. This total is also the highest since the end of 2004 when it stood at K7.59 billion.

So far the Bank of Papua New Guinea, the IMF and others have had nothing to say about the rising public sector debt possibly because debt servicing these days is more manageable that it was a decade ago.

The question still needs to be asked whether the rising debt is being used to provide improved services and infrastructure or whether, as in so much of the past, vast sums of money just continue to disappear into dark sinkholes.

A corollary to this question is whether the O'Neill government, like some earlier predecessors, is making unsustainable commitments with plans to plug any gaps with steadily rising government debt.

After all, the 2012 national budget has indicated a public sector debt ratio of 30% could well be contemplated in future planning and there is really a long way to go at present to get there.


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