Posted on PNG Blogs
With almost 60 more days to go before the current government reaches its first 100 days in Parliament under the leadership of Prime Minister James Marape, many people are anxious about what he will do to pick up from where his predecessor left off.
Opposition leader Patrick Pruaitch, who was one of the speakers at the 2019 PNG update at the University of Papua New Guinea, claims that the inability of the Marape government to deal quickly and effectively with key resource project issues will impact on most other policy areas, including inadequate spending on education and health.
Mr Pruaitch made this concluding remark while giving an update on the country’s state of the economy from the opposition’s point of view.
He told attendees that the country is still struggling to get out from its troublesome past when the gross domestic product in 2000 was around US$3.5 billlion. The economy in that year shrank by 2.5 per cent as per the World Bank data.
Pruaitch said per capita income fell from a high of US$1,153 in 1994, when the economy grew by 5.9 per cent, to a mere US$632 by 2000. By 2002, at the depths of what a former Treasurer said should have been termed a ‘depression’ rather than a ‘recession’, per capita income had fallen to US$512.
“In real terms, income levels were the lowest since independence in 1975. Inflation in 1999 and 2000 were running at over 15 per cent – a period when PNG would have been among the worst performing economies in Asia Pacific.
In a relatively short period of eight years, between 1994 and 2002, average PNG incomes more than halved in nominal terms – never mind the ‘dramatic change in real terms’!
These days’ politicians have robust arguments about whether government debt to Gross Domestic Product has breached the 30 per cent level set by the original Fiscal Responsibility Act. This was temporarily adjusted upwards to 35 per cent by the previous O’Neill government,” he said.
“When we look back to 2002, we recognise how difficult the fiscal situation would have been. Public debt stood at 72 per cent of GDP. One reality of the irresponsible policies of the 1990s, now called ‘the lost decade’ , was that one quarter of the 2002 budget of K3.2 billion was needed to service debt.”
Pruaitch presented further that in the first five years in office the National Alliance led government had managed to make up for all the losses during the last decade, with per capita incomes running at a record level of US$1,440. In that year GDP had grown by 11 per cent. LNG had not come into the picture as yet.
He said when Sir Rabbie Namaliu, as Treasurer, presented the Somare government’s 2007 budget on 14 November 2006, this is what he had to say:
“The government we replaced in August 2002 had been spending far more than it had been raising by way of taxation and other revenue, resulting in a large and rapidly growing budget deficit…Our public debt was rapidly approaching dangerously unsustainable levels…… Investors had lost confidence in PNG, with 2002 being the third year in a row of the real level of economic activity falling…. It is no understatement to say that, in economic terms, Papua New Guinea was going backwards. And the government had been living well beyond its means.”
Sir Rabbie said that by restoring Fiscal Responsibility and cutting back on government expenditure the government managed:
First, to make 2007 the fourth consecutive year with higher GDP growth than population growth and rising per capita incomes;
Second, inflation was cut from 11.8 per cent in 2002 to 1.7 per cent by 2005;
Third, the kina recovered from less than US20c in 2000 to US33c.
(Sadly, it stands today at US30c!!);
Fourth, a balanced 2006 budget pushed debt to GDP down from record highs to 42.5 per cent; and
Finally, formal sector employment grew 7.8 per cent in the year to June 2006, making an impressive 20.4 per cent in jobs growth in a four-year period.
“This serves as a reminder of the precarious journey this nation has made in the past two decades. For the record 2006 was the year in which the NA government passed the Fiscal Responsibility Act, as a milestone and guide for disciplined forward economic planning and development,” he said.
Fast forward to recent times, he said the former government inherited a strong economy that was growing well, based on sound fundamentals, including strong growth and exceptionally low public debt levels.
He added that average income by this time had risen to US$2,474 even though political turmoil in 2011 severely impacted on economic growth, which fell to 1.1 per cent compared with 10.1 per cent the year before.
“During the nine years from August 2002 to August 2011, per capita incomes had risen five-fold, a record that will not be matched in our lifetime.
The PNG economy underwent a radical transformation to grow from US$3 billion to US$17.98 billion in a period of two decades. The O’Neill government was riding high when it took office but economic mismanagement and soaring debt levels caused incomes to decline and living standards to fall,” he said.
Pruaitch said virtually all projects were grossly overpriced and most were never completed within proposed budgets.
He pointed out that, monuments to this massive waste are the unfinished Sir Hubert Murray Stadium and hundreds of vehicles purchased for APEC that continue to lose value out in the open on Port Moresby’s waterfront, with one at the back of the Pacific Games village.
He said while the capital prospered and took on signs of a modern city, much of the nation felt neglected. Local and regional road networks fell into a state of disrepair, impacting on the daily lives of rural communities.
“The impetus given the national economy by the PNG LNG project, approved by the previous government, resulted in a surge in investment and employment until LNG construction ended in mid-2014.
According to the World Bank per capita incomes peaked at US$2973 in 2014 before falling sharply to US$2462 two years later. This outcome would have worsened considerably in 2018 after the economy shrank by 0.7 per cent to record the nation’s worst economic performance since 2000 when GDP fell 2.5 per cent,” Pruaitch says.
“Ironically, there are clear parallels with the early 1990s when governments indulged in excessive borrowing that contributed to the ‘lost decade’.”
Pruaitch said even before the US$19 billion PNG LNG project began production, the government borrowed heavily to finance deficit budgets. The planners forget that big resource projects like Ok Tedi in the past, are highly capital intensive and rely on substantial debt. Meaning they can take many years- almost 10 years in the case of Ok Tedi – to become significant payers of company tax.
“In 2013 the O’Neill government borrowed K3.07 billion, K3.4 billion in 2014, K2.6 billion in 2015 and K3.09 billion in 2016. Public debt this year will surpass K28 billion, K13 billion more than it was five years ago or K20 billion more than when O’Neill became Prime Minister.
Putting the trend into perspective over the decade, you will all recall that government borrowing in 2013 alone was more than the entire national government budget in 2002,” he said.
“Despite the sharp fall in commodity prices – minerals in 2012 and oil and gas at the end of 2014 – the O’Neill government continued to borrow and spend at an unsustainable rate.”
When debt becomes counterproductive… Pruaitch said;
“I have nothing against borrowing with funds that are put to good use. With slack expenditure controls and numerous excessively priced projects even so-called ‘cheap loans’ become a rip off and a severe burden.
“When spending of this nature does not provide adequate returns it becomes counterproductive with debt levels that cannot be properly serviced by wealth generation. PNG has reached the stage where debt servicing costs are double the expenditure on education or, for that matter, for health or law and order.
“Many loans from China in this category involve dubious political involvement and questionable outcomes. Many have generated minimal employment within PNG. In spite of the tremendous government spending in the past six years, employment levels have fallen dramatically. Surely this is a clear sign of things going wrong.”
According to Bank of Papua New Guinea, non-resource sector employment rose by 6.2 per cent in 2011 and 6.5 per cent in 2012. Employment levels remained flat in 2013, and fell by 2.9 per cent and 4.2 per cent in 2014 and 2015 respectively.
The formal sector jobs plunge resumed with a vengeance in 2017 when 5 per cent of the workforce lost their jobs. The World Bank estimates another 2 per cent of jobs disappeared last year.
“You would recognise that every employed person losing his job would result in severe financial problems for five or six additional people. Thousands of people would have fallen into the poverty trap under the past regime,” he said.
Pruaitch also said part of the dismal employment record in recent times is linked to the outflow of foreign direct investment, which has become a hidden scourge on the economy. No one talks about this. There is little public awareness.
“What it reflects are poor national and international perceptions of government policies that contribute to a weakening investment climate.
Companies are pulling out and taking their money abroad. Even our Central Bank makes passing reference to this issue without discussing it in any detail. If not for monitoring done by the World Bank, we would not be aware that this problem exists,” he said.
“Negative FDI flows are also a little discussed contributor to the nation’s foreign exchange problem.”
According to the World Bank, negative FDI has occurred in PNG in 20 11 and 2012, linked to political turmoil and uncertainty, with this trend continuing in 2014, 2016 and 2017.
“This is the worst record of any government since independence. FDI turned negative historically only on two occasions – when the Australians packed up to go home in 1975 and again in 2008, at the height of the global financial crisis.
With the Marape government adopting much of the rhetoric and policies of its predecessor this challenge is certainly not going to go away. The prime minister and his high-powered delegation have come away with good intentions and feelings from their recent state visit to Australia. Unfortunately, the rhetoric and the actions do not appear to be in sync,” he said.
“The World Bank had said so in recent economic statements on PNG. The local business community is also sounding alarm bells, but it seems that many politicians have become deaf to this ‘noise’.”
Pruaitch said in Treasurer Sam Basil’s recent economic budget to Parliament, Basil said the previous expectation of 0.3 per cent economic growth had been downgraded to a contraction of 0.7 per cent because of the poor performance of the PNG LNG Project in the second half of 2018.
However, the opposition leader dismissed this stating this was a fallacy because in the second half of last year the PNG LNG Project had its best performance since the start of production in May 2014.
He said it should therefore have lifted the nation’s economic performance. Instead it now means the recovery anticipated this year is likely to be sub -3 per cent and contribute to a further fall in per capita incomes.
“High oil and gas prices, and the falling value of the kina, meant LNG export revenues last year rose 22 per cent to an all-time high of K12.8 billion. Since the fall in oil and gas prices at the end of 2014 there has been a lot of criticism channeled at the PNG LNG project. Much of this is misplaced and based on misinformation. The government’s inability to complete clan vetting processes cannot be considered a failure of the LNG project,” Pruaitch said.
“A study completed last year by the National Research Institute concluded that the PNG LNG project led ‘to a permanent upward shift in productivity growth’ but that these positive impacts would not occur if the government “were to squander the proceeds of the project on wasteful spending.
“The co-authors of the study said that among the intangibles is the fact that PNG’s crude oil production has been four times higher by 2016 than it would have been without the LNG project.” he said.
“The higher growth trajectory generated by the LNG project means that PNG’s total GOP would be K81 .7 billion higher and reach K169.5 billion in 2030. If the LNG project had not taken place total GOP would only have reached K87.8 billion in 2030.”
With the medium-term outlook he said there is no good news to deliver because since Marape taking office the country’s situation worsened with the 2019 MYEFO paints a rather grim picture for the current year with a soaring budget deficit and public debt.
“The First, from a global perspective: The International Monetary Fund has downgraded the outlook for the world economy due to the ongoing trade conflicts between the United States and China, a significant slowing in world trade and rising Middle East tensions. The US-China trade war is worsening as we speak, sending negative signals to global markets,” he said.
“This will have direct and indirect impacts on the economy. Crude oil prices have become volatile. Lower anticipated world demand has become a crucial factor. There is no consensus about the path of energy prices in the next few years.
“Oil prices are in the balance because of uncertainty over whether US shale oil production can be sustained at levels that have made the US the world’s biggest oil producer. Despite extremely strong demand for natural gas from China, spot prices for natural gas have dropped sharply in the highly competitive East Asian markets.
“On the domestic front, much emphasis has been placed on Papua LNG and Wafi-Golpu as projects that will underwrite stronger
economic growth.
“The government decision to approve the previous gas agreement for the Papua LNG Project is welcome. However, it appears likely that front end engineering and design (FEED), which had been stalled, is only likely to commence next year,” he said.
“It will be conducted under a cloud with many countries paying greater attention to the use of renewable. The United States could also become a significant factor as it becomes the world’s third biggest LNG exporter after Qatar and Australia.”
Pruaitch said Newcrest and Harmony Gold, equal partners in Wafi-Golpu, have abandoned plans for early works. The government has also failed to deal clearly with the expiring Mining License for the Porgera mine. The mine operators have now received a court directive that allows them to continue production while the government makes up its mind on the mine extension.
“From this perspective it would be realistic to expect that economic growth in the coming year would slow down to the sub-3 per cent GDP levels at which per capita incomes continue to fall,” he said.
“The Marape government shows no sign s of making the tough decisions that are necessary. The current inertia in dealing with the revenue gap, as has happened in the past, could lead to further macro economic instability and strongly rising public debt.”
Pruaitch says that’s why the inability of the Marape government to deal quickly and effectively with key resource project issues will impact on most other policy areas, including inadequate spending on education and health.
“Populist policies may sound nice and encouraging and have many people applauding from the sidelines. But if the end result is inability to compete on a global scale, investment flows will continue to shrink and worse still, continue to flee this country and make the task of economic development and progress even more elusive. In many areas, a back to the basic’s agenda is needed,” he said.
He said most affected will be aspirations to improve the performance of the agricultural sector and like the past government, the current government is prone to support capital intensive agricultural ventures which tends to employ small numbers of people and neglect the majority of the nation’s farming communities.
“As in many other areas what is called for is much greater investment and involvement in the subsistence sector.
“This is with greater use of extension workers and programs such as the World Bank’s Productive Partnerships in Agriculture Program.
“This is the sector where much of our Small to Medium Enterprises exist.
“And when properly developed can raise the prospect of doubling or even tripling agricultural output and in quickly improving living standards among rural communities,” Pruaitch said.
“In this regard the latest World Bank economic commentary on Papua New Guinea has noted that the provision of extension services is extremely limited.
“This, it said, was due to the complex and poorly understood organic laws governing relationships between the national, provincial, district and local level governments. The World Bank intimated that poor extensions services are linked with corruption, such as “the practice of appointing unqualified personnel, motivated by political gain or nepotism”. This, it said, creates conditions that make policy development and implementation unworkable.
“Without strong and enlightened governmental leadership, the problems and challenges of the past will continue to haunt not only policy and law makers but the citizenry whose future depends on the decisions we make.”
Go to this link for more: http://www.pngblogs.com/2019/08/is-marape-government-able-to-recoup.html
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