PNG hits economic bumps as Chinese economy corrects

BUSA JEREMIAH WENOGO

RECENT news about the devaluation of Chinese the yuan against the United States dollar should seriously concern the Papua New Guinea government given that China is one of our largest trading partners.

Since the Chinese economy began to cool off, the People’s Bank of China has devalued the Chinese currency in a bid to make Chinese exports cheaper.

The yuan is expected to continue depreciating unless Chinese authorities are satisfied the sliding economy has bottomed out.

The implication for PNG is that the kina will have to be devalued against the yuan to keep our exports competitive in Chinese markets.

The Chinese economy, which was projected to grow at 10% this year, is now forecast to top out at 7%. This means commodity prices will continue to tumble as Chinese demand takes a breather.

For PNG this means a further fall in commodity prices and a revision of our economic growth rate, currently projected to be around 10% mark but likely to be around 7%.

Despite forecast budget problems, the PNG government last week reassured the country that the economy is sound – but there are increasing signs of budgetary stress. For example, yesterday PNG Attitude reported that universities are having their government funding cut by a massive 40%.

This flew in the face of a government commitment to maintain funding to key priority areas such as health and education.

The government has also argued that its debt level is under the “lawful” ceiling of 35% of GDP. However, in the event that public debt eclipses the ceiling captured in the Fiscal Responsibility Act, the government could argue this has come about due to expansion in GDP. Lies, damn lies and statistics.

The main concern is that the government, by default, may underestimate or deliberately neglect the GDP level in pursuit of an expansionary budget and give rise to much higher public debt.

Right now, the government estimates that the debt level at 34.2% of the GDP, however there are suspicions that the actual figure is worse than this.

So far the government has not looked at raising revenue through tax, instead it has opted to undertake cost cutting measures by taking funding from what it terms as “non-priority” areas in its budget to support its key policies on health and education.

Or so the government says. As I described above, behind the scenes it seems that even these ‘protected’ sectors are being hit hard.

It is worth noting that most of the borrowed funds were used to finance projects predominantly in Port Moresby and Lae. The impact of borrowing on the wider economy will only be felt once loans are used to rehabilitate the highlands highway or similar projects that will allow rural people access to markets.

Concentrating most of the spending in urban areas, biases PNG’s economic growth and helps explain the continuing drift as rural people flock to urban areas to take advantage of what they see is a buoyant economy.

For the sake of rural folks, the last thing we need is for the government not to honour its commitment to the range of decentralised improvement programs as it come under increasing pressure to keep the economy afloat.

PNG’s economic situation could become desperate if commodity prices don’t pick up quickly given that the government needs to meet its debt obligations. Thus far PNG has an impeccable record as it has never defaulted on a debt repayment.

Yet this could change if the government’s revenue sources dry up. According to the government there is no need for panic given that about 60% of its total debt is domestically financed due to high liquidity in the banking sector.

It also argues that the 30% of its foreign loans are low interest. That said, it will be interesting to see if the Exxim Bank loan and other loans sourced from China will have their interest rates adjusted as the Chinese economy continues to slide.

The PNG government is also adamant that its import cover of nine months means that foreign reserves are adequate to sustain imports until such a time when both the Chinese and PNG economies rebound.

I’ve argued in the PNG Attitude blogsite on a couple of occasions that the Chinese system of government will be forced to change as its citizens demand the same level of freedom and privileges enjoyed by the citizens of the democratic countries.

The phenomenal growth of the Chinese economy over the last 30 years has acted as a pressure valve as improvements in material well-being have minimised dissent that could lead to civil unrest.

What is happening in China’s economy now is a challenge to the Communist regime as it nuances its way to economic and political reform.

I guess here in PNG we’ll just have to strap ourselves in for a bumpy ride. As it is now, most of the world’s economies including ours are being dragged into a fast developing hole and the end is not yet in sight.

Pride more than anything else is killing PNG's Economy

By Busa Jeremiah Wenogo

While commentators and Economists alike in recent times have been ringing the warning bells over the reports of the Mid Year Fiscal Economic Fiscal Outlook being recently released, very little has been said in describing the government's spending behaviour. The government in its part has also tried its best to save face by trying to settle the nerves of the public. Its Finance Minister has been adamant ever since the red lights came on. The Opposition has been on the attack ever since the government undertook a decision to take out a massive loan with the EXXIM Bank of China and then the infamous UBS Loan. The fact that the government will introduce a supplementary budget this year indicates that the economy is well and truly "under stress" and some "belt tightening will have to take place". Within the government circles Departments and agencies have been asked to slash back funding from their "development budget" as a "savings measure".

The problem with PNG's Economy right now is that it is in danger of "sinking" because of "pride".

The increase in expenditure (which I suspect has already push the "GDP-debt ratio" beyond the required ceiling in the Fiscal Responsibility Act contrary to media reports and statements from Treasury) has now surpassed historical spending figures since independence.

This has all come about because we have decided to play "big men" politics nationally, regionally and globally.

A downturn in commodity prices and other factors are now being blamed for this huge gap between expenditure (actual) and revenue (projected) however, we must never forget the fact that we have spent well beyond what we could have.

Is it mismanagement of the economy? Yes I think so because any right thinking government knows that we are mortgaging our assets (SOEs and other assets) as collateral for the loans against future earnings that are bound to fluctuate.

While the argument will be that PNG unlike in the past has the capacity to spend to that level because of large projects like LNG and other extractive projects, the government must be mindful that much of these large investments are primarily driven by loans.

Somewhere down the line the government (today and future) will have to pay for it regardless whether we are earning income from our exports or not.

The current situation of our economy has a very real possibility of pushing our government to ramp up its effort to get the 2nd and possible 3rd LNG into production mode as soon as possible. It will also mean more exploration and development licenses will be issued for potential investors to make "its books" look good.

The danger in all of this is that it will lead to unsustainable outcomes where no proper "social mapping" and "environmental impact assessment" will be done.

Because of our reckless management of the economy to satisfy our "pride" we will be putting the lives of our people now and the future generation at risks.

In economics it is known that whenever a government plans to undertake a "fiscal expansionary budget"/deficit budget it will be very difficult to reign in the expenditures when the popularity of the government sours as a result of increase economic activities and general improvement in the well-being of the population in terms of employment and income generation.

The current government has basically done that in its commitment to host regional and global events while churning out large chunk of money to Port Moresby at the expense of the rest of PNG.

In order to get our economy back on track the government will have to "humble" itself. Furthermore, it needs to grasp the reality facing most of our Papua New Guineans rather than working on a "default" mode assuming that all be OK.

No it will not so long as we "beat our chest" in "pride". Too much of our "pride" has already brought our economy to its knees. What is happening to Ok Tedi could be an indication that we have done so much harm than good to our own economy and people that it is now time to change our approach.

Inorder to get our economy back on the track the government will have to "humble" itself. Furthermore, it needs to grasps the reality facing most of our Papua New Guineans rather than working on a "default" mode assuming that all be ok. No it will not so long as we "beat our chest" in "pride". Too much of our "pride" has already brought our economy to its knees. What is happening to OK TEDI could be an indication that we have done so much harm than good to our own economy and people that it is now time to change our approach.