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.
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