The present state of our economy is anyone’s guess

By Busa Jeremiah Wenogo

The health of the PNG’s Economy has lately come under intense scrutiny that it is hard to overlook the economic data that has been circulated in the media. The government through the Department of Treasury and Central Bank has brushed aside claims raised by some critics such as Sir Mekere Morauta that the economy is “heading for doom” and urgent intervention from the government is required to keep the economy afloat. However, developments on the ground is increasingly portraying an economy that is in dire need of urgent stimulus to stay afloat until the prices of key commodities pick up again or new projects comes on board. News of the government slashing funds earmarked for priority areas such as health and education, difficulty in the payment of public servants’ salaries and rental bills for offices, increase levels of domestic and international borrowings and government scampering across the world to secure additional funds to support its budget and address the foreign currency crisis are raising fear of the health of the economy.     

In a country where data collection has been a chronic issue for the government any economic data that gets spurn around in the media will no doubt generate skepticism. In addition, government’s tight control on the release of key information concerning the economy (and its budget) will always raise question mark about the economic information that it puts out on public domain. Information like the Mid-Year Economic & Fiscal Outlook Report or the Quarterly Monetary Statements produced by Treasury and Central Bank respectively have always served as an important information outlet. Lately it seems these data have increasingly strayed from the reality on the ground raising questions about the authenticity of this information. Bearing in mind these limitations; I would like to provide my own analysis of the state of the economy and offer my predictions on the future of PNG’s Economy relying heavily on observation rather than statistics given I am not privy to any “inside information”. My believe is that regardless of what is portrayed by the economic data the day to day struggles felt by the private sector and citizens in general are true reflections of the underlying problems that are affecting our economy. Observing these realities or phenomena provides insights into the state of our economy beyond the numbers that are thrown our way. For a lot of developing countries such as PNG a positive economic outlook does not often translate into improvements in social development indicators. Case in point are the impact communities of numerous petroleum and mining projects in the country whose lives have not seen any drastic changes.        

Exchange Rate and BOP

BPNG Governor’s claim that current Balance of Payment is sufficient to cover import for 10 months can be challenged on the following grounds;

      1)   There is currently a long queue of back-logs in import demands and

      2)   The depreciation of Kina against the US Dollar although the Kina has been pegged against the $US Dollar. Continued depreciation of our Kina (while being pegged against the US Dollar) could mean that the Foreign Reserve held by the Central Bank is not adequate to maintain the rate at which the Kina is pegged. The Foreign Reserve is being depleted due to various factors as will be outlined in the next paragraph.

Subsequently BPNG has advised the government to seek financing arrangement outside to address this problem.  To dispel confusion in the minds of the public BPNG need to provide details of the total unmet import demands (back-logs). The absence of such information is raising speculation and fears among the public.     

The back-log of import demands was stimulated by BPNG’s intervention in the foreign exchange Market when it imposed a trading ban in an attempt to stop the outflow of foreign currency. The Central Bank was of the view that “unauthorised traders” and the creation of “VOSTROS” Accounts were responsible for repatriating “foreign dollars” out of the economy. Yet given our current predicament it would seemed that this measure was too late to stop the plight of our foreign reserves. Importantly, this indicated that our foreign reserve level was already decreasing and the implementation of the said ban was to stabilize the foreign reserve. This may have stemmed the outflow of the foreign currency from our reserves but the problem is still persisting. The only other hope is for the commodity prices to pick up so that we can build up our foreign reserves. However, reports have predicted that it would be another 6-12 months before the prices pick up again. This means that what happens now until then is important to the health of our economy. So what could have caused the unexpected drop in the foreign reserve?

     1)   PNG’s rapid private sector investment means that demands for import increased rapidly.

     2) The government securing multiple international loans meant that it was repaying those loans in foreign dollars. For example the controversial UBS Loan.

     3)  Fall in commodity prices no doubt affected our exports; meaning less foreign dollars were coming into our economy to boost up the foreign reserve level.

The above factors caused an imbalance between the inflow and outflow of foreign currency on the currency market leading to a back-log in unmet import demands. This is causing our Kina to depreciate/slide against the other foreign currency (fall in Kina value) given that we don’t have sufficient foreign dollar to buy back Kina (on the foreign exchange market) to put an upward pressure on the Kina to rise against the other foreign currency such as the US Dollar. At this point importers will pay more to access their imports. To cover their losses they would then pass the buck to the consumers who would then experience an increase in the prices of goods and services. On the export side, the continued stagnation in the global commodity price means that although our exports (mineral, petroleum, and agriculture) can take advantage of a falling Kina; the fact that demand has dried up at the global market means that we will be receiving much lesser foreign dollars from our exports compared to the flush period.

In an attempt to address the back-log but at the same time stabilize the available foreign reserve and subsequently the value of Kina; it was revealed by the Prime Minister during question time in parliament that Central Bank is only prioritizing import requests from 3-4 major importers. This means that only certain amount of import demands will be processed. The backlog is still there. In addition the Central Bank’s advise for the government to explore international financing arrangement to clear the back logs has hit a wall given the recent downgrading of our credit ratings by the international credit rating agency. Thus from now on we will be borrowing against a much tougher credit condition until our credit ratings improve. Financing institutions will impose tougher conditions to minimize their exposure to risks such as loan defaulting. However, as mentioned earlier on this will only bring in temporary relief to clear out some of the back logs. With the drop in the value of Kina on the currency market the total unmet demand in Kina value may have already risen.

So the reality is that the back logs of demands are piling up. The more this goes on businesses will be forced to lay off workers or close down operation in the country.

Government 2016 budget;

The government should urgently introduce a revised budget or as in the words of Sir Mek a “mini budget” as the 2016 budget is no longer feasible given that its budget assumptions are no longer relevant. We are already in the middle half of the year. If it still endeavours to persist with this budget the government will be forced to seek additional loans both domestically and internationally to support its budget. This will further increase our debt level. Right now our rising debt level means that it is unwise and not prudent to seek additional financing to support the budget.

Domestic Economy

Apart from a possible rise in the prices of goods and services local industries that depend on the importers for supplies/materials will struggle to operate their businesses. These include the construction and manufacturing industries. The informal economy which is often neglected by the government is poised to once again soak up the bulk of the spill-over from a faltering economy. For the sake of diversifying our economy the government is once again urged to support the informal economy as a key strategy to supporting the growth of the SME Sector. Any attempt to suppress the informal economy in these challenging times could back fire against the government.  

2017 General Election

The call to introduce a revised or mini budget will require humility from the government. Since taking over, the government under the leadership of Peter O’Neill has pursued an expansionary budget. An expansionary budget gives the government leverage over its opponents as it quickly becomes popular with the constituency. Introduction of the Tuition Fee Free Policy, Free primary health, massive infrastructure developments and hosting of regional and international events are the outcomes of this policy. Right now Peter O’Neill is still very popular among the general population because of these ‘populist’ policies. As such to move away from it can be “politically damaging” for the Prime Minister and his government. From this context introducing a new budget would be an admission by the government that their initial budget has fumbled in light of the sudden drop in the global commodity prices. Infact it is looking ominous as each day passes by that this is likely to be the case. The writing on the wall points to a real need for the government to quickly reign in on its expenditure and instill control and discipline. Given that we are a year away from the general election it will be a test of character for the government to maintain this stance. Experiences in the past demonstrates that the period leading up the general election is one where the government goes on a massive spending spree to prop up its support among the voting populous. However, this time around the government will need to move away from this trend given the critical state of our economy. The frightening thing is that we are not too sure what the true extent of the mess that we are in at the moment. I suspect only the PM and his close aides know but they prefer to keep things tightly wrapped to prevent any revolt.  Yet they must also exercise caution and restraint. This is not the time to bank a nation’s future against an assumption that last time we checked was way off and brought us to where we are right now. For the rest of Papua New Guinea the health of our economy is anyone’s guess.