PNG Survey of Recent Developments, 2014-15

Abstract

This paper provides a survey of economic and related developments in Papua New Guinea (PNG) over the last twelve months, roughly from July 2014 to June 2015. The early commencement of the mega PNG LNG project notwithstanding, economic circumstances in PNG are currently difficult. Moody's has downgraded the country's outlook (though not its credit rating) from stable to negative. The fall in oil and therefore gas prices has greatly reduced the short-term benefits of the LNG project. The commencement of LNG production has boosted GDP, but in other sectors economic growth seems low. There is extensive rationing of foreign exchange and the exchange rate is overvalued. After several years in which the growth of expenditure greatly outpaced that of revenue, and then a shock to revenue due to the oil price fall, the fiscal deficit is now unsustainable and difficult to finance. If unaddressed, these problems could lead to a further loss of foreign exchange reserves and severe cash rationing within government. There is also a risk of a further slowdown in economic activity, and damage to important government services. The exchange rate is now being gradually depreciated, and expenditure cuts are being implemented, but further currency depreciation, better expenditure prioritization, and a new medium-term fiscal strategy are needed to reduce risks and restore confidence. Given the fiscal stress and the risks to growth and government effectiveness, structural and public sector reforms are particularly important at this time, and are also discussed in the paper.