Deficit bias and debt accumulation to economic crises in Papua New Guinea

Abstract

[Introduction]: This paper argues that one of the major reasons for the poor record on development is to do with poor macroeconomic management. The three liquidity crises faced in the 1990s, several near misses, and yet another impending crisis inmid 2002 are evidence of such mismanagement. This paper argues that a strong deficit bias in fiscal policy has seen public debt rise from zero at independence to 45 per cent by 1990 and 66 per cent by 1999—the most recent period for which published data is available. There is little hope of debt levels stabilising while the incentives driving this process remain. The high debt levels and the rising cost of servicing such debt has raised the frequency of fiscal crises, an issue likely to be of increasing concern to policymakers and international financial institutions who carry the bulk of the responsibility for rescuing the situation. Monetary policy, in contrast, has remained conservative and without an inflation bias. This contrast lends support to the view that differing incentives are present in fiscal vis-à-vis monetary policy; central bank independence is a core part of the explanation.