Macroeconomic crisis and structural reforms in Papua New Guinea

Abstract

Papua New Guinea enjoyed sound macroeconomic stability prior to the 1990s, however, in the past six years, this stability has been derailed twice. The first was caused by the closure of the Bougainville Copper Mine in 1989, and the second appeared to be a loss of control of fiscal management 1994. In each case, the macroeconomic policy response was quick and decisive and orthodox austerity measures were put in place to reduce the aggregate demand. <p> The years 1994 and 1995 were difficult for the Papua New Guinea economy. Following a 16.8 per cent growth rate in 1993, during the next two years financial instability overshadowed other economic problems. Although this crisis derived from budgetary mismanagement, the instability of the macroeconomic environment has tended to be crisis prone. Since independence 21 years ago, economic growth has been sluggish, occasionally rising sharply with the start of a major mine but tumbling precipitously after peak production of the mine. <p> The macroeconomic instabilities of the 1990s may turn out to be a blessing in disguise, if they result in policy reforms that address the problems of debilitating economic performance, and not just macroeconomic policy stability. They have served as reminder to the economic managers of the structural weaknesses of the economy and have indirectly forced the formulation of a comprehensive structural adjustment program in 1995.