Deficit bias, debt accumulation, and repeat economic crises in Papua New Guinea

Abstract

This paper shows that a strong policy bias towards deficits, leading to rapid accumulation of debt that periodically makes debt roll-over difficult, has been the principal reason for the three liquidity crises faced by Papua New Guinea in the decade commencing 1990. The deficit bias is argued to be the result of a lack of information amongst stakeholders, strategic debt accumulation by incumbents in government, and a common-pool problem. Recommendations for policy interventions to break out of the deficit-debt-crisis cycle and the role of aid in the above are highlighted.