Papua New Guinea’s 2018 Budget signals a shift away from dependence on the resources sector

The Papua New Guinea Treasurer has handed down the countrys’ 2018 National Budget. It indicates that the government is looking to focus more on the non-mining sectors of the economy, and shore up revenues.

Treasurer Charles Abel has tabled the 2018 Budget. Credit: The National

Presenting his first National Budget, the Treasurer Charles Abel announced that the projected income, including grants, would be K12.73 billion and expenses would be K14.71 billion, leaving a shortfall of K1.99 billion. The budget deficit for 2018 is estimated at 2.5 per cent of GDP.

Economic growth is projected to be 2.4 per cent next year, driven mainly by the non-mining sectors of the economy.

Inflation is projected to be 5.9 per cent and the provincial sector will receive K3.9 billion, or 26.7 per cent of the total outlays, Abel said.

The Prime Minister Peter O’Neill said the focus in the Budget is on boosting agriculture, tourism, manufacturing and SMEs.

Pillars

The Budget has four pillars: a medium term revenue strategy, a medium term expenditure strategy, a fiscal deficit strategy and a debt management strategy.

‘The PNG Government expects a substantial increase of 14.2 per cent in revenue in 2018.’

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According to a KPMG Budget Brief, the Budget ‘is an ambitious attempt to combat the multiple issues currently impacting the PNG economy’.

The report says the PNG Government expects a substantial increase of 14.2 per cent in revenue in 2018, stemming mainly from increases in taxes on goods and services and international trade and transactions taxes, together with a ‘much increased pass through’ from collections by Government agencies and dividends.

There will be a focus on tax compliance activities in an attempt to reverse ‘a significant reversal from the recent trend of declining revenue.’

Medium term fiscal outlook Source: KPMG

Strategy

According to a 2018 Budget Strategy Paper released by Abel earlier this month, tax and revenue collections in 2016 declined as a percentage of nominal GDP, to 13.4 per cent from 18.5 per cent in 2012.

‘Economic growth is expected to remain subdued for years.’

‘This is low by historical standards in PNG and low by regional standards, including countries comparable to PNG,’ Abel commented.

‘For example, revenue (excluding grants) as a percentage of GDP in 2015 was 24.5 per cent for Australia, 25.7 per cent for Fiji, 18.5 per cent for Vanuatu, 13.6 per cent on average for all low-income countries and 15.4 per cent for lower middle-income countries.’

The Government is adopting a cautious approach, adopting a ‘deliberate conservatism in the baseline projections’ to ensure that fiscal budgets can be executed and financed. Economic growth is expected to remain subdued for years, according to Abel.

‘Moderately higher non-mineral real GDP growth (3.3-3.6 per cent range) is expected over the medium- term.’

‘Baseline real GDP growth is expected to remain in the range 2.0-2.8 per cent per year over the subsequent four years.

‘This is a conservative set of projections and excludes all potential major resource projects and a continuation of a subdued commodity price outlook.’

The Government’s effort to stimulate growth in sectors other than mining and petroleum represents an attempt to make the economy more diverse and resilient to commodity price cycles.

‘The Budget signals a “significant shift” from domestic to international borrowing.’

‘Moderately higher non-mineral real GDP growth (3.3-3.6 per cent range) is expected over the medium- term, driven by the Agriculture, Fishery and Forestry sector and the non-resource sectors,’ Abel commented.

Shift

The Budget signals a ‘significant shift from domestic to international borrowing,’ according to the KPMG Brief.

There are hopes that a US dollar bond program will generate significant foreign exchange inflows.

‘This will alleviate the current imbalance and relieve pressure on the domestic security market which will allow the Government to ‘deepen that market with an increase in longer-term securities,’ the KPMG Brief says. ‘The local market has shown an increased reluctance to take up the shorter term securities through 2017.’

The challenges remain steep. The KPMG Brief says the ‘overall impression is that quite a lot of things have to go right if the Government is to make progress around correcting its revenue and expense position and the foreign exchange imbalance.’

 

Government revenues Source: pngeconomics.org

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