Spending cuts loom in Papua New Guinea Supplementary Budget; central bank governor to review kina restrictions

The Papua New Guinea government will cut K1.6 billion in expenditure from its 2015 Budget, and may seek further cuts of K1 billion, according to Treasury Secretary, Dairi Vele.

Treasury Secretary Dairi Vele gives his economic update at the 2015 PNG Advantage investment Summit

Treasury Secretary Dairi Vele gives his economic update at the 2015 PNG Advantage investment Summit

Speaking to the 2015 Papua New Guinea Advantage Investment Summit in Brisbane, Vele said a supplementary budget would be introduced by the Government next month, in response to falling commodity revenues.

He said a key issue for the government is the collection of revenue, which will be addressed by a newly-established Enhanced Revenue Committee. He indicated limits on infrastructure tax credits, and holding back on tax concessions.

Vele said expenditure cuts included deferring spending on some projects and reprioritising expenditure to areas such as health, education, law and order, and infrastructure.

Kina

Meanwhile, the Governor of the Bank of Papua New Guinea, Loi Bakani, said he would review the decision, made 14 months ago, to restrict the trading of the Kina against the US dollar to within a narrow band, saying it was introduced because foreign currency dealers had gone ‘went well outside the Interbank rate’.

Bank of PNG Governor Loi M Bakani

Bank of PNG Governor Loi M Bakani

‘The exchange rate is continuing to devalue, and is at the present US35.95 cents to the Kina. It can be assumed that this trend might continue, at a much slower pace, until the end of this year, when we expect the exchange rate to stabilise.’

‘The market is now disciplined and so are exporters, so they know they cannot entice banks to operate outside the band.’

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Since restricting the Kina movements, Bakani said the currency had devalued by 15 per cent.

‘The exchange rate is continuing to devalue, and is at the present US35.95 cents to the Kina. It can be assumed that this trend might continue, at a much slower pace, until the end of this year, when we expect the exchange rate to stabilise.’

He said any further sharp devaluation would only add to inflationary pressures.

‘As I said to the head of the IMF mission last week, prove to me that when the Kina goes down, it will attract foreign exchange coming in from exporters. All the exporters in the non-mineral sector are converting their foreign currency to Kina already.

‘The other point is that the mineral sector only brings in foreign currency when they need to make Kina commitments so they are not basing this on the Kina value or anything, or on a speculative nature, so it’s business as usual for them.

‘I will assess when the foreign exchange market is normalised and obviously that’s a decision I will have to make.’

His comments preceded an announcement by Puma Energy that it was limiting petrol supplies in Port Moresby.

‘Due to the lack of liquidity in the forex [foreign exchange] markets, Puma Energy has been only able to convert very limited amounts of local currency into USD to pay for it supplies,’ Country Manager, Jim Collings, said in a media release.

Debt ratio out of date?

Bakani has also lent his support to lifting the current debt-to-GDP ratio of 35%. Prime Minister O’Neill told the summit that debt is currently K13 billion, or 33.2% of GDP.

‘We are one of the few countries in the world that have such a limit,’ said O’Neill. ‘This is a limit set during economic contraction that did not show any growth, and was designed to limit public expenditure—particularly on non-productive items.’

Bakani told Business Advantage PNG the ratio was low and in need of review ‘in light of the new potential revenue earning capacity of the economy’.

Dairi Vele’s and Loi Bakani’s presentations to the 2015 PNG Advantage Investment Summit can be found here.

 

 

Comments

  1. Mike Jeremiah says:

    I have been wondering if the majority of Papua New Guineans understand our economic activities to our GDO ratios. While 80% is still financially illiterate we are not moving together, I believe if financial literacy us understood at local rural level then more changes can be achieved economically. We are greatly dependant on outside market forces and not creating through large scale industrial business concepts utlilizing the landowner partnership frameworks. What I really believe can change the economic ratios of our country is to concerntrate budget to financing large scale local industrial products for increased commodity exports and downprocessing. Infrustructure alone would not be enough but together with sustainable industrial activity for profit generation.

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