Analysis: Papua New Guinea National Budget reflects improving outlook in 2019

Papua New Guinea’s 2019 National Budget, announced last week, reflects an improving economic outlook, says Zanie Theron, KPMG’s PNG Country Managing Partner. She points to increased private investor confidence and positive signs for PNG’s foreign exchange situation.

KPMG’s Zanie Theron. Source: BAI

This Budget is a positive one, framed against a supportive world economic environment and domestic economic conditions recovering from past difficulties—tempered with an improved outlook due to inroads that have been made into domestic fiscal and financing challenges.

This year’s theme reflects an increased level of private investor confidence and the stimulus of the domestic non-mining sectors.

The Budget is aimed at ensuring a broad-based resilient economy that, as far as it is possible, has future-proofed itself from the volatility that can be brought about by economic and environmental disruption.

‘One of the significant outcomes predicted by the Government is the elimination of the foreign exchange imbalance no later than 2019.’

The GDP growth rate is expected to reach 4 per cent in 2019.

Between 2019 and 2023 the economy is expected to grow by an annual compound rate of 5 per cent.

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Inflation is expected to ease to 5.4 per cent next year.

Revenue collections will be increased through a further increase in compliance efforts and a broadening of the tax base.

Whereas 76 per cent of total revenue will come from taxes, of interest in terms of non-tax revenue is the K1.2billion expected from state dividends and K751million from statutory transfers.

Efficiencies

The 2019 expenditure strategy focuses on allocative and expenditure efficiencies.

The Government will focus on adequately funding its five key expenditure programs around free tuition, free primary healthcare, infrastructure projects, agriculture and SMEs.

In terms of expenditure control, it appears last year’s Budget aim of introducing greater financial controls over Government personnel expenditure (PE) spending has not eventuated.

This has resulted in a commitment to introduce reforms in 2019 to contain PE within the budget ceiling of K4.5billion.

‘The Budget makes changes to tax rules.’

Other areas with histories of overspending and possibly under budgeting will also be addressed to ensure that future capital expenditure funding is not required to be diverted again to fund inefficient operational expenditure.

Foreign exchange

One of the significant outcomes predicted by the Government is the elimination of the foreign exchange imbalance no later than 2019.

The Treasurer is of the view that this elimination is theoretically achievable by the end of 2019.

The Budget makes changes to tax rules around losses carried forward, tax thresholds and certain customs and excise rates.

Changes foreshadowed for 2020 are:

  • the possible introduction of capital gains tax,
  • the implementation of a simplified tax regime for SMEs,
  • a minimum tax on loss making companies,
  • a revision of the tax depreciation schedules and a turnover tax on mobile telecommunication companies.

All of these areas will be subjected to consultation reviews during 2019.

Sovereign wealth fund

It is worth noting two specific areas impacting future years.

The Government plans to operationalise the Sovereign Wealth Fund after the appointment of the inaugural Board in 2019—while recognising that it will not be fully operational until the required fund balances have been built up.

The economic benefits of APEC are expected to be mainly in the areas of beneficial international trade and tax policies, as well as direct infrastructure development support.

Zanie Theron is Managing Partner at KPMG in Papua New Guinea.

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