The suspension of Parliament means that Papua New Guinea’s 2021 National Budget will be delayed until at least next month, and possibly longer. Whenever it is finally delivered – and whoever delivers it – the recently released Budget Strategy Paper clearly outlines the challenges it must address.

The Treasurer, Ian Ling-Stuckey, is being warned about the potential debt trap of COVID-19 spending.

The Department of Treasury’s 2021 Budget Strategy Paper – which provides some of the thinking behind the 2021 National Budget that was being prepared for Treasurer Ian Ling-Stuckey to deliver this week – predicts PNG’s economy will return to positive growth in 2021, but budget deficits look inevitable until at least 2025.

The paper sets out the Marape government’s proposed fiscal strategy, now in question due to the political situation. The strategy involves

• investing in capital programs that generate economic growth and employment, such as the Connect PNG program
• keeping government spending on goods and services at ‘skeleton’ levels, and
• reducing the government’s wage bill (by introducing a hiring freeze, among other measures)

The paper suggests government revenue in 2021 will be just K12.995 billion, while planned expenditure is much higher, at K19.607 billion.

Shortfall

As these numbers suggest, there are major risks to the government’s fiscal strategy because of a shortfall in revenues.

‘Revenue shortfall from delayed policy measures and larger than expected reduction in corporate income taxes represent a significant risk to the execution of the strategy,’ the paper warns.

The strategy for dealing with this shortfall includes improving the flow of funds from state-owned enterprises and statutory authorities. These measures will only provide an additional K260–K280 million, however. Greater tax revenue is also expected in 2021 due to improved compliance and growth in the economy.

For those businesses owed money by the government, the budget paper says ‘the Government is committing in 2021 to continue drawdown in the level of arrears’. However, with arrears currently valued at K1.207 billion and ‘new’ arrears expected of K1.492 billion, the budget paper projects the government will still owe K1.5 billion in 2021.

External financing

The paper argues that the 2021 Budget will require K6.6 billion in additional financing due to large gap between expected revenue and expenditure.

‘External financing is planned to cater for about 70 per cent of the deficit while the remaining 30 per cent is planned to be sourced domestically by issuing T-bills and T-bonds [Treasury bills and bonds].’

The targets for the external financing will be multilateral financing facilities such as the World Bank’s COVID-19 emergency DPO; the Asian Development Bank’s SOE reform linked policy loan and ‘pre-signed project based concessional lending worth at least K1.6 billion’. It says that ‘further financing is being explored at this time’. Some budget support from Australia looks likely.

Whoever is Treasurer after 1 December, securing this budget finance is going to have to be a major priority if PNG is to maintain a balanced budget.

Scenario planning

The 2021 Budget Paper considers three scenarios for PNG’s economic recovery.

The first is a ‘weak’ scenario, that anticipates a gentle recovery over the medium term driven almost entirely by non-resource GDP growth, with mining and petroleum output remaining low.

Next is the ‘moderate scenario’, which was being used for making Budget projections. This assumes Porgera will return by second half of 2021.

The third, ‘strong’ scenario is a more optimistic outlook, with Porgera returning at the start of 2021, all of PNG’s gold producers ramping up production to take advantage of record high prices, and agricultural exports recovering.

The report says that the weak and baseline scenarios imply a long-term nominal growth rate for PNG of 5.7 per cent per annum. Should the strong scenario apply, however, long-term growth would be higher.

If the ‘weak scenario’ occurs, there are significant risks for PNG’s economy. The paper suggests that PNG would breach its limit for the debt-to-GDP ratio (60 per cent). Conversely, if the strong scenario occurs, the debt-to-GDP ratio would fall to 45 per cent by 2025.

The paper considers the middle outcome to be more likely, however, ‘given the uncertainties around the timing of the upcoming projects … with dramatic delays in LNG projects around the world.’