How to deal with resource sector volatility in Papua New Guinea


The World Bank has released a new report which provides a bullish assessment on economic growth in Papua New Guinea. But it says the country’s dependence on natural resources is not generating sufficient jobs to absorb its growing population and suggests a change in direction. David James explores.

The Panguna mine

‘Economic growth is expected to increase to about five per cent in 2019, with a return to full production in the resource sector,’ the World Bank says in its report 2019-2013 Country Partnership Framework.

‘Non-resource sector activity is expected to continue expanding, with better investor confidence supported by improved access to foreign exchange.

‘Over the longer term, GDP growth is expected to edge toward its potential rate, which is estimated at 3–4 per cent per year.’

The World Bank says that in the medium-term the economic outlook is relatively positive, underpinned by several ‘likely large-scale resource projects, with plans to double LNG production and develop new gold, copper, and silver reserves’.

But it says the challenge is to create policy, regulatory settings, and capacity to maximize returns from resource projects for the wider benefit of the population.

Fiscal policy

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PNG’s debt-to-GDP ratio is mandated at 32.6 per cent, set under the Fiscal Responsibility Act.

This becomes the headline number when considering the government’s financial and debt position (fiscal policy).

‘There is a need to improve tax compliance to strengthen the revenue base and ensure that monetary policy and exchange rate policies are “effective and supportive of growth”.’

But the World Bank suggests that this ratio can be misleading and that it should not be the ‘prevailing fiscal anchor’.

Instead, other financial ratios should be used to develop a strategy to deal with volatility in the resources sector.

‘(The) debt-to-GDP ratio ceiling has not adequately delinked government spending from revenue volatility in the resource sector.

‘This volatility has undermined the government’s ability to provide—and maintain—good quality services with relatively larger negative impacts on the poor and vulnerable.’

Instead of just looking at the debt-to-GDP ratio, the report proposes that fiscal policy (the balance of government expenditure and revenue) be linked to a ‘non-resource primary balance rule’.

By doing this, the World Bank believes it would discourage pro-cyclical spending (whereby the government spends too much when the commodity cycles are strong, only to be caught out when prices fall).

It would also provide a measure to the government on how to diversify the economy, which Prime Minister Peter O’Neill has stated is the key to the government’s strategy.

In effect, it would be a way of seeing PNG as two economies: the extractive sector and the non-resources economy.

Central bank

This World Bank position echoes what the Bank of Papua New Guinea said in its March 2019 Monetary Policy Statement, which noted that tax exemptions and foreign currency provisions for large scale resource projects, combined with resource sector volatility, ‘rendered the Central Bank ineffective’.

According to the statement, it caused the country to ‘miss out on foreign exchange inflows, tax receipts, and other matters of national interest.’

The World Bank report agrees that there is a need to improve tax compliance to strengthen the revenue base and ensure that monetary policy and exchange rate policies are ‘effective and supportive of growth’.

Developing a sovereign wealth fund (SWF) would also ‘act to absorb volatile resource flows and provide a predictable stream of financing to the annual budget.’

Capital markets

Another reason why the country is vulnerable to resource industry volatility, according to the World Bank, is the ‘underdeveloped’ state of the capital markets.

The report says there is a small stock exchange dominated by government debt securities.

‘This lack of depth in the debt-capital market hinders the creation of long-term local currency finance for priority sectors.’

The World Bank points to the absence of a corporate bond market as ‘a particular challenge’ and says its sister organisation, the International Finance Corporation (IFC), ‘will work to deepen capital markets by assisting PNG regulators.

‘The IFC will aim to jump-start the market by developing (and possibly investing in) the first private sector bond.

‘The IFC is exploring the issuance of an IFC Kina Bond for longer-term local currency.’

The report says it has been asked to provide support to the Autonomous Bougainville Government in ‘strengthening its capacity to manage a re-engagement in the mining sector.’

Bougainville is the location of the huge but dormant Panguna copper mine.

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