Opinion: 2014 Budget must calm markets with focus on core functions


The Treasurer is about to present the 2014 Budget to Parliament, after a challenging year for Papua New Guinea and its government. Paul Barker looks at what next year’s Budget should contain.

The Institute of National Affairs' Paul Barker

The Institute of National Affairs’ Paul Barker

The Government presented an ambitious and expansionary Budget for 2013, aimed at helping sustain economic growth in the face of the winding down of the construction phase of the major PNG LNG project.

It also aimed to set the basis for longer term economic and social development, through overdue investment in the country’s core transport infrastructure, education and health, the districts, and ostensibly reinforcing law, and taking a stand against corruption.

But the Budget implementation was delayed by lack of capacity, particularly in the Districts, after years of being run down.

Fortunately, the LNG project construction dragged longer than intended, making up in part for the delay in Budget implementation, and helping maintain jobs for a while and foreign investment influxes.

Lower commodity prices have pushed down earnings and profitability, and hence tax revenue, from the resource sector.

‘Many local investors in PNG have become perplexed and anxious, with potential investors and contractors increasingly cautious.’

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The growth rate for 2013 remains strong, perhaps at 5%, albeit driven partly by domestically-funded projects, by both private sector and increasingly this year, by government.

Impact of kina’s fall

The kina’s recent fall has given modest relief to PNG agricultural producers, already suffering from low US dollar prices for their copra, oil palm, coffee, copra, rubber, etc. The planned Sovereign Wealth Fund (SWF) is designed partly to stabilise the kina, notably when LNG earnings commence.

Until LNG production commences in later 2014, or commodity prices start picking up, with more positive global economic prospects, or another major externally-funded project commences, then there is unlikely to see much upward stimulus for the kina.

Investors puzzled

Of late, international and many local investors in PNG have become perplexed and anxious, with potential investors and contractors increasingly cautious.

Uncertainty over mineral rules and nationalising a major mining project and associated development company, already both PNG-owned, are sending stark messages out, both internationally and to domestic markets.

There is now a level of nervousness which the Government must address, which has the potential to drive away needed new investment jobs, and capital, which incidentally would also put further down pressure on the kina.

It’s not the time for the Commerce Minister to be scaring new or existing investors away with tough and counter-productive foreign ownership restrictions.

Nor should he introduce blanket domestic-processing requirements, when employment generation and value-adding should be the objective.

Nor is it time to offer gas/petroleum licenses to new investors, when these licences are already held.

‘There is now a level of nervousness which the Government must address.’

Domestic SMEs are best assisted by addressing the real impediments to business and investment, which are largely shared with larger investors (overseas and domestic).

Reassurance required

Now it’s time for Government to reassure markets.

It needs to talk to the business sector and the wider community, and develop well-considered, rather than knee-jerk, policies and plans.

The next Budget’s policies need to address the real impediments and commit public funds to genuine public needs and priorities, strengthening the way in which policies are put in practice.

Improving spending oversight and anti-corruption capacity, slashing opportunities for abuse and waste, and limiting the burgeoning Budget deficit, including over-priced contracts and white-elephant projects, are essential.

There is no reason for the State even to buy into major resource projects, when it has major outstanding obligations to meet ordinary households’ needs. Funding for community health workers and child welfare staff, for example, is totally inadequate.

‘PNG’s prospects should be sound into 2014 and beyond, and the envy of many developing countries.’

With regards the extractive industries, the government must focus on meeting its social, labour and environmental regulatory and community responsibilities more effectively.

Central Bank independence

The Central Bank’s independence on monetary policy is crucial, but government measures must complement the Bank’s interventions, ensuring  trust funds (including future SWF) are transparently managed and accountable, and that the State (including SOEs) not unduly indebted.

PNG’s prospects should be sound into 2014 and beyond, and the envy of many developing countries.

However, it currently looks far from certain, and Government must avoid repeating the mistakes made in the previous resource boom era of the 1990s, which turned to bust, including a sliding currency, and was only finally reversed with a period of reform and relative austerity.

Paul Barker is Director of Papua New Guinea’s industry think-tank, the Institute of National Affairs.

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