Papua New Guinea’s Prime Minister James Marape straight after his election to office, described the PNG economy as ‘bleeding and struggling’.  What can the Prime Minister and his team do to support a sustained recovery? The Australian National University’s Stephen Howes offers his suggestions.

Detail of Papua New Guinea’s National Parliament building. Image: David Kirkland

The incipient recovery underway in PNG in 2018 faltered and economic growth has once again slowed. I don’t think this conclusion is a surprise to many, including not to James Marape, who, straight after his election described the PNG economy as ‘bleeding and struggling’.

Indeed, the economy has been struggling for some time now. Formal sector employment has fallen every year since 2013, by 2018 by a cumulative 10 per cent. That’s very worrying news in a country with rapid population growth. Based on our 2019 PNG Survey and my 2019 PNG Update presentation, I offer five suggestions.

1. Fix governance

ANU’s Stephen Howes.

First, and indeed the reform being emphasised by the Marape administration, is to fix governance. No one can argue against the proposition that PNG, its people and economy would benefit from less corruption and stronger law and order.

2. Devalue the exchange rate

The kina was allowed to float up during the boom but has not been allowed to adjust afterwards. Whatever nominal depreciation there has been in recent years has just sufficed to compensate for PNG’s higher inflation. In real terms, the exchange rate is still at boom levels.

The contrast with Australia, as shown in the graph below, is instructive. In Australia too, the real exchange rate floated up during its boom, but there has been significant real depreciation since. Not so in PNG. Until there is, export and import sectors will struggle to be competitive, and forex rationing will remain a fact of business life.

The real effective exchange rate in Australia (blue) and PNG (red). Credit: Source World Development Indicators/Devpolicy

3. Revamping of fiscal policy

PNG has tried to bring down its borrowing. The graph below, however, shows the underlying fiscal reality that (adjusting for inflation) revenue has been flat since 2013 while salaries and interest payments have continued to grow. In this context, significant expenditure arrears have emerged.

To add to its fiscal woes, there are growing worries about the debt being carried by state-owned enterprises and guarantees provided by government in relation to them are starting to be called. The government missed its fiscal deficit target last year and doesn’t seem to be planning to hit it this year.

4. Encourage investment to promote employment

Now is not the time to restrict foreign investment. Rather, the focus should be on making the financial sector more competitive to drive down interest rates, and to improve infrastructure and governance to encourage all investors, national and foreign.

Salaries, interest and revenue in PNG. Credit: PNG Budget Database/Devpolicy

5. Prepare for the next resources boom

A lot can be learnt from the last one. A Sovereign Wealth Fund was legislated for during the last boom but has not yet been operationalised. It needs to be in place before the next boom starts.

Exchange rate policy during boom times also needs to be revisited. Given how difficult it has been to implement a real depreciation after the last boom, greater care should be taken to avoid a real appreciation during the next one. Or else the economy will be left even less competitive.

‘The new Prime Minister and Treasurer have a critical role to play, by explaining the difficulties the economy is in, and then outlining the difficult decisions that will need to follow.’

None of the reforms proposed will be easy. And in any case reform is not just a technical matter of coming up with the right policies. To succeed, economic reforms need strong political support, and a compelling narrative. This is where the new Prime Minister and Treasurer have a critical role to play, by explaining the difficulties the economy is in, and then outlining the difficult decisions that will need to follow.

The government should also look for external support. If Marape really believes that the economy is ‘bleeding and struggling’ then he should consider requesting the International Monetary Fund to provide the financing and the technical expertise PNG needs to support a successful economic recovery program.

This is an edited version of the story ‘PNG: some reform suggestions‘ first published in Devpolicy.