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SHORT FORM COUNTRY REPORT PNG

AN EXPORT DESTINATION

UPDATE : As at 11 November 2013.

 

BACKGROUND

The PNG economy has achieved strong economic growth as a result of high commodity prices, mineral investment flows, sound macroeconomic policies and a strong degree of financial stability. Growth and employment has been boosted by the construction of the large – scale liquefied natural gas (LNG) project in the past. The LNG project is now moving from the construction production phase but at the same time a sharp downturn is being experienced in the non mineral sector which highlights the need for structural reforms and financial deepening so as to support more inclusive growth.

THE ECONOMY

There is an expectation that the current account deficit will narrow sharply in 2013 due to a decline in imports and income inflows, resulting from the wind down of LNG Project construction. There is also now a decline in capital inflows associated with the LNG Project, and this with declining commodity prices has meant the Kina has been depreciating since mid 2012.

Inflation: this is expected to increase to about 4 per cent in 2013 from 2 per cent in 2012 due to a pass through effect from Kina depreciation and increased government spending.

Interest rates: The Central bank has maintained rates without any change since early 2013 as a result of the weakening non mineral sector demand and has issued Central Bank Bills and raised cash reserve requirements so as to absorb excess liquidity in the banking system.

LOOKING FORWARD

The country faces a daunting development challenge as the power and transport infrastructure and basic education and health services remain undersupplied.

There is a need for accelerated structural reforms to diversify the economy and a need to deliver quicker development results to counter the slowdown in the non mineral sector.

In 2013 the Government increased expenditure to target development enablers, law and order, health, education and infrastructure. It is envisaged the 2013 budget will have a fiscal development of 7.3 percent of GDP with intentions to devolve spending to provincial, district and local government. Delays however have been experienced in project implementation due to capacity constraints and overall spending has been mixed.

Risks : economic growth in 2013-15 should be broadly balanced but tilted to downside over the longer term A further dampening in external demand and commodity prices could be further impacted negatively by a weak global economy. Also LNG prices could be reduced due to global development of shale gas with subsequent pressure on government revenue, export earnings and a low Kina. There is also the possibility that lower LNG and mineral prices accompanied by uncertainty surrounding the ending of easy global monetary conditions that may also reduce inflows of foreign direct investment

Source: Selected date from the IMF and PNG authorities

 

John Brooks

Trade Economist

The Auspacific Institute

20/11/2013