Papua New Guinea: Economy

The Asian Development Outlook (ADO) 2014 Update confirms the ADO 2014 forecast in April that gross domestic product growth will rise to 6.0% in 2014 and soar to a record 21.0% in 2015, driven by exports of liquefied natural gas (LNG) through Papua New Guinea’s (PNG) new pipeline. LNG exports commenced this year, but 2015 will be the first full year of production. Growth outside of the mining and petroleum sectors is expected to continue to slow to just 1.6% in 2014. The strong growth achieved outside of resource extraction in recent years - largely spillover from LNG pipeline construction - has dissipated. Construction is forecast to contract by 6.4% in 2014, while activity in transport and logistics, wholesale and retail trade, and financial services appears likely to slide from the highs recorded over the past 3 years.

Selected economic indicators (%) - Papua New Guinea 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 6.0 6.0 21.0 21.0
Inflation 6.5 6.0 5.0 5.0
Current Account Balance (share of GDP) -7.0 -7.0 13.0 13.0

Source: ADB estimates.

The outlook for agriculture is supported by improved international prices for PNG’s main agricultural exports in the first half of 2014. Coffee prices jumped by 57% from December 2013 to June 2014. Prices for other major agricultural exports have consolidated earlier gains, with copra rising by 10% in the first half of the year and cocoa by 12%. On the downside, the production response to these higher prices has likely been constrained by the unexpected sharp appreciation of the PNG kina in July 2014, as well as by structural constraints like weak transport and logistics networks, a cocoa pod bora infestation, and aging coffee and tea plantations that require replanting.

The Treasury Department’s midyear economic and fiscal outlook highlights the intensifying fiscal pressures facing the government. Although capital expenditure was 19.0% below budget in 2013, weaker-than-expected revenue collection and spending over budget on recurrent items caused a budget deficit equal to 7.6% of the gross domestic product (GDP), well above the targeted deficit of 6.5%.

Likewise, weaker than expected revenue collections - particularly from mining and petroleum taxes - have led the government to revise their budget deficit projection for 2014 from 5.9% of GDP to 6.9%. As a result, public debt is now expected to rise to 37.1% of GDP by the end of 2014, up from 22.0% at the end of 2011. This debt exceeds the government’s debt ceiling target of 35% established in its 2013 Medium-Term Debt Strategy, which had already revised the government’s previous ceiling of 30% of GDP.

High government expenditure, combined with the kina weakening against most major currencies during the fourth quarter of 2013 and the first half of 2014, have contributed to reemerging inflation. Consumer prices rose by 2.9% in the last quarter of 2013 and are expected to increase by 6.0% by the end of 2014, less than forecast in ADO 2014.

The current account deficit continues to narrow from 13.7% of GDP in 2013 and is expected to turn into a surplus in 2015, as envisioned in ADO 2014. The commencement of LNG exports in 2014, as well as expanding production of gold and nickel at a new mine, will drive the improvement in the external balance.

Over the past decade, the strong performance of PNG’s economy outside mining and petroleum has seen formal employment grow by an average of 6% per year. This has almost doubled the size of the private sector workforce and created new opportunities for an emerging middle class. However, as construction on the PNG LNG Project ends, and as growth derives more from mining and petroleum exports, new structural reforms to enhance productivity in other sectors must be prioritized to ensure that formal employment continues to expand.

Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.