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Signs of the expected slowdown in economic growth from 9.8% in 2012 to 5.5% in 2013 are appearing, but the economy of Papua New Guinea (PNG) remains broadly robust and businesses upbeat. As construction on the liquefied natural gas (LNG) project tapers from its peak, activity in wholesale trade, transport, and logistics is moderating. Construction growth is also easing but is supported by a large increase in government spending on infrastructure and by private investment in property. Fiscal stimulus may add as much as 2% to real output growth in 2013, according to Bank of Papua New Guinea estimates.
|Selected Economic Indicators (%) - Papua New Guinea||2013||2014|
|ADO 2013||Update||ADO 2013||Update|
|Current Account Balance (share of GDP)||-15.1||-15.1||-8.4||-8.4|
Source: Asian Development Outlook (ADO) 2013 Update; ADB estimates.
The inflation forecast for 2013 is lowered from 6.5% to 6.0%. This revision takes into account the low final 2012 inflation outcome of 2.2%, continued weakness in global demand, falling prices for many of PNG’s export products, and low inflation in major source countries for imports such as Australia. PNG’s trade-weighted exchange rate index remained fairly stable in the first half of 2013, but the lagged pass-through of the 28% appreciation of the index during the previous 2 years continues to help hold down domestic prices.
The current account deficit is projected to narrow to 15.1% of gross domestic product (GDP) in 2013, unchanged from the Asian Development Outlook (ADO) 2013 forecast in April, mainly due to reduced imports of equipment for the LNG project. A rebound in production at existing mines and the ramping up of nickel production at the new Ramu facility are expected to boost export earnings. Further narrowing of the current account deficit, to 8.4% of GDP, is expected in 2014 as LNG exports begin and the government’s budget deficit moderates to an expected 5.9% of GDP. The smaller budget deficit is seen helping to ease import demand.
PNG's medium term outlook remains broadly positive, with growth of 6.0% expected in 2014. However, fiscal challenges are growing. Revenue collection is being dampened by falls in international prices for some of PNG's major exports. Since the start of 2013, the price of gold has fallen by 20%, copper by 12%, and oil by 6%. These prices are now below 2013 budget projections, indicating that if current prices persist, authorities will have to either cut spending or find additional sources of revenue to meet their deficit target of 7.2% of GDP.
The expenditure side of the budget also presents challenges to the government. By mid-2013, budget expenditures were just 29.5% of yearly allocations. Weak systems of public finance and project management make it difficult for government administrators to implement ambitious public sector investment plans. Exacerbating challenges to budget execution, the 2013 budget significantly increased funding to subnational government authorities, which exhibit weaker implementation capacity than do central government agencies.
LNG exports remain on track to commence in late 2014 and are expected to significantly boost growth. If commodity prices trend lower, as expected over the medium term, this would adversely affect investment into new mining and hydrocarbon facilities and dampen the growth outlook. The outcome of the recently announced taxation policy review also has potential to adversely affect future investment in mining. Policy makers will need to carefully balance the goals of maximizing public revenues from natural resources and of encouraging new investments.
Source: ADB. 2013. Asian Development Outlook 2013 Update. Manila.