External and internal factors have coalesced to produce headwinds for Papua New Guinea’s economy and prompt a sharp reduction in the 2015 growth forecast.
|Selected economic indicators (%)||2015||2016|
|ADO 2015||Update||ADO 2015||Update|
|Current Account Balance (share of GDP)||13.5||4.4||15.0||4.2|
Low prices for commodity exports and unfavorable weather have dimmed the outlook for agricultural output and exports. Expenditure cuts necessitated by a growing fiscal deficit, and the temporary closure of the Ok Tedi mine, further weigh on growth prospects.
The deficit is largely the result of disappointing revenues, particularly from mining and petroleum taxes, and consequently the government is facing short-term cash flow constraints. It has little recourse to domestic financing as PNG-based purchasers of Treasury bills have already invested heavily in short-term government debt. New sources of finance—for example, asset sales or sovereign bond issuance—are being considered but will take time to materialize and could be expensive.
These headwinds are seen to slow growth in 2015 and 2016. Slower growth is the main reason the 2015 inflation forecast is revised down. However, the inflation forecast for 2016 is raised as energy and other commodity prices are seen to rise modestly next year.
Driven by Liquefied Natural Gas exports, the surplus in the current account is forecast to reach about $800 million in 2015 and 2016. Foreign exchange reserves will likely be maintained at $2 billion, equivalent to about 4 months of imports of goods and services.
These forecasts hinge on the government curbing expenditure and adopting more prudent monetary policies. In its midyear outlook, the government highlighted the fiscal pressures it faces this year. Without immediate cuts to expenditures, the budget deficit is projected to widen to the equivalent of 9.4% of Gross Domestic Product (GDP), or more than double the 2015 deficit target of 4.4%.
The government is likely to reduce operating expenditure and defer capital expenditures by the equivalent of 2.5% of GDP. Public expenditure reform currently underway offers the most effective option for addressing the near-term cash flow constraints. However, reform should be accompanied by a clear and credible set of measures to guide fiscal policy back to balance over the medium term.
Proposed new investments, particularly in the mineral sector in 2017 and 2018, could boost growth in the medium term. The priority should still be to improve productivity in agriculture and service sectors because of their importance to employment and poverty reduction. This will require sustained investment in infrastructure that supports productive sectors, increased capacity in the public sector and more efficient budget execution, improved labor market institutions and labor skills, and expanded business opportunities.
Greater dynamism in the non-mineral sectors would strengthen the Papua New Guinea economy’s resilience to commodity price fluctuations and help address concerns about rising inequality fueled by strong growth in resource extraction.
Excerpted from the Asian Development Outlook 2015 Update.