Politics
Grimmer Outlook As Disaster Hits Rural Sector
A monumental task for Treasurer Bart Philemon
The economic outlook for Papua New Guinea was already grim when Sir Michael Somare won power in August, with central bank governor Wilson Kamit warning that the “unsustainable” spending of the government of Sir Mekere Morauta would trigger a financial crisis.
But the scene looks much worse today— giving Treasurer Bart Philemon, a popular businessman from Lae, a monumental task to finance credibly the 2003 Budget he hands down this month.
- ADVERTISEMENT -
 |
|
|
The most recent quarterly bulletin of the Bank of PNG revealed that a disaster has already hit the country’s crucial rural sector, the main source of income for most of the population of 5.1 million.
For during the June quarter, as the country’s convulsive election was getting under way, the value of rural exports collapsed by 30 percent, despite the weighted average price of the commodities the country sells — chiefly coffee, palm oil, logs, cocoa, copra, tea and rubber — soaring by 32 percent.
Coffee, the crop that creates most of the wealth in the populous Highlands, suffered the most, its export volume falling 66 percent against the same quarter of 2001, chiefly because of bad roads and crime. But copra was not far behind with output down 61 percent, palm oil down 58 percent, cocoa 55 percent, and logs were 41 percent lower.
Kamit said: “Activity in the private sector remained flat, due to the lack of new lending, lower aggregate demand, and the general downturn in economic activity.”
This appears, in hindsight, to have helped seal the fate of the Morauta government. While government revenue in the first half of 2002 was 4.9 percent above the same period last year, expenditure was 25.1 percent higher.
The mini-budget brought down by Philemon, on August 28, soon after the new government took office, will have to be just the start of a succession of harsh budgets as the country tries to adjust to its shrinking earnings. He sought to cut government spending to reduce the deficit to 3.4 percent of gross domestic product, from what he claimed would otherwise have been an unsustainable 7.7 percent.
The resources sector is also on the decline, with Lihir likely to be the only mine still operating in 10 years. Oil output is also falling, and ever more is riding on the prospect of the Exxon-led gas consortium picking up sufficient customers in Queensland to trigger the construction of the $US3.5 billion pipeline from Papua New Guinea’s troubled Southern Highlands to Brisbane in Australia.
In the mini budget the government forecast 1.1 percent growth in 2003 following three consecutive years of negative growth. But it is difficult to see where the growth is to come from.
A Supreme Court judgment on September 27 appeared to make Philemon’s task utterly impossible, by ruling that its 10 percent Value Added Tax (VAT), introduced in mid 1999, was unconstitutional. It provides a quarter of government’s revenues.
The legal action was launched by the governor of the Morobe province and a former acting judge, Luther Wenge, who hailed his victory as “a win for the grassroots’’ and declared, in celebration, a public holiday.
Inconsistencies were identified in the way the VAT Act extinguished the former rights of provincial governments to levy sales and service taxes. But Somare’s government appealed and won a stay for the tax until July 2003.
The verdict only offers marginal relief, however. Treasury Secretary Koiari Tarata said that even with VAT still in place, the government faced a $US110 million financing gap for 2003, due substantially to the extent of debt repayments.
During his visit to Washington for the annual meetings of the World Bank and International Monetary Fund, Philemon asked the two institutions to return to Port Moresby to consider another rescue package, just two years after the country’s last $US260-million structural adjustment programme (SAP). He has also asked Australia to convert some of its $US180 million a year aid to direct budget support, the format all the aid used to take.
But a leading development economist warned that as a result of such responses to crises, Papua New Guinea was suffering from long-term “moral hazard” — a failure to tackle problems because it was confident international friends would always bail it out.
Dr Satish Chand, of the National Centre for Development Studies in Canberra, said records showed the country suffered an economic crisis every three years, usually in September.
He said: “In the past, leaders’ rhetoric about reform has convinced donors, and they have signed every piece of paper presented to them, accepting all conditions on new loans. Then, the conditions have been breached, one after the other. This process is counterproductive to both sides. A new path has to be found.”
The alternative, he said, was unthinkable to Australia and to major international institutions. This would be to allow Papua New Guinea to fragment into another Solomon Islands-type “failed state”, in which other provinces would follow the Southern Highlands to degenerate beyond central control, into ground contested by war lords.
Short-term issues will probably be addressed by rescheduling debts — with more than a quarter of the Budget going to repay loans — while a new SAP would be considered for the medium to longer term, to help stabilise the ratio of debt to gross domestic product at the present 70 percent.
Transparency International’s PNG chairman, Sir Anthony Siaguru, argued that senior officials and heads of government businesses should be interviewed and appointed on merit, and rewarded and promoted on performance. But the new government pressed on with wholesale change at senior levels of the administration.
They included Thaddeus Kambanei, appointed Finance Secretary; former Tax Commissioner Sir Nagora Bogan slated for Foreign Affairs Secretary; former Chevron executive and Unitech vice chancellor Moseley Moramoro, chairman of the Independent Public Business Corp (which holds the shares of government agencies intended for privatisation, a process now put on hold); and former finance minister Masket Iangalio, acting managing director of Independent Public Business Corp.
