Business
Businesses Struggle As Interest Rates Soar
PNG's heading the same way as the Solomons
As some interest rates reach 33 percent, Papua New Guinea's business community, having given the Michael Somare government eight months grace, is beginning to raise a despairing voice about the country's future.
Prominent Highlands businessman, Ken Fairweather, a naturalised citizen formerly from Australia, paid for full-page advertisements in Papua New Guinea's daily newspapers in early May claiming: "The central bank's policies are destroying the economy."
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Fairweather, a haulier and planter with strong interests in the Western Highlands and Madang provinces, is chairman of Papua New Guinea's copra marketing board and vice president of the Peoples' Action Party, a member of the government coalition. He wrote: "We have spent 10 years in an economy dominated by 20 percent interest rates, but for what purpose? The central bank claims it is increasing lending rates to reduce inflation and stabilise the kina. Its record in regard to both these factors is appalling."
Michael Mayberry, president of the Papua New Guinea chamber of commerce and industry, agrees. He says: "Businesses are really struggling. Tragically, we're heading the same way as the Solomon Islands."
Mayberry says academic experts believe that high rates‹now up to 33 percent for leasing‹attract funds from overseas and encourage domestic cash to stay put. But while this may be the case in other countries, he doesn't believe "there is any correlation here" where for more than three years there has been negative growth without an end in sight.
But the rates are only a symptom of the problem, he says. A lot of political announcements are made, "but they are not being implemented", including claims about delivering services. Last coffee season, K200 million of the harvest failed to reach markets because of the deterioration of the roads.
Mayberry, a leading accountant, says: "We must ask whether PNG really wants foreign investment. It says it wants the investment, but it doesn't seem to want the investors." American investors are particularly discouraged by the instability of many arrangements with landowners and find greater certainty even in fast-changing Indonesia, he says.
"There is no evidence, despite lots of comments from the government, that it is kick-starting the economy. Governments have talked, for instance, about downstream processing, but they haven't followed up."
One example is a Swiss-American teak factory with 300 workers in East New Britain, that closed because it felt governments made promises they failed to deliver.
"Mining companies like Placer appear to be leaving too," he adds. "When you see a house on fire, you don't just let it burn. The government is asking what incentives it needs to give to get companies to stay or to come. The answer is none at all. It needs to make sure government processes work, and at a reasonable pace."
He cites work permits, which businesses have constantly told the government is an issue discouraging investment, with approvals taking up to eight months and even major investors being offered a maximum permit of three years. He says that instead, the government has boasted of cutting the number of expatriates employed in the country.
"If we want to grow, we may need more, not less expatriates," Mayberry says.
As a result, some head offices are considering moving to Queensland.
"Many investors would like to sell, but they have no one to sell to," he says. "Papua New Guineans are investing in Australia instead."
The Bali bombing was an opportunity for the country to promote its under-rated tourism potential, he says. But nothing was done.
Some economic sectors are being restricted to Papua New Guineans, he says.
But it is difficult to borrow money without tradeable securities, and even if they could borrow it, the rates make repayment questionable.
He says if Papua New Guinea encounters economic difficulties, its first response is to ask where it can obtain more aid. "That's just a band aid answer."
Within a decade, most of the country's mines will have ceased production and it will have to generate more income from elsewhere or cut government spending drastically.
The population has doubled since independence in 1975, he said, greatly increasing the burden.
Satish Chand, an economist with the National Centre for Development Studies at the Australian National University, says: "I don't buy the central banks inflation story. Much is urban and driven by the fall of the kina, producing imported inflation. Cranking up interest rates won't do much to dampen domestic demand."
The situation is now as bad as when Sir Mekere Morauta took over the prime ministership from Bill Skate in - or worse, because the resources sector had declined since then, he says.
Governments, including Morauta's in its final year, have over-spent and over-borrowed, he said. And the central bank has printed money to fund this, in an apparent breach of legislation affirming its independence, and then raised rates to dry up the resulting excess liquidity.
