Good News For Somare: PNG's Back In The Black

Papua New Guinea is heading back into the black. Its government says the economy grew by two percent in 2003 after three years of contraction, and will this year start breaking into a modest trot, and then grow by a respectable five percent in the medium term.

This is good news not only for the Pacific region's biggest economy, but also for those neighbours‹especially the Solomon Islands‹which stand to benefit from a stable, prosperous Papua New Guinea.

There is still a long way to go, however, even to make amends for the ground lost over the last 15 years or so, for the declines in living standards. And the present revival depends heavily on continued good harvests and strong prices for those cash crops that can survive the decaying roads and highway robbers, in order to reach the markets.

Bart Philemon, the Minister for Finance and Treasury, introduced a two percent temporary import tax as it aims to cut its budget deficit to 1.5 percent of gross domestic product in 2004. The mining and petroleum industries, and charitable sectors, will be exempt from paying import levy. Tax concessions will be granted for new agricultural projects and the controversial forestry sector will have its tax rate cut by five percent. And reflecting the strong view of PNG's beleaguered business community, Philemon said: "There is now immediate scope for gradual but significant downward movement in interest rates. We urge our central bank to be forward and not backward looking with its monetary policies."

Leadership threat: The group that¹s threatening Sir Michael Somare¹s reign as prime minister. It is led by Milne Bay Governor, Tim Neville (middle sitting).

Next year, he said, the government would establish a Treasury Corporation that would manage the Treasury's debt programmes "in more independent and aggressive ways". The extensive sale of treasury bills has been widely blamed for Papua New Guinea's high interest rates.

Philemon launched a strong attack on "regional development banks seeking to micro-manage significant aspects of PNG's sovereign administration and policies".

He added: "PNG will desist from further humiliation and move to cancel the remaining portions of such loans."

He appeared to be referring to the Asian Development Bank (ADB) concerns about governance of the fisheries sector that had so far prevented the ADB from disbursing a A$50 million loan, and conditions on logging imposed by the World Bank.

At the same time, he said PNG would rely on donors for a "relatively low" 13 percent of total budget payments, while seeking to reduce public debt to "manageable levels" of about 60 percent of GDP by 2007.

The minister gave the country's 109 MPs A$40,000 each as "electoral support funds" which he admitted comprised a "sweetener" to persuade them to extend the protection of prime ministers from no confidence votes, from 18 months to three years.

Philemon said the A$4.4 million payment was "the choice between giving a little bit and not getting anywhere".

The sweetener failed, however. So Prime Minister Sir Michael Somare will almost certainly face a challenge, perhaps as soon as February.

He said outlays on oil and mining exploration had started to grow again in 2003, and above all the country had benefitted from good weather and strong prices for its commodities, coffee gaining from Brazil's frost, cocoa from Ivory Coast's civil unrest, copra from lower production in the Philippines and Indonesia, and palm oil from declining output in Malaysia and Indonesia. As a result, a current account deficit in 2002 had been transformed to a surplus of 10 percent projected for 2003.

Philemon said about PNG's frustrated efforts at commercialising its gas reserves: "If the Australian pipeline cannot come to fruition, then we will aggressively seek out other markets, particularly in Asia." But he did not specify how PNG's gas might be shipped there.

The Treasurer received guarded support from the country's beleaguered business community for his budget.

PNG Chamber of Commerce and Industry president Michael Mayberry said the private sector retained its overall confidence in Philemon.

But it would rather have seen greater emphasis on wealth creation in the budget, he said. The two percent import tax, for instance, will add to the cost of inputs such as fertiliser and fuel for export industries whereas an increase in the 10 percent goods and services tax (formerly value added tax) would have been recoverable by exporters. A constraint on such a move, Mayberry said, was that GST revenues were split with PNG's provincial governments, while the new import tax was wholly collected by the national government.

"The real problem is that the government is short of money, and services including education, health and roads still need more resources," he said. Local government councils‹often starved of funds‹are empowered by the budget to raise up to A$20 (Kina 50) tax per person, and A$40 (K100) for businesses in their areas.

Mayberry said the private sector was concerned about Philemon's political survival, "because other politicians are not very happy about his very tight rein on expenditure. They say that Australia will have to come to PNG's aid. But that's the problem of the drug addict expecting his craving to be satisfied by others."

Opposition Leader Sir Mekere Morauta described it as a lazy budget, because it takes an easy way out to balance the numbers by increasing revenue and spreading it across the board like butter on hot toast. The butter will melt quickly, leaving little trace.

The government's approach to reform leaves the public sector as it is, oversized and under-resourced.

"We continue to fund an army of public servants, without working capital." The director of PNG's Institute of National Affairs, Mike Manning, lamented the lack of backing in the budget for the agriculture sector which, he said, would respond as mining had to more supportive government measures. He said the reductions in duty for alcohol, tobacco and poker machines suggested "a sin-led recovery rather than an export-led one." He said the economy is in much better shape than it was last year.

Unfortunately, the growth news is more good luck than good management, and many of the deep-seated problems remain. GDP has grown because of increases in oil, gold and copper prices rather than any fundamental increase in production of sustainable crops.

"The PNG government still has to turn this into something that will continue into the future. The budget is constrained by the debt trap locked in from previous governments. Debt is estimated to be about 70 percent of the total estimated 2003 GDP and more than 25 percent of the budget is taken up with servicing it."