World Report

The government of PNG is aiming to build on the foundations of stability and growth achieved last year and is confident of success

A strong performance by PNG’s leading export producing sectors, agriculture and mining, lifted the economy in 2003

iscal discipline and an aggressive export-driven strategy led to economic recovery in 2003, with improved performance in the agriculture and mining sectors assisted by favourable commodity prices on world markets. This impressive turnaround is forecast to continue in 2004, with growth predicted at 2.8 percent.

Minister for Finance and the Treasury Bart Philemon says the economy and national finances are in far better shape than they were a year ago. The government has fully accepted responsibility for the independent management of the nation’s financial and economic affairs and positive results have started to flow.

“Increased independence and responsibility in approach is clearly working, and we intend to stay the course, not just for 2004 but for the full five-year term of the government,” says the Minister.
The government is taking a medium-term approach aimed at achieving higher sustained growth over time. “We are not simply operating in a short-term vacuum. We have developed a clear vision of where we wish to see Papua New Guinea go over the next five to ten years.”

Mr Philemon adds, “We have turned the corner. All of our social and economic policies are being geared to attainment of at least 5 percent growth over the medium term.”
Prime Minister Sir Michael Somare says, PNG has proved its resilience over the last 15 months and the government is confident that with the continued strict fiscal discipline and spending in growth areas the economy will continue to grow.”

Indeed, he explains, “Five percent could turn out to be a conservative estimate. Indications are that we would be heading towards much higher growth.”
Consolidating and building on what has been achieved so far is the objective of the budget for 2004, introduced in December. The Prime Minister describes it as “a budget of real growth and progress”.
When the present administration took over in 2002, the government’s fiscal position was in a state of crisis. Following three years of negative growth, the new administration inherited a huge debt, rapidly declining foreign reserves and rampant inflation, with the national currency, the kina, falling rapidly in value against all major currencies.

The administration took firm action to re-establish fiscal discipline and restore all sectors of the economy to growth. “Immediately after we took office the projected K800 million (£135 million) deficit in the 2002 budget was reduced by half to a manageable level of K400 million (£67.5 million),” Sir Michael recalls.

Steps were taken to promote private sector activity, particularly in the productive and export-oriented sectors.
“The private sector responded favourably to the initiatives we introduced in the 2003 budget and by the first quarter of last year there was a general rise in business confidence in response to the way in which the government was addressing the issues of macroeconomic stability and growth.”

Last year saw a significant turnaround in the current account, which moved from a deficit in 2002 to a surplus of almost 10 percent of GDP. Gross international reserves rose to nearly £270 million, almost the strongest since the country gained its independence.

Improved inflows of foreign exchange allowed the kina exchange rate to continue its appreciation against the US dollar in the first half of 2003 and to remain stable in the second half of the year. The stability of the kina helped fuel investor confidence. Inflation began to recede sharply in the second half of the year and there is confidence that the trend will continue.

Wilson Kamit, Governor of Bank of Papua New Guinea, the independent central bank, describes the country’s performance in 2003 as “encouraging”. He attributes the improvement in economic activity to the fiscal discipline introduced by the government and improved performance in both the agricultural and mining export sectors.
Mr Kamit stresses the importance of the government continuing its present policies. “The Bank is encouraging the government to continue to prioritise expenditure in order to correct the imbalance between fiscal expenditure and revenue, and refinance its domestic debt with external financing to free up domestic resources for greater private sector participation.”

A continuation of prudent management of the budget by the government will sustain stability and investor confidence, says Mr Kamit. “It will send a strong signal of the government’s determination to consolidate the gains made recently, and lay a foundation for sustainable economic growth.”

Bart Philemon acknowledges that the government’s fiscal position remains fragile. “Improving the structure of our debt portfolio and financing profile are amongst the most important of our medium term challenges,” he says.
Mr Philemon says the budget proved a “tougher challenge” than the previous year’s because more foreign debt repayments are becoming due. The budget made provisions for an offshore loan of £27 million to close the financing gap.

Gross domestic product is predicted to increase by 2.8 percent this year

According to Sir Michael Somare the government wants to reduce PNG’s reliance on development partners and make the country more independent.
PNG receives about £125 million in foreign aid from Australia, the majority of which supports project work being done by Australian companies. Other major donors include the World Bank, the International Monetary Fund and the Asian Development Bank (ADB).