Economic Overview of Papua New Guinea

Papua New Guinea is a Pacific island country that is richly endowed with natural resources, particularly minerals, forests and fisheries. But rugged terrain and inadequate infrastructure have hampered the exploitation and development of these resources. About 75 percent of the population engages in agriculture, mostly at a traditional subsistence level, although commercial export-oriented agriculture is gaining in importance. Conversely, the mineral sector – including oil, copper and gold – is by far Papua New Guinea’s largest source of export earnings (about 70 percent) and the biggest contributor to gross national product. In recent years, Papua New Guinea has made good progress in achieving macroeconomic stability underpinned by fiscal consolidation, a supportive monetary policy, and favorable export commodity prices. Also, in recent years, the government has opened up markets in telecommunications and air transport – making both more affordable to the citizens. However, the country remains poor and vulnerable to world commodity price fluctuations. An unattractive investment environment, including weak infrastructure and governance, constrains more rapid and sustained growth of the non-mineral sector. Also, as of 2010, Papau New Guinea had the second highest HIV/AIDS infection rate in all of East Asia and the Pacific, an epidemic which could impact the economy.

In contrast to many other Pacific island countries (PICs), Papua New Guinea’s economic growth held up relatively well during the global economic crisis with its real GDP slowing modestly in 2009. A number of factors contributed to this favorable outcome. Continued foreign demand for PNG’s commodities led to the country’s financial sector being insulated from the turmoil in global capital markets. Domestic credit continued to grow, though at a slower pace. External demand also remained strong as stimulus measures in other Asian countries supported demand for its main export commodities. The country relies less on remittances and tourism income than other PICs which were significantly impacted by the global crisis; and booming commodity prices and prudent fiscal policy in previous years left the government in a position to fund significant fiscal expansion that helped support domestic demand. However, spending from accumulated mineral revenue for the fiscal stimulus in 2009 was larger than warranted, shifting the fiscal balance from years of surpluses into a large deficit. The International Monetary Fund issued a 2010 report on Papua New Guinea, reinforcing that the global financial crisis had only a mild impact on PNG. However, the organization warned that the country’s crisis management framework, including the lack of an effective mechanism for providing central bank liquidity, could pose significant challenges in the event of a systemic event. Also, improving access to financial services remains a significant developmental challenge with about 85 percent of the adult population excluded from the formal sector, mainly those in rural communities. In August 2011, Standard & Poor’s Rating Services affirmed Papua New Guinea’s foreign currency long-term rating at B+ and said its long-term rating outlook was “stable.” However, S&P cited concerns such as the country’s heavy dependence on its mineral sector, its fragmented political structure, and lack of transparency. However, by January 2012, S&P had revised its long-term sovereign credit rating on Papua New Guinea to “negative” from “stable.” The agency noted that the political scene had weakened after the defense force chief was detained by elements of PNG’s military seeking the reinstatement of Sir Michael Somare as prime minister.

While Papua New Guinea remains a low-income country, its resource wealth gives it an opportunity to raise living standards for all. To achieve its development targets, the government is focusing on public services, including education, health, law and order, and infrastructure. Reforms are under way to raise the efficiency of public enterprises and increase competition in the private sector. In 2011 and 2012, the National Parliament passed legislation that created an offshore Sovereign Wealth Fund (SWF) to manage government surpluses from mineral, oil, and natural gas projects. In recent years, the government has opened up markets in telecommunications and air transport, making both more affordable to the people. In August 2012, Peter O’Neill took over as prime minister of Papua New Guinea, pledging to make the government more transparent and “stamp out corruption wherever it occurs.” Indeed, in 2012, Transparency International ranked Papua New Guinea as the 150th most corrupt country in the world, out of 176 surveyed.

In November 2012, Standard & Poor’s noted Papua New Guinea’s weak policy environment and shortcomings in governance. The ratings agency also said that the country’s infrastructure shortcomings and security risks impede investment needed to diversify the economy, which remained highly concentrated in the resources sector. In January 2013, Prime Minister O’Neill banned ministers and other government officials from traveling overseas for work in an effort to cut costs and ensure officials stay focused on their work. He said that investigations revealed that travel funds had been abused for trips that were not necessarily beneficial to the country.

After a decade of strong growth, Papua New Guinea in 2013 faced a sharp slowdown in the nonmineral sector as construction wound down on a large, $20 billion liquefied natural gas (LNG) project. Growth in construction fell in half to 12 percent from 24 percent in 2012. This slowed growth in wholesale and retail trade to 5 percent in 2013 compared to 20 percent in 2012. But by June 2014, the Papua New Guinea kina had spiked 18 percent on after traders said the country had introduced new trading band restrictions following a steep and prolonged fall in the currency.

While growth was forecast at 6 percent in 2014, the Asian Development Bank was predicting a record 21 percent growth in 2015 thanks mainly to the commencement of gas exports in late 2014.

In March 2015, heavy rain caused flooding and landslides in Papua New Guinea as farmers saw their food gardens swept away. But by early September, a severe drought had engulfed the country, affecting nearly a million people in the highlands and leaving many facing severe food shortages until rains return at the end of the year. The Papua New Guinea government’s National Disaster Centre estimated that providing food to families that need it would cost $12 million through the end of the year, as the country endured what some are calling the strongest El Nino climate phenomenon in memory, according to the International Organization for Migration.

In April 2015, Papua New Guinea’s National Petroleum Company (NPCP) said it was looking to raise billions of dollars to help fund new oil and gas projects, as the country struggled with a sharp slump in forecast revenue from a drop in prices for the commodities.

Following strong growth in 2015 (the Asian Development Bank estimated it at 9.9 percent), the first full year of gas production, Papua New Guinea’s economy was forecast to grow by only 4.3 percent in 2016 and 2.4 percent in 2017. Increasing reliance on resource extraction was raising the volatility of the economy. The IMF’s projections were even lower with estimates that the economy would grow by only 3.1 percent in 2016 and fall further to 1.4 percent in 2018.

In April 2016, Standard & Poor’s affirmed Papua New Guinea’s ratings at ‘B+/B’ with a negative outlook. The ratings agency noted that low global energy prices were weighing on the Papua New Guinea economy, export receipts, and government revenues. Looking ahead, the outlook remained negative, reflecting the possibility that the Papua New Guinea government was not able to constrain its debt levels.

Leave a Reply

Your email address will not be published. Required fields are marked *