Papua New Guinea
Briefing Notes for the Launch in Port Moresby, 6 May 2010
Transmission of impact of the crisis to Pacific islands
- The crisis was transmitted to the region through various channels, i.e., declining demand for exports; falls in tourism income; falls in remittance earnings; changes in oil prices; loss of value in off-shore trust funds.
- Pacific island countries slowed but maintained a positive growth at 1.9% in 2009, due largely to continued, albeit more modest, economic expansion in Papua New Guinea (growth rate of 4.5%).
- Relatively modest impact of crisis on Australia and New Zealand, Pacific islands’ major trading partners, have cushioned the impact of crisis.
Impact of crisis
- Economy decelerated from 6.7% in 2008 to 4.5% in 2009.
- Damage on PNG economy is milder than on other Pacific island countries due to healthy foreign exchange reserves and domestic bank liquidity resulting from the commodity boom years.
- Moderate economic growth in 2009 (4.5%) was supported by
- Government spending on infrastructure
- Lending to the private sector, which rose by 41% in 2008 and 21.3% in 2009.
- Gold price which has remained at a record high in reaction to economic uncertainty.
- The resulting increase in budget deficit was partly financed by trust funds the Government had accumulated during the commodity boom.
- The recent commodity boom increased formal employment: 8.4% growth from March 2007 to March 2008 and 3.8% to June 2009.
- The inflation rate surged to 10.6% in 2008;
- an increase of 16.6% for food prices;
- non-food prices rose by 7.5%.
- Additional factors of inflationary pressures were
- fast growth in the money supply and credit,
- strong private-sector growth and Government expenditures
- Inflation slowed to 6.9% in 2009.
- Inflationary pressure remain in medium term due to;
- risks of inflation imported from the country’s main trading partners
- depreciation of the kina against major trading partners’ currencies (for example, the Australian dollar).
- Regarding commodity exports, PNG has benefited from high prices during 2008. Declines in primary commodity prices towards the end of 2008 slashed export revenues, albeit with variations. For instance, prices for gold, Arabica coffee and cocoa sustained, offsetting declines in revenue from other primary exports such as petroleum and copper.
- Australia is the main source of visitors for Papua New Guinea although the extent of the contribution of tourism to the economy is still limited. Recovery of visitors from Australia in the latter half of 2009 has a positive prospect for PNG as well.
- Restructuring of the Pacific airline industry and increased connections to major tourist source countries, accompanied by competitive airfares, have encouraged tourism in Samoa and Vanuatu in recent years. Papua New Guinea also followed suit by partly opening up its international airline services.
- Australia and New Zealand are the major destinations of export products for PNG. Around 45% of Papua New Guinean was destined for Australia in 2007 even though their shares in its imports were negligible.
- Strong growth is expected with rising commodity prices and growth in domestic demand.
- Inflation is forecast to rise in 2010 in view of medium-term risks of inflation imported from the country’s main trading partners and depreciation of the kina against major trading partners’ currencies (for example, the Australian dollar).