Papua New Guinea
Date: 10 May 2012
The event will be held in Port Moresby , Papua New Guinea , with the participation of distinguished participants from academia, government, civil society, international organizations, and the press. The list of well known participants making opening remarks, presentations and commenting on the publication includes:
Mr. Benny Popoitai
Bank of Papua New Guinea
Country briefing note <download pdf file>
Strong economic growth continues
- The GDP growth performance of most Pacific island developing economies improved in 2011, dominated by the strong performance of resource-rich Solomon Islands and Papua New Guinea . However, the economy of Federated States of Micronesia recorded lower growth in 2011 as compared to the previous year while the economy of Tonga actually contracted in 2011.
- Papua New Guinea is the star performer with 8.9% GDP growth in 2011 compared with 7.1% growth in 2010.
- The economy benefited from higher commodity prices as a result of a strong demand for its exports (oil, gold, copper, coffee, cocoa, and palm oil).
- The economy was also boosted as construction of Papua New Guinea liquefied natural gas (LNG) project continued and the knock-on effect of this benefited other sectors, such as wholesale and retail trade.
High inflation is a major concern
The Pacific island developing economies generally experienced rising inflation rates in 2011, with Marshall Islands recording the highest inflation.
The prevailing inflation in the sub-region has been driven by higher global prices for oil and commodities and by accelerating price pressures in some of their trading partners, particularly Australia and New Zealand .
In Papua New Guinea , inflation rose from 6% in 2010 to 8.7% in 2011.
Inflation in 2011 is attributed to the global economic recovery with higher food and commodity prices and increasing domestic demand associated with the LNG project.
High demand for skilled labour and strong economic growth is contributing to rising wages and rentals, and a surge in consumer and asset price inflation.
Current account deficit widened as growth of imports outpaced growth of exports
Most Pacific island economies had current account deficits for 2011 with deficits widening for Kiribati , the Federated States of Micronesia , Papua New Guinea , Samoa , Tonga and Tuvalu as growth in imports of goods and services outpaced that for exports.
In Papua New Guinea , the kina strengthened against the US dollar by 19% and by 15.4% against the Australian dollar in 2011 due to strong domestic growth. Papua New Guinea 's total imports increased by 35.4% and exports by 27.1%. Current account deficit is estimated to have widened considerably in 2011.
Fiscal and monetary policies
Available data suggest a mixed picture in terms of budget performance for Pacific island developing economies in 2011, with the Marshall Islands, Federated States of Micronesia, Nauru and Solomon Islands recording budget surpluses, while others, such as Cook Islands, Fiji, Kiribati, Papua New Guinea and Tonga were among those that recorded a deteriorating budget situation.
In Papua New Guinea the fiscal position remains healthy, buoyed by strong growth in tax and royalty revenue from projects in the mining and petroleum sectors. Total revenue and grants were much higher in 2011 compared to the previous year.
The Government has managed its fiscal position well in recent years by following a prudent strategy to cope with volatility in global commodity prices. Instead of increasing recurrent spending as revenue has risen on the back of the boom in commodity prices, the Government has put funds in trust accounts for “additional priority spending” on social and infrastructure development programmes.
The Government is planning to have a balanced budget in 2012 with expenditure and revenue changes directed at improving the country's development prospects and sharing the benefits of economic growth with all the citizens. The 2012 budget is focused on delivering free education, improving law and order and improving road infrastructure.
The Bank of Papua New Guinea acted to stem monetary growth in the country in 2011 by raising the policy interest rate, the kina facility rate, and boosting the capital adequacy requirements for banks. These measures tightened liquidity conditions and contributed to a slowdown in private sector lending in 2011.
Future outlook and policy challenges
- Due to the global slowdown, a slight deceleration in growth performance of Pacific island economies is expected in 2012. The economies of the Federated States of Micronesia, Palau, Papua New Guinea and Solomon Islands are expected to slow, while those of the Cook Islands, Fiji, Kiribati, the Marshall Islands, Nauru, Samoa, Tonga, Tuvalu and Vanuatu are projected to see improvements in GDP growth in 2012.
- The Pacific island economies are strongly linked to the neighbouring major economies of Australia and New Zealand . Both of these economies are projected to grow by 3.5% and 2.4% respectively in 2012 and contribute to the positive outlook for some of the small islands developing economies.
- Papua New Guinea is again expected to lead this growth with 7.8% growth in 2012, boosted by rising commodity prices and growth in domestic demand coupled with acceleration in investment in a large gas export project and several mining projects.
- One factor that could affect Papua New Guinea 's growth prospect is movements in the prices of primary commodities and oil products. While some countries with rich natural resources such as Papua New Guinea and Solomon Islands have benefited from rising commodity prices, their economies remain fragile due to wide price volatility.
- One key challenge for Papua New Guinea is to manage the resource boom well so that rapid economic expansion does not translate into continuously high inflation. It is encouraging that Papua New Guinea has taken steps to set up the Government's new Sovereign Wealth Fund (SWF) to invest revenue earned from resources for future generations.
- Food and oil prices remain volatile. Therefore, the challenge for Pacific governments, including Papua New Guinea would again be to devise appropriate social protection policies to protect the poor. While many governments adopted some good social protection policies in 2009 and 2010, they ought to evaluate further and refine them to ensure the maximum positive impact for the poor.
- The ever-present challenge for the Pacific island developing economies including Papua New Guinea is to diversify their economies. One area that offers potential for diversification for them is agriculture. These economies can build a comparative advantage in agriculture, especially with their tropical fruits and vegetables, through proper marketing.
- Pacific island economies including Papua New Guinea need to improve infrastructure for rural agricultural production and marketing and should put more effort in addressing the often binding constraints to agriculture, such as land tenure, high labour costs and marketing infrastructure. Most of them also need to invest significant amounts in social and economic infrastructure.
- Apart from contributing to economic growth, these initiatives could also help address the increasing unemployment levels, especially among the youth, and ease the flow of urban migration from rural areas, which is a burning issue in many of the larger Pacific economies. Projections indicate that urban growth in Papua New Guinea will double that of total population, with the urbanization ratio expected to rise from 12.5% in 2010 to 18.2% in 2030.
- Some of the major challenges of urbanization that Pacific island economies including Papua New Guinea need to address are how to improve good governance, strengthen positive urban-rural development linkages, provide housing and related services/infrastructure and ways to deal with natural disasters resulting from climate change.
Policy brief: Living with high commodity prices <download pdf file>