Papua New Guinea
Country briefing note <download pdf file>
Economic growth slows
- The GDP growth of Pacific island economies generally slowed in 2012. Papua New Guinea's economy grew by 9.2% in 2012 on top of growth of 11.1% in 2011, making it one of the better performing economies in the Asia-Pacific region.
- Much of the growth was driven by business activities associated with the construction of a liquefied natural gas (LNG) project and a high level of private sector investments and government spending.
- While there were some declines in the international prices of Papua New Guinea's commodity exports, production at new nickel and cobalt mines boosted output in the mining sector, even though petroleum output continued to fall due to declining oil reserves.
- All other related sectors also performed strongly in 2012, led by construction and transport, as building of the new LNG pipeline reached its peak, and as a result of higher than expected government spending.
- Strong performance of the economy is also reflected in persistent increases in the level of employment and private sector credit.
Inflationary pressures subside
- Owing to slower economic growth and relatively lower global prices of food and energy, inflation slowed in 2012 in a number of economies in the subregion.
- Papua New Guinea recorded a lower inflation rate of 4.1% in 2012 compared with 8.5% in 2011.
- The appreciation of the domestic currency coupled with the country's tariff reduction programme helped in containing imported inflation.
- The education programme of the Government, which is free of tuition fees, curtailed the cost of education.
Fiscal and monetary policies
- In Papua New Guinea, the budget deficit increased to 1.2% of GDP in 2012 from 0.2% of GDP in 2011.
- The deterioration in the budget outcome reflects lower revenue collection as a result of declining commodity prices, particularly for gold and copper, combined with overspending, mainly related to national elections.
- It is planned that the 2013 budget will be increased by 23% in nominal expenditure, which will raise the size of the expected budget deficit to 7.2% of GDP. This significant economic stimulus is well timed to counter falling domestic demand as construction of the LNG project begins to wind down.
- Under the 2013 budget, the priority sectors of health, education, infrastructure and law and order are being targeted. The budget allows for increased spending on education, mainly related to the implementation of the Government's “free education” policy and transport infrastructure.
- Grants to provincial, district and local level governments have been increased significantly, signaling a major shift in the Government's approach to delivering services to rural and remote areas.
- While the large increase in funding to provincial and local governments will directly transfer large amounts of funds to rural areas, this may strain the capacity of the provinces to effectively implement the Government's ambitious service delivery agenda.
- In response to lower inflation, the Bank of PNG moved to ease its monetary policy stance in September 2012, by lowering its target interest rate from 7.75% to 6.75%.
Current account deficit remains large
- Pacific island economies face high and rising current account deficits, reflecting largely poor performance of their merchandise exports rather than high levels of imports. Some of these economies are highly dependent on the remittances of overseas workers, which slowed due to the weakening global economic environment.
- Papua New Guinea recorded a current account deficit of 28.4% of GDP in 2012. Lower international commodity prices and appreciation of the domestic currency had an adverse impact on exports. Investments in new resource-related projects led to higher imports.
- The deficit in the current account was also due to net service and income payments, which more than offset a surplus in the trade account and net transfer receipts. The level of foreign reserves at the end of June 2012 was sufficient to cover 10.8 months of imports.
Future outlook and policy challenges
- Growth of Papua New Guinea's economy is expected to slow to 4% in 2013, partly due to the LNG project having already reached its peak levels of investment.
- The economic slowdown is also attributed to the reduction in global market prices of gold and copper in 2012. In addition, prices of other commodities, such as timber, coffee, cocoa, palm oil and copra which comprise 20% of the country's exports, also declined, and this could have a negative impact on incomes of the rural poor.
- Among the various challenges being faced by the Pacific island developing economies including Papua New Guinea is their narrow base and high dependence on subsistence agriculture and tourism. Diversification of these economies will always remain a challenge. However, the subsistence agricultural sector can be further developed, and its productivity should be enhanced.
- The involvement of the private sector and the role of Government as a facilitator in improving agricultural productivity are important. Pacific island developing economies need to invest heavily in physical infrastructure (roads, ports, water and electricity) and in research and development in agriculture.
- Despite their small size and remote location, Pacific island developing economies including Papua New Guinea have growth potential but unlocking this requires the development of appropriate institutional environments, including reforming the investment and communication technologies sector. The economic reforms that lead to productivity increases, such as opening internal telecommunications and airline services for competition, opening trade and investment channels and improving education and training, become even more critical for these small island economies if they are to exploit fully their growth potential.
- The achievement of better and deeper regional integration would be in the long-term interest of these small island economies. Regional cooperation will enable them to reduce the cost of doing business and improve public services.
- Trade and investment linkages between Pacific island developing economies and Asia are likely to continue to expand due to low transportation costs. However, their long-term economic prospects will depend more heavily on their capacity to seize opportunities in a changing global landscape.
- The largest social problem facing many Pacific island economies including Papua New Guinea is the high level of youth unemployment. Performance of these economies will depend on how they are able to address youth issues. About 20% of the total population in the subregion is aged between 15 and 24. The majority of the youth that are unemployed are also not skilled, and many do not have secondary or even primary education.
- The improvement in agricultural productivity, including downstream value added processing and better linkages of the tourism sector with the wider community, could help address the high youth unemployment levels.
- The effects of climate change and natural disasters on these small island economies are well known. For economies with sufficient resources and technology transfer, adapting to climate change can be turned into an opportunity to create a new approach to development based on sustainability. Applying improved agricultural practices, adopting clean technologies, enhancing energy efficiency and making modern and clean energy available to the poor would help to simultaneously fight climate change and promote sustainable development in these countries.