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PNG facing ‘extraordinary’ collapse in revenue

Tuesday 3 November 2015 | Published in Regional


PORT MORESBY – Economists are warning that Papua New Guinea faces a collapse in government revenue of historic proportions.

A collapse in global commodity prices has already seen the government push out the date for a return to surplus, but there are fears that this week’s budget will herald brutal cuts to government spending.

Only a year ago Papua New Guinea’s government was expecting extraordinary economic growth as a result of the massive Liquified Natural Gas project in the Highlands, Radio New Zealand’s Dateline Pacific reports.

Banking on this, the government embarked on an ambitious spending spree, which included introducing free education and improving healthcare, but also building conference centres, flyovers and stadiums.

But only a year after the first shipment of LNG, world prices for gas and other minerals have plummeted, and the country has been hit by the worst drought in decades.

An economist at the Australian National University, Paul Flanagan, says the Treasury is now forecasting an extraordinary drop in revenue.

“PNG had a 20 percent hit on its revenue this year already. About 10 percent of that was a fall in international commodity prices, about another 10 percent of that due to a general economic slowing down driven in part by issues such as drought, but also because of government policy such as the restrictions on foreign exchange, which is starting to hurt business and starting to hurt growth in PNG.”

Flanagan says this means the budget, which will be announced by treasurer Patrick Pruaitch this week, will involve significant spending cuts.

Pruaitch has already pushed back a forecast return to surplus from 2017 to 2020, and says the budget will seek to reduce government expenditure by as much as a third.

Flanagan says Pruaitch has a difficult task on his hands.

“Some scenarios have requirements of a 75 per cent cut in expenditure in remaining areas. And they’re in areas that still include areas such as PNG’s tax office, the ARC, funding for all of the central agencies. There are critical areas that are being potentially targeted.”

The executive director of the Business Council of PNG, Douveri Henao, welcomes the government’s move to rein in spending.

But he says spending on essential services need to be kept intact.

“They are spending on education, they are spending on health, and they are also spending on infrastructure. It’s these critical things that are going to drive the economy forward.”

Henao says the government can also seek to increase revenue by reforming what he says is an inefficient and expensive public service.

The director of the PNG Institute of National Affairs, Paul Barker, agrees, saying there should also be greater accountability.

“We know that a major problem area in PNG has been issues like ghosts on the payroll, abuse of contracting, heavily overpriced contracts, contracts being awarded without due process, and a range of other issues that have caused major leakage of public funds away from the priorities.”

Barker says the government has spent the past few years spending big on motorways and stadiums in Port Moresby, while pinning its fortunes on the LNG project.

He says the government continues to prioritise grand construction projects, and putting them on hold could save millions.

“Some of them are looming on the horizon. Big 600 million kina airport terminals for Moresby and Lae. While some of these upgrades are certainly valuable, clearly there’s a strong need to curtail overall cost so as to avoid jeopardising the need for basic functions.”

The Prime Minister, Peter O’Neill, says the budget will confront the challenges facing the resource sector and carefully manage spending to ensure essential services continue, while reviewing projects that aren’t considered essential.

However, Paul Flanagan, Douveri Henao, and Paul Barker all agree that too much faith has been put in the resource sector, and the country should be looking to diversify.

- Dateline Pacific