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IMF warns against spending pressures
By BAEAU TAI
HIGHER election-related spending could lead
to increasing price pressure, the International Monetary Fund (IMF) has
warned.
IMF predicts that the situation could result in rising interest rates as
monetary policy is tightened, thereby “choking” off economic growth”.
Weak fiscal accountability especially for many trust funds also poses
risks of higher or inefficient spending, IMF said in its March
assessment of the PNG economy after concluding the Article IV
consultation with PNG.
The IMF praised the (Sir Michael) Somare Government for its improvement
and management of the economy since it took office in 2002.
It said PNG was enjoying its fourth year of recovery and macroeconomic
stability, but “major challenges” still lie ahead.
The report noted that sound macroeconomic policies over the past several
years have reduced fiscal vulnerabilities, lowered inflation, spurred
business confidence and boosted growth, while high prices of key export
commodities – petroleum, copper, gold and most agricultural products –
have strengthened the fiscal and external positions.
However, progress toward achieving the country’s development strategy
objectives or Millennium Development Goals has been limited.
“In particular, structural reforms needed to stimulate activity in the
non-mineral economy have stalled in advance of June general election,”
IMF said, referring to the stalling of sale of State assets, and
downsizing of the public service.
The report said that although recent growth rates had been strong
relative to the past, the growth performance gap relative to comparator
countries is “widening”.
“Poverty and unemployment remain high as the economy is unable to absorb
a rapidly growing labour force,” IMF reported.
It said the economic recovery was expected to gain steam this year, with
growth rising to over 4%, as new mines begin production and increased
Government spending stimulates activity in the non-mineral sector.
It said an overall fiscal surplus was expected for the third successive
year this year, although the underlying non-mineral deficit would
further widen due to higher spending and lower non-mineral tax revenue.
It noted that the 2006-07 budgets provide for large spending increases
mainly for development expenditure (over three quarters of the total
increase), much of it one-off, and smaller allotments for public
enterprise investment, natural disasters victims and domestic arrears
clearance.
It said the public sector debt should be at a respectable debt to equity
ratio of 40% from a high of over 70% in 2002.
While the IMF commended PNG authorities for their sound and supportive
macroeconomic policies, it urged the Government to work to reduce
unemployment and poverty, to step up the pace of structural reform in
order to accelerate economic diversification, boost private investment
and growth and move more quickly toward the Millennium Development
Goals.
 
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