Bottom Line: PNG starts to enjoy benefits

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Kudos to the PNG Treasury

Regular readers of this column would be familiar with the often repeated proposition that each country needs to pioneer its own unique ways forward, while weighing up its strengths and weaknesses.
Sure there are lessons to be learned from other developing countries but the way forward is always mired in various layers of complexity because many problems and issues need to be tackled simultaneously.
There is no single answer or foolproof way to tackle the problems of underdevelopment though, clearly, nations can blunder along without much progress, as has been the case for Myanmar.
Or despotic leaders can take them on a path to hell, as has been the case with North Korea and more recently Zimbabwe.
Over three decades of independence, Papua New Guinea appears to have blundered along somewhat with periods of extreme volatility on the economic front.
Until the Somare Government took office in the middle of 2002, there were big and regular swings in economic growth which is why that this is the first time the country is enjoying four consecutive years of economic growth.
But I digress from the topic at hand – the importance of charting one’s own path forward.
From this point of view one of the most commendable government reports I have come across has been the PNG Treasury’s key budget document, Volume 1: Economic and Development Policies.
This is an admirable piece of work. Though Treasury may be a touch too conservative, it has provided an excellent analytical framework of the economy and the role being played by the national budget.
Possibly partly because the nation is presently not lurching from one economic crisis to the next, as was common in the past, Treasury has begun to show a creative flair that bodes well for the nation.
We have heard often enough from the International Monetary Fund, World Bank and others about the dangers of the “resource curse” or the “Dutch disease”, an affliction this country did go through in the early 1990s.
In the face of massive windfall revenues from mining and oil exports, Treasury has now tried to take the guesswork out of the “windfall” element for better planning as we move forward.
It has established a rule of thumb that is probably unique in its application to PNG.
The Treasury document states: “The rule in this strategy is that only the component of expected mineral revenue equal to 4% of gross domestic product will be used to fund on-going expenditure.
“The remainder of mineral revenue is to be regarded as additional revenue, to be allocated in ways which could be adjusted, with a minimum of disruption, when the amounts received vary from their forecasts and fluctuate from year to year.”
Even though this “rule” will be reviewed after two years to ascertain its continuing suitability, it is a significant step forward in budgetary planning.
Treasury has also decided that use of “windfall” revenues should be guided by four key principles. It outlines these as:
* Benefits for future generations – because mineral revenue is derived from once-only extraction from sale of non-renewable resources, it should also be used for investments that will benefit future generations;
* Flexibility – additional mineral revenue should be used in various areas and not be disrupted if amounts vary from the forecasts during the year in which plans were made; it is already the standard for additional revenues received too late in the year to be used to pay off public debt;
* Consideration of impacts on domestic and import demand – such revenues should not make demand by government for non-government goods and services within PNG to fluctuate by large amounts; and
* Basis for comparison – funding of investment projects should only be undertaken after comparative studies of expected net benefits, adjusted for the risks which attach to the receipt of benefits and they should be compared with other possible uses of these funds in the context of formulating annual budgets.
Other Treasury initiatives should also improve levels of transparency within government and contribute to a better informed public and help with efforts to reduce corruption.
The government has begun a tradition of publishing a mid-year fiscal and economic outlook and a report on the final budget outcome.
Future submission to the National Executive Council that has financial implications for the State, will need prior consideration by Treasury.
Wastage from resource company royalty payments have almost assumed legendary status and, in conjunction with the World Bank, the government plans to implement an “Extractive Industries Transparency Initiative”.
This will indirectly address the issue of revenues flowing to provincial governments, for which there has been little accountability in the past.
A useful performance indicator has also been drawn up by Treasury over the past 12 months to examine progress with implementation of the Medium Term Development Strategy in 13 key areas, including primary and preventative health, basic education and HIV/AIDS prevention to governance and public sector reform.
These indicators show the Somare Government has done well in 10 areas but has been lagging and not performing well in three – law and justice, governance and public sector reform.
While there have been improvements made in the former two areas, in terms of trends since 2000, the indicators suggest the Somare Government is doing a worse job on public sector reform.
This is not surprising. Recommendations on “rightsizing” made by a working group was completed in September 2005 but continues to gather dust.
Formal considerations was deferred until after the 2007 national elections. With so much ‘windfall’ money flushing around the system, it seems that important decisions about a more efficient public service may continue to remain in the “too hard” basket.