Bank warns of LNG risks

 THE Central Bank has warned of major risks facing the PNG economy as a result of the PNG liquefied natural gas (LNG) project and advised how to manage the country out of danger.

Governor Loi Bakani has advised the Government, through the bank’s Quarterly Economic Bulletin for March which was released yesterday, to start serious investment in the agricultural industry to avert the onset of what is commonly referred to as the Dutch Disease.

This “disease” is brought about when high inflows of revenue push up the value of the currency to the extent where it will become very hard for other sectors of the economy such as manufacturing and agriculture to operate profitably.

Other effects of the LNG project on the economy include the winding down of the construction phase this year, which is already impacting on the non-mining private sector as spin-off business activities start to slow down. 

“This momentum is expected to pick up and would imply that more labour and equipment engaged in the project will be laid off and ready for use elsewhere in the economy,” Bakani said in the first quarter report.

He said it was important that the Government utilised the labour and equipment to undertake its development infrastructure projects. 

“With the Government’s 2013 Budget stimulus package to increase funding for development projects, this would be a great opportunity for the Government to utilise spare capacity to further develop the economy and partly to offset the impact of the slowdown in activity from the LNG project,” Bakani said

With respect to financing of the 2013 Budget deficit, the governor advised the Government to borrow locally, given the high liquidity and current low interest rate environment. 

The Government has opted for domestic financing over external financing.

Bakani said significant growth and revenue receipts in the form of foreign exchange inflows would force the kina to appreciate significantly which would have potential negative consequences on important economic sectors such as agriculture.

“PNG can avert these risks and, more generally, the potential LNG-generated Dutch Disease effects by putting more resources and effort into developing the agricultural sector. It is important to note that for PNG to have a sustainable economic growth, the Government must heavily invest and develop the agriculture sector including other non-mineral private sectors so that in the long run growth must be underpinned by these sectors rather than developments in the resource sector,” he said. 

“The current problem, however, is not of the Kina appreciating but of it depreciating, pushing up prices of imported goods.”

The governor warned that the international food price index had increased to 215.2 points in May from 210 points in January reflecting a general increase in food price levels. 

Bakani said he was concerned that high import demand could exert further downward pressure on the exchange rate and lead to increase in domestic prices. 

According to the quarterly report, the daily kina exchange rate had depreciated against the US dollar, euro and Australian dollar, which was mainly attributed to high import demand, and, hence, higher demand for foreign exchange and lower foreign exchange inflows.