ADB committed to PNG’s growth

The National Business
The Asian Development Bank is committed to supporting diversified, sustained, and inclusive growth of PNG, guided by its Country Partnership Strategy (CPS) and PNG’s development strategies and goals. Business reporter MAX ORAKA discusses ADB’s commitment and its perspectives on the economy with the bank’s country director, Said Zaidansyah.

Q: What are your thoughts about PNG’s economy?
ZAIDANSYAH: PNG is a resource-dependent lower-middle income country with annual gross domestic product (GDP) growth averaging only 1.5 per cent from 2019 to 2023. Growth has been held back by:

  • A SERIES of shocks including the COVID-19 pandemic;
  • A NON-diversified economy that is overly reliant on the natural resources extractive sector;
  • STRUCTRAL impediments, including a large infrastructure gap, a poor and unstable law and order environment manifested in continued internal unrest and violence, and complexities associated with accessing land for investment; and
  • WEAKNESSES in macroeconomic management of boom-bust cycles that have resulted in persistent exchange rate overvaluation and restrictions on the access to foreign currency since 2015.
An Oil Palm grower in Northern bringing out the palm fruits on the side of the road to sell. – Nationalpic by NATHAN WOTI

That said, PNG has the potential for a positive, sustainable inclusive growth trajectory. Future growth could be driven by, among others, agriculture, fisheries, and tourism in addition to the extraction of natural resources. Addressing the above development challenges is critical to unlocking PNG’s vast growth potential. Our estimated economic growth in the country for short and medium term is reflected in our response to the next question.

Q: What is PNG’s current status in terms of growth?
ZAIDANSYAH: Growth slowed from 5.2 per cent in 2022 to an estimated 2.0 per cent in 2023 as resource output weakened. Growth is projected to accelerate to 3.3 per cent in 2024 and 4.6 per cent in 2025 on strong mining output. This is driven mainly by the reopening of Porgera. The mine produced its first gold in February and full production is expected to resume in the third quarter. However, the civil unrest in January and ongoing challenges such as foreign exchange restrictions and power supply disruptions cloud the outlook for the rest of the economy.

Q: What is ADB’s assistance programme and how has it helped PNG’s economic development?
ZAIDANSYAH: ADB is one of the largest development partners in the country. The value of our active programme in PNG currently stands at US$1.38 billion (K5.31b). The largest sectors ADB is supporting are transport (roads and civil aviation) with 59.5 per cent and energy with 19.7 per cent to address the large infrastructure gap in PNG. The human and social development sector (18.8 per cent) as well as building resilience to climate (2 per cent) also form part of ADB’s active portfolio. Going forward, while ADB will continue to focus on transport infrastructure, public sector management, energy, and education, it will also provide new emphasis on water, sanitation, hygiene, agriculture, and financial inclusion. In addition, ADB will strongly support climate change mitigation and gender equity and facilitate significant economic opportunities and access to public services.

Q: PNG has been facing a foreign exchange issue. Would a market-driven exchange rate sort out this issue?
ZAIDANSYAH: An orderly transition to greater exchange rate flexibility is an appropriate mechanism to gradually return to Kina convertibility. As such, the authorities’ recent adoption of a craw-like exchange rate arrangement can be viewed as a step in this direction. Over time, although not immediately, this policy adjustment should address the imbalance in the forex market.

Q: Do you think the forex issue is affecting growth in PNG? If so, how?
ZAIDANSYAH: The forex restrictions are a major impediment to growth. Such restrictions are known to negatively impact economic activity, productivity growth, and domestic investment. Foreign investors are also disincentivised from commencing new projects because of forex restrictions that hinder profit repatriation. The operations of PNG businesses are particularly affected because of their high dependency on imported intermediate and capital goods.

Q: What are some things affecting inflationary pressure on PNG’s economy?
ZAIDANSYAH: We project headline inflation to rise from 2.3 per cent in 2023 to 4.5 per cent this year, and further to 4.8 per cent in 2025. The main drivers are base effects, exchange rate depreciation, and civil unrest. Education subsidies will continue, but their disinflationary effect will dissipate throughout the year. While slowing global inflation lowers imported inflation, it is counterbalanced by further exchange rate depreciation as the central bank moves to a market-determined exchange rate. Domestic inflation could also rise because of supply issues caused by the civil unrest.

Q: What is ADB’s priority and what does it hope to achieve for PNG?
ZAIDANSYAH: ADB aims to support PNG’s diversified, sustained, and inclusive growth, guided by our Country Partnership Strategy (CPS) for Papua New Guinea (2021–2025). Aligned with the national development strategies, including the Medium-Term Development Plan IV 2023–2027, the CPS has three strategic pathways: (i) improving infrastructure and private sector environment for diversified economic growth; (ii) improving governance, financial management, and public service delivery; and (iii) addressing inclusivity and building resilience. It also supports the key crosscutting themes including gender mainstreaming, addressing climate change, improving safeguards implementation and compliance, strengthening governance, institutions and capacity, and regional cooperation and integration.

Q: Do you think the PNG Government should focus its core functions to cut down costs of doing business in the country to help its economy?
ZAIDANSYAH: Bringing down the cost of doing business is indeed critical for PNG to further grow its economy as they hinder the development of the private sector. To do this, the Government should:

  • CONTINUE to focus on infrastructure development for better connectivity and reliable power supply;
  • ENHANCE governance and accountability; and
  • INVEST in human capital through education including vocational school and the health sector by providing greater access to hospitals and other form of medical care.

We are committed to working with the Government on these efforts. Another important area that requires major overhaul, but outside of ADB’s mandate, is to improve law and order to create a safe environment for business to operate.