Barker explains economy

Developments in the Papua New Guinea economy have been very topical since the end of the construction of the PNG LNG project. The shutdown of the Ok Tedi Mine,  the drop in the commodity prices in the international market, fall of the PNG kina by 36 per cent (against the US dollar), an heightened exchange rate were some of the notable factors that affected the PNG economy, especially government spending. The National business reporter GEDION TIMOTHY asked economist and executive director of the Institute of National Affairs PAUL BARKER to reflect on the performance of the national economy this year and going forward.
This is what Barker said:
Despite the commencement of LNG production in 2014 and a full year of production in 2015, PNG has experienced two tough economic years.
This is largely as a result of the major fall in commodity prices starting in 2014, combined with the effects of the El Nino drought and frosts on agricultural production and even briefly impacting mineral exports in 2015/16.
So the country experienced the paradox of strong economic growth figures until 2016 (based on the LNG construction and then production), combined with strong exports by value, despite the fall in prices, but very low and a massive drop in revenue from the resources sector during these two years.
The Government had launched ambitious programmes of investment in infrastructure, education, health, law and order. And the districts even borrowing heavily during the time of high prices, banking on strong early revenue, which of course had not materialised, and essentially evaporated.
When commodity prices declined, Government lacked needed nimbleness to restrain and realign expenditure, although more focussed in 2016 than 2015.
The ambitious programmes, aimed at reversing accumulated lack of investment in physical and human capital, were nevertheless restrained by being sporadic and often ill-planned, using weak institutions or planning and implementation mechanisms, especially in the districts, and with over-emphasis upon a few relatively prestige or unproductive facilities in the National Capital District.
The predicament of low revenue from the resource sector, even with the more recent improvement in gold, oil/gas and some other commodity prices, highlights the need to diversify PNG’s economic base.
This is particularly in the renewable resources sector, which also largely provide the jobs, but including some downstream processing and more diversified activities, substantially dependent upon restored and improved basic access and communications, power and other public and some private goods.
The continued, if reduced, investment in resource exploration has continued to generate modest economic activity, even some revenue, indirectly.
However, it’s been the other, although also commercially strained businesses in the non-extractive sector, together with personal income tax and GST that have provided the bulk of the revenue over the past couple of years. Although actions to go out and attract suitable business sometimes pays off, this can often be a distraction.
The priority is not for Government to sponsor winners, whether pushing agricultural projects in unsuitable locations or offering exclusive trading monopolies or tax havens.
The priority must be to address the constraints, notably the high cost of doing business in PNG (whether for overseas or PNG-owned firms) and the inconsistent policies and other risks, which restrain investment, business activity and employment generation, including by micro-enterprises.
This requires government listening to the private sector and learning from surveys and other evidence provided. Offering sweeteners or exclusive investment deals for some firms or in some centres, but not others, generally undermines, rather than strengthens, a sound business environment.
Announcing major policy and legislative amendments in the economic sector without adequate consultation or consideration of consequences, such as a substantially expanded or ambiguous “reserved” list, or rushed through and major alterations in mining, agricultural, lands or other legislation or application, can frighten away not only new investment but also existing players.
And the Government must also bear in mind its social and environment responsibilities more seriously.
Nothing replaces proper planning, landowner engagement and consultation, and honouring agreements, right from the start, and certainly not application of an unduly heavy-handed approach, especially as the customary landowners (and those downstream etc) may also be the resource owners themselves but at least are the greatest stakeholders (both as potential beneficiaries and also as losers).
Economic and social development in PNG is dependent on awareness and sound partnerships between the State, private sector and wider community.
This requires the public being better informed and empowered to help keep the public institutions and leaders accountable, including with the use of public funds for priority expenditure.
This is so especially in fiscally tight years, like 2017, when the election can further undermine prudent expenditure and behaviour.
Restoring the credibility of public finances will be critical, both to deliver core services, but also to honour past and present public obligations, including unpaid state debts.
It’s understandable that the Central Bank and some in Government have been reticent to see the Kina fall too far or fast, triggering inflationary effects on the costs of critical imported goods and living on already overburdened households.
The Bank argues that if the Kina fell further, it wouldn’t stimulate more economic activity, as producers respond slowly. Therefore, they argue, stability is more important. And come 2019, when some gas earnings do finally flow and maybe further major resource construction proceeds again, upward pressure on the Kina may recommence.
Some of that argument may have merit, but disrupting the foreign exchange market has encouraged speculation and uncertainty. And tight filtering has imposed a major cost on business, not only those importing, but the domestic processors and exporters too.
Failure to release timely foreign exchange to the major exporters, including in agriculture, that actually generate Papua New Guinea’s foreign exchange, risks throttling the bird that lays the golden egg, without which there would be little or no foreign exchange available for all players.
So, as we roll forward towards 2017, a major focus needs to be on setting and applying suitable conditions consistently for businesses to develop. It is they which generate the economic activity, jobs and revenue that the country needs, whether micro or small to large enterprises, but including the overseas investors, especially those committed to Papua New Guinea.
2017 will be somewhat disrupted by the election process.
This process is critical to PNG’s future. But it requires a genuine commitment to the democratic process and expression of the will of an informed population, untainted by bribery, threats, manipulation or other cheating.
The election needs to focus upon sound party policy platforms and performance.
Papua New Guinea has innumerable sound policies, plans and institutions. But many of those public institutions barely function, and are unaccountable (civil society, including church run institutions are generally better run, more cost effective and accountable – but not all).
Even with the recent tight government budgets, there remains enough in the public purse to be able to achieve much more.
That is, if waste is cut, whether in over-priced contracts, ghosts on payrolls, unproductive and political district projects, and staff put in a full day’s output, and if there’s good coordination so that each institution or unit works in cooperation with other government and non-government bodies to achieve the agreed output.
Government must however prioritise expenditure on core functions and stop diverting public funds to unproductive status projects or imagining that it’s running a commercial business and investing in business enterprises as the tax review highlights.
On revenue, it starts by ensuring that resource investment conditions are sound and internationally competitive and transparently applied. The IRC cannot secure the needed extra revenue without adequate funding, especially going out and signing up the newer businesses that by-pass paying corporate and wages tax or GST.
This is a necessary investment which will provide sound returns and ensure a level playing field for business, where the tax burden often falls on a few established enterprises, which are then undermined by those that bypass tax, or other laws and regulations and even bring in their produce duty free, such as through duty-free mining ports.
But the same applies to other revenue collecting institutions, from the Fisheries Authority to the Lands Department. They need to play their part.
For months, for example, the Lands Department has been turning away those seeking to make land lease payments as their computer system and records seem to be down. Tens of millions are being forfeited, at a time when the revenue is most needed.
Water and energy should be a major focus in 2017 as lack of reliable and affordable water and sanitation and power remain a major impediment for businesses and households.
The State is now squeezing revenue from the State-Owned Enterprises which are already largely undercapitalised and need to invest heavily to achieve their core service functions.
Some, such as Eda Ranu and Water PNG, should be amalgamated.
They also need public-private partnerships to bring in private capital to deliver power and other services, and face some competition, where possible, or oversight in, to deliver goods and  services at affordable prices.
Papua New Guinea has abundant renewable power resources, and was at a global forefront for decades ago in their utilisation, but has been lagging since then.
Renewable energy sources, including solar, are now increasingly competitive. Some are readily deliverable at large or small scales.
But clearly further utilisation of relatively greenhouse-cleaner and locally available gas to replace old oil and diesel power plants is a sound interim option.
So despite major economic and budget challenges facing Papua New Guinea, 2017 should be a constructive year – if everyone pulls together and political and other vested interests are subjugated to the wider public interest.
Basic access and transport, clean water supply and affordable housing, safety and security, work and incomes, quality education, immunisation and basic health, accessible local parks and sports facilities are all more important  to the people of Papua New Guinea than flash conference centres and flyovers for passing international visitors, or inflated commissions.
So let’s keep things balanced in 2017 and beyond.