Budget deficits pose risks

 PAPUA New Guinea faces a serious risk over constant budget deficits, an academic from the Australian National University says.

Paul Flanagan said PNG had recorded high deficits in the past two years, which posed a risk that the country could be heading towards a financial crisis.

Recently in a quarterly economic bulletin Bank of Papua New Guinea stated that fiscal operations of the Government last year showed an overall budget deficit of K2672.4 million, which was 16.9 per cent higher than the previous year.

Flanagan said increased trend was becoming almost similar to several periods in 1990s in which big budget deficits led to PNG facing major economic crises.

“In the late 1990s, with that increase in the size of deficits, that was a time of economic crisis in PNG as well and one that the Finance Minister was talking about how the repair job was still recurring back to 2001-02 and even 2003,” he said.

“In 2013 and 2014, these are the highest deficits that PNG has had in its history and it’s a slippery slope towards crisis.

“PNG faces short-term challenges which if not managed will lead to a crisis.”

Flanagan said there were early signs of a crisis, especially with rationing of exchange rate, increasing interest rates and pressures on getting government cash out.

He said there were possible pathways out, such as “returning PNG LNG dividends to the budget and increased tax compliance, K2 billion in expenditure cuts through a thorough expenditure review by 2016 budget, and no real growth in spending until 2019 so no scope for major new initiatives without other savings”.