Call for firm fiscal stand

 Papua New Guinea appears to be facing a fiscal conundrum, according to the ANZ Asia Pacific Economic Pacific Quarterly.

The report stated with the country to face the economical challenge, as non-mineral gross domestic product (GDP) growth is running well below trend, a strong expansionary fiscal stance is appropriate.

However, it stated that deficit spending appears to be hitting constraints.

“Revenue is at risk of undershooting and domestic funding is becoming increasingly expensive. 

“If new sources of deficit financing or revenue extraction do not emerge soon, ultimately deficit spending will have to stabilise at much lower levels than is now the case.

“This would ultimately delay much needed infrastructure spending to later in the decade and the allocative efficiency of the economy would be slow to improve.” 

The report suggested that sovereign bond issuance should now be seriously considered.

“A sovereign bond issue would be a simple solution to several issues,” it said.

“One, the US dollar funding would guarantee that the current fiscal boost continues, importantly developing infrastructure and expanding capacity. 

“Two, with the move higher in domestic market interest rates amid historically low global rates it will likely be a cheaper source of financing. 

“Three, the immediate inflow of US dollar will provide the foreign currency market with needed liquidity and incentivise exporters to come to the market. 

“While, using PNG Treasury’s recent Mid-Year Economic and Fiscal Outlook (MYEFO) as a starting point, we address the desirability of PNG Sovereign Bond Issuance in this Quarterly Feature Note. 

“The recent MYEFO has confirmed what ANZ believe to be an appropriate setting of fiscal policy given that growth is running below potential.

“This year’s budget remained strongly expansionary, with government expenditure outpacing revenue receipts, i.e. deficit spending, by a considerable margin.

“Though the macro backdrop confirms this deficit spending is appropriate, ability to finance that deficit spending is likely to become more constrained as revenue appears likely to miss targets and domestic financing is becoming prohibitively expensive.”