Creating a path to future prosperity

Focus, Normal

The 2010 Budget is a testament to the strength and resilience of the Papua New Guinea economy in the wake of the global financial crisis.
This may seem a big call to make, but consider the following:
* Planned expenditure in 2010 of K7.5 billion is based on record government revenues – up K3.46 billion since 2003 to K6.1 billion – and a balanced budget;
* Forecast national economic growth of 8.5%, or 5.5% without the impact of the LNG project, is as good as or better than most countries around the world;
* The agricultural sector, on which the vast majority of Papua New Guineans rely, will generate export revenues of K2.95 billion, slightly below the all-time high in 2008; and
* Jobs growth in the formal sector continues to remain at historic highs, having risen by an unprecedented 48% since the March quarter of 2002.


Reassessing the 2008 deficit
From the perspective of the 2010 budget an arguable case can be made for the somewhat controversial budget deficit of K478.5 million last year.
This required financing through domestic loans of K863.2 million and payment of K384.7 million towards overseas loans.
As a result, the Government’s domestic debt rose by K778.3 million to K3.95 billion at the end of last year compared with the year before. External debt fell by K267 million to K2.88 billion.
While domestic debt is at an all-time high, overseas debt is at the lowest level since the end of 1998.
Total public debt at the end of last year was K6.95 billion compared with K6.32 billion in 2007, K6.7 billion in 2006 and K7.3 billion in 2005.
Nevertheless total Government debt as a proportion of GDP at the end of last year had fallen to a new low of 32.1% from 33.6% in 2007 and is almost half the 63.1% level in 2003.
One fifth of all Government revenue was needed in 2003 to service external debt, but since 2005, this figure had fallen below single digit levels.
The K638.1 million increase in public sector debt last year was the first increase since 2003.
The stimulatory impact of higher Government spending enabled the economy to grow by 6.7% last year at a time the global economy was contracting.
This was slightly below the 7.2% growth in 2007 but still the second best year since the early 1990s.
Although the slump in commodity prices only bottomed around March this year, and has yet to fully recover, PNG’s economic growth this year is anticipated to remain a fairly robust 4.5%.


Government spending trends
PNG governments have always had a tendency in good times to overshoot budget expenditure estimates and last year was no exception.
This trend was exacerbated by a fall in revenues caused by the global financial crisis and the related plunge in commodity prices.
Expansionary budgets, nevertheless, were the way of the world last year.
Legendary amounts were borrowed and spent by countries like the United States, Britain and Australia and also by Japan, South Korea, Singapore and Malaysia, among others in our region.
This increase in domestic government spending helped to fend off the threat of a global depression and create the basis for a rapid recovery, which commenced in the June quarter of this year.
In PNG, the increased Government expenditures last year, at a record K7.6 billion, contributed to a solid 6.7% real growth in gross domestic product, a significant factor in the fall in public sector debt as a proportion of GDP.
While many countries are continuing to boost government spending through deficit budgets, PNG is using record revenue flows and planning for a balanced 2010 budget with spending that is only slightly less than last year.


Agriculture sector shines
According to Treasury forecasts, agriculture will, for the first time since 2006, overtake construction as the single biggest contributor to GDP growth.
But I find this most unlikely given the boost the construction sector will get from ExxonMobil’s PNG LNG project.
The contribution of agriculture, forestry and fishing to GDP is projected at 1.7% for the best performance since 2005, when agriculture contributed 2.1% out of total GDP growth of 3.9%.
The performance of the various sectors points clearly to the greater diversity and resilience of the economy.
The 1.6% contribution to GDP growth by mining represents its best performance in well over a decade, while construction is seen as toppling to second place with a 1.5% contribution.
A casual observer would be very aware from the many building sites around Port Moresby or in key towns and centres around the country that construction has been a mainstay of our recently robust economic growth.
In fact, Treasury data shows that construction has been the single biggest contributor to overall GDP growth from 2006 to this year.
There is every chance construction may retain its No 1 status as a contributor to GDP next year in the face of volatile prices for agricultural exports and the slower export ramp up by Ramu nickel.
In real terms, construction next year will enjoy a record turnover of K1.66 billion, up from K1.5 billion this year and a little less than K1 billion in 2005.
This contrasts with the 23.4% growth anticipated for mining and quarrying, which will take that sector to K910 million in real terms.
Most heartening of all is the performance of our rural agricultural sector with a projected growth rate of 4.8%.
The contribution of agriculture to GDP will amount to a record K3.69 billion, representing a 4.8% increase this year, the strongest rate of growth since 2005.


Tomorrow: Budget 2010: Inflation and ‘Dutch Disease’ may impair growth prospects


* Brian Gomez, a former journalist with The National, is presently corporate and public affairs manager for the Independent Public Business Corporation. Comments in this article represent his personal views.