Economic downturn & Covid-19


NORMALLY, when there’s an economic downturn, there are a range of measures that the State (including the Central Bank) can take to stimulate the market and/or employment, which includes fiscal stimulus measures, including infrastructure projects and direct public employment schemes, but also facilitating finance for private investment.
However, this is a health crisis, where it is the Government itself that is imposing some of the restraints on business activity and employment in order to constrain transmission of the virus.
Hence, around the world, governments have invested in job keeper and job seeker type programmes paid direct to employees, or mechanisms paid to businesses to keep afloat, and in part as compensation for the economic pain caused by the Governments’ own lockdown interventions.
These are intended as interim measures to stop large corporations like airlines, or especially smaller enterprises, like cafes and restaurants which employ large numbers, from closing for good, so that they can pick up, somewhat adjusted, as restrictions are lifted and, hopefully, the market recovers in the new norm, which is likely, in the absence of a vaccine (at least until 2021), to entail continued imposed or self-imposed operating restrictions.
Government is the only entity which can more or less print money and fund health interventions at the same time as providing some lifebelt for the economy and welfare relief to citizens.
Of course, that’s much easier for developed economies, especially those with advanced population databases, and established social protection mechanisms.
Unlike businesses, Governments can’t really go bankrupt, at least domestically, as they can issue new money and inflate their way out of domestic debt, albeit destroying their economies in the process, if done in excess; they can, however, default on international debt, which one or two, such as Argentina, have, with serious consequences, including foreclosure from future market access.
PNG’s difficulties are that:

  • Although debt levels were low at the start of the last decade they rose substantially, with major budget deficits from 2012 to the present, even without the Covid-19 appearing.
    The Government had been trying to shift some of the debt from increasingly high interest domestic and some high interest overseas borrowings to lower interest international borrowing, and in the process access needed foreign exchange, although of course, this does add extra exchange rate risks and associated costs, with a weakening kina;
  • Revenue is seriously down from all sources, except gold, which is enjoying record prices this year, but we’ve now closed the 3rd largest mine (2nd largest gold mine) and put 3,800 tax payers out of work, apart from all the contractors and their employees; so that imposes another unnecessary hit on the poor economy and revenue.
    So, our domestic and international borrowing, from the domestic financial institutions and concessional (and commercial) global lenders, is largely going to make up for foregone revenue and to cover the government’s ongoing costs, notably for the public service and the growing debt servicing costs, which have resulted from years of public borrowing, displacing spending on priorities such as infrastructure, health, education and law and order;
  • We have a relatively large and inefficient public service (although some components are short-staffed in relation to demand for teachers, health workers and police), with limited flexibility to shift, reskill or retrench in a timely manner, although it could be done with various dynamic reforms;
  • We have little established institutional capacity to support the private sector or provide general or targeted welfare support to formal or informal sector employees and their households or those in greatest need.
    The government does not have the databases, except indirectly the IRC (Internal Revenue Commission) database and the superannuation fund membership.
    There is no database of the elderly, children, persons with disabilities (except in New Ireland) or other economically vulnerable persons.
    The only mechanism is through the churches (of which there are many) and community mechanisms, and in some areas, data held in village books.
    Mechanisms for financial transfers are deficient, with barely 20 per cent financial inclusion, although mobile phone ownership and registration may provide some larger database and mechanism for dialogue and some simple transactions;
  • Communications and telecommunications are still poor and expensive, leaving e-commerce still in its infancy, not helped by the high cost of the new domestic fibre optic network, which seems to have been poorly laid and further damaged by successive earthquakes; and,
  • Health institutional capacity is very limited, again with an ageing (and, therefore, “at risk”) workforce, and church health services which provide most of the rural services especially, starved of funds for an extended period.
    So, back at the start of April, the treasurer (Ian Ling-Stuckey) made extensive commitments to fund the health and the Covid-19 management process, with a succession of interim funding and then more substantial support as donor contributions chipped in.
    He also made a commitment for the government to economic and welfare support, initially through concessional tax arrangements (or at least loosening deadlines for payment of dues), and superannuation funds providing relief to members, including providing interim access to funds during unemployment, (as well as for their core function of providing pensions), while also potentially investing in agriculture and other economic enterprises and buying Covid-bonds, while also taking a hit on the revenue and asset value from the weakening of the property market, as well as other business; all a big ask, on the funds and their contributors.
    The commitment was also in the longer term to provide a stimulus package using various instruments, including finance and micro-finance institutions.
    So putting health preparation and support mechanisms in place has been slow and challenging, with weak revenue and heavily committed funds, and especially with weak provincial and district mechanisms and accountability, leaving little resources for even considering or progressing the economic relief or stimulus mechanisms.
    Some economic measures have been advanced, albeit largely programmes already being developed with development partners, such as extension of current PPAP (coffee and cocoa project) and its successor, the EU-funded agriculture project in East Sepik, as well as critical efforts to safeguard existing industries, facing other plant and animal diseases, like African swine fever, which has struck part of the Highlands.
    Some existing industries, which employ large numbers, such as palm oil industry, have been further perturbed by the somewhat ad-hoc imposition of a series of additional revenue measures, notably using levies for various new statutory offices, seemingly being imposed at time when industries are facing existing low prices and high costs.
    Going forward, there is clearly a need for much more coordinated measures, deferring new taxes and levies on the industries which contribute the most jobs and can least afford them (as in agriculture), while ensuring fairer benefit sharing, subject to existing agreements, in resource sector (on the basis of capacity to pay) and the unregulated sector, (i.e those industries currently by-passing or failing to forward required tax contributions).
    It is the private sector, (comprising large and small, domestic, joint and overseas-owned enterprises), that generates bulk of economic activity and jobs, as well as revenue to the state, directly or indirectly through employee taxes and sales taxes.
    It is, therefore, crucial that investment is stimulated, rather than subdued by additional tax burdens, or up-front investment taxes or bonds on foreign investment (except in the resource sector).
    It is particularly critical to safeguard and retain the credible existing investors, to be ready and comfortable to make longer term future commitments, as well as securing further genuine domestic and overseas investors.
    Currently, investors, both domestic and overseas, will be discouraged by market conditions, but also by Government’s apparent ambivalence to genuine foreign investors, and inconsistent and multiple revenue mechanisms, but also a sweep of impediments that need to be urgently addressed, including deficient and high costs of communication, ICT (information and communication technology) and power, lack of access to foreign exchange and right to remit funds (which partly relates to exchange rate and account issues), policy and legislative threats and uncertainty, as well as ongoing corruption, including in key private sector fields, notably lands and procurement.

One thought on “Economic downturn & Covid-19

  • Very much updated infor suggestion could be possible the employee/service % tax rate component be reviewed less and that will sustain life support respectively for most of the rural areas lacking covid-19 packages excluding POM. Most of the elected leaders sighted drop fall in carrying out their responsibilities effectively during this season error the end times.

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