Economic growth depends on investment in resource projects

Kina Bank has reviewed the Government’s 2020 Mid-Year Economic and Fiscal Outlook (MYEFO) tabled in Parliament recently. The bank concludes that: “All things considered, PNG is in a reasonable relative position but investment from resource projects is a pre-requisite to medium-term economic growth.”

THE International Monetary Fund estimates that the global economy will shrink by 4.9 per cent in 2020.
PNG by comparison is expecting a relatively modest 2 per cent fall in real Gross Domestic Product (GDP) in the Mid-Year Economic and Fiscal Outlook (MYEFO).
Additional Covid-related expenditure was required and revenue losses were felt by the economy, which placed upward pressure on PNG’s debt-to-GDP ratio.
Initially projected at 40.3 per cent of GDP, debt is expected to increase to 48.9 per cent at the end of financial year 2020 with a forecast medium-term track of increasing debt-to-GDP in line with ongoing fiscal deficits.
In addition to the resource projects, there are many infrastructure projects scheduled to be implemented between 2020 and 2025 before the onset of Covid-19.
The scheduled commission and associated government expenditure of these projects fortuitously coincides with the current and medium term need for fiscal stimulus post-Covid, and provides a buffer to the Covid-19 headwinds.
These investments are across the board in areas such as a transnational highway network, telecommunication infrastructure, ports, roads and runways as well as electricity, and water supply and sanitation.
All areas of positive economic and social impact over the medium and long term.
This major infrastructure spending will augment expected foreign direct investments and provide a foundation for economic development and stabilisation to the economy.

Revenue Breakdown
Total revenue in 2020 financial year is expected to come in at K11.35 billion, down by K2.736 billion (19.4 per cent) from the 2020 Budget of K14.095 billion.
Revenue is captured under three main categories: taxation revenue, donor grants, and other revenue. Tax receipts are expected to fall short by 14.7 per cent, donor grants remain unchained, while other revenue will fall by 58 per cent.
Tax receipts are expected to fall short by 14.7per cent; donor grants remain unchained; while other revenue will fall by 58 per cent.
Taxation
The MYEFO projected that taxation revenue would be K9.64 billion, down from K11.30 billion expected in the National Budget.
The K1.661 billion (14.7 per cent) loss in revenue is due to lower collections from company tax, mining and petroleum tax, import excise, export tax and goods and services tax.
Company tax and mining and petroleum tax are responsible for 96 per cent of the shortfall. Company tax receipts are lower, because of the economic downturn, additionally the Internal Revenue Commission (IRC) allowed for delays in lodgments and reductions in provisional payments to support cash flow.
Personal income tax (PIT) is expected to increase due to the ceasing of goods and services tax credit offsets for companies. This allows the Internal Revenue Commission to collect the full PIT liabilities.
The increase in the public sector headcount also added to PIT, and mass layoffs in the services sector is expected to be below the tax-free threshold.

Grant
Grants from donor partners are expected as originally anticipated. There was K932.1 million projected in 2020 financial year: K766.2million (82.2 per cent) from foreign governments, and K165.9million (17.8 per cent) from international organisations. This amount is expected to be realised in full throughout the year.

Other Revenue
Other revenue has been revised to less than half the National Budget estimate with an anticipated decline of K1.076 billion (fall of 58 per cent) to a new estimated collection of K779.8 million.
Mining, petroleum and gas dividends and dividends from State-Owned Enterprises are expected to fall short of the Budget by K45 million (56.3 per cent) and K100 million (100 per cent) respectively.
Government services revenue is expected to be 26.8 per cent lower than budget. Penalties and fines have been adjusted upwards by 125 per cent, and miscellaneous transfers are expected to be 66.6 per cent lower than budget.

Expenditure Breakdown
Total expenditure was reduced by 3.9 per cent to K17.98 billion.
The Government has spent 36.9 per cent of the 2020 National Budget envelope in first half of 2020.
When broken down into expenditure categories, operational and capital spending in first half of 2020 feached 41.3 per cent and 27.2 per cent of their respective budget allocations.
The lower-than-expected expenditure is due to cash flow constraints faced by Government and operational restrictions from Covid-19 lockdowns.
The Government has reprioritised its main capital expenditures for 2020 financial year to deal with the Covid-19 pandemic. Some operational expenditures have also been diverted to the Covid-19 pandemic response.

Operational Expenditure
The operational component of the Budget has been lowered by K1.12 billion (8.8 per cent) to K11.61 billion.
The lower outcome is due to slowdown of non-essential operational activities during the lockdown.
Delays in programmed external financing had also caused fiscal distress and prompted a tightening of spending.
Salaries for public servants are expected to make up 49.6 per cent of operational expenditure, and 32 per cent of total expenditure.
Functional grants to provinces will be maintained, while goods and services purchased will be cut by 30.9 per cent for a K1.171 billion saving.
Interest payments for debt servicing amounted to K1.012 billion for the first half of 2020, with 76.3 per cent paid to internal borrowing and 23.7 per cent paid externally.
The right-sizing exercise for public service had progressed slower than expected, but the MYEFO expected the retirement exercise and associated expenditure to quicken towards end of third quarter.
K12 million is expected to be spent to retire 133 personnel in the third quarter, with an associated K36 million paid to the superannuation provider, Nambawan Super.
Exit payments to Nambawan Super have been revised downwards from by K60 million while K145.8 million was shown in the June outturn for State share contribution to Nambawan Super.

Capital Expenditure
27 per cent of capital investments was expended in first half of 2020, with K2.87 billion in capital spending planned for the second half of 2020.
All capital expenditure is expected to remain as budgeted, with the only change occurring in the transport sector.
The transport sector will see K300 million added to its spending for 2020 to support the repayment of arrears for capital works from contractors.
Financing Breakdown
The fiscal deficit for 2020 financial year will be increased from K4.63 billion to K6.63 billion, a 43.2 per cent increase.
Outstanding Treasury Bill issuance is K3.72 billion and will be auctioned in the second half of 2020.
There is K2.65 billion expected in second half of 2020 from external sources. Of these external funds, sources for K1.98 billion are yet to be confirmed at the time of the MYEFO but there is a high degree of confidence that these funds will be secured.
The MYEFO also suggested that Government may offer securities domestically above the budgeted amount to support cash flow until international funds are received late in the year.

Internal Financing
The MYEFO projects that gross borrowing in the domestic market for financial year 2020 will be K12.83 billion, and net borrowing at K1.92 billion.
It is expected that the domestic net borrowing in excess of the MYEFO amount will be needed to support government cash flow until concessionary and international financing comes through in late 2020, which has already occurred with the K45 billion bond issuance in August.
The remaining year’s issuances will focus on rolling over debt and net redemptions.

External Financing
Gross external borrowing has increased by 6.4 per cent due to a K1.85 billion increase in exceptional financing.
Net external borrowing has been revised upwards by K887.8 million (26.3 per cent) to K4.262 billion.
The MYEFO expects K4.635 billion inflows from external borrowing over second half of 2020, primarily driven by K3.871 billion in receipts from exceptional financing.
The unprogrammed receipt of the K1.25 billion from the IMF of Covid support was significant unprogrammed boost to exceptional financing in first half of 2020.

Trust Account Drawdowns
The International Monetary Fund Rapid Credit Facility provided K1.25 billion to the PNG Government for fiscal support during the height of the Covid-19 pandemic.
These funds were kept in a trust account and K445.6 million is expected to be drawn down to support Government cash flow.

China recording strong growth figures despite pandemic

China has recorded strong growth in trade, while other major economies still struggle with the impact of coronavirus.
Exports in September rose 9.9 per cent, while imports grew 13.2 per cent, official data showed.
The rush of imports cut China’s usually meaty trade surplus – the amount by which exports exceed imports – to US$37bn (K129.3bil) from US$59bn (K206.2bil) in August.
Most other large economies are expected to suffer large contractions as lockdowns and public fear cut spending.
But the data suggested a rapid recovery in China from an initial reduction in overseas orders sparked by the pandemic.
China was the first country to be hit by the coronavirus outbreak, reporting the first cases late last year.
The world’s second biggest economy saw a sharp decline in the first three months of 2020, amid strict lockdown measures, before bouncing back in July.
Analysts said the recovery in trade since then had been driven by a surge in international demand for home electronics, medical devices and textiles, including personal protective equipment.

However, they warned some of this demand could begin to fall.
In the year up to the end of September, China’s combined imports and exports with other nations reached 23.12 trillion yuan (US$3.4tn, £2.6tn, K11.88tn), up 0.7 per cent and reversing the hit the country took in the early days of the coronavirus pandemic.
In August, the Japanese economy was revealed to have shrunk at its fastest rate on record, partly because of a fall in exports. The US economy saw its fastest contraction in decades in July.
Meanwhile, the International Monetary Fund (IMF) is forecasting a somewhat less severe recession than it predicted in June for the global economy.
The IMF said in its World Economic that the global economy still in deep recession and the risk of a worse outcome than in its new forecast is “sizable”.
The predicted global economic contraction is more moderate than the IMF envisaged four months ago, at 4.4 per cent. That is followed by rebound of 5.2 per cent next year, which is less than the previous prediction.
Next year’s world downgrade is less than this year’s upgrade.
The slightly less-bleak assessment reflects downturns in several large developed economies in the April-to-June quarter of the year that were not as severe as the IMF expected.
The return to growth in China, where the pandemic arrived first and was held back first, was stronger than expected.
China’s biggest trading partner is the Association of Southeast Asian Nations, which includes Malaysia and Singapore.
Its next biggest customers were the European Union and US, China’s General Administration of Customs said. – BBC