Economy contraction predicted

PAPUA New Guinea’s economy has been hit hard by the Covid-19 crisis due to weaker demand and less favourable terms of trade, according to the latest World Bank economic update for the country.
From Relief to Recovery, the World Bank’s economic update for PNG this month stated that the country would experience an economic contraction this year, with pandemic-related global and national movement restrictions weakening external and domestic demand and affecting commodity prices.
These impacts are also expected to lead to wider financing gaps for the government and the Central Bank and higher unemployment and poverty than previously anticipated in early 2020. It is estimated that PNG’s real GDP (gross domestic product) will shrink by 1.3 per cent in 2020, the current account surplus will narrow to about 15 per cent of GDP and the fiscal deficit will reach 6.4 per cent of GDP.
In response to the Covid-19 crisis, the Government mobilised domestic resources and was engaging development partners and the private sector for additional support for the people and the economy of PNG.
World Bank country director for PNG and the Pacific Michel Kerf said: “The World Bank welcomes the swift actions by the PNG authorities to manage the Covid-19 shock by protecting the lives of the people of PNG and supporting livelihoods of vulnerable households and small businesses.”
“While the focus of the authorities is currently on crisis mitigation, it is important to also look beyond the current year to a more robust and resilient recovery over the medium term.”
The report emphasises that a Covid-19-related revenue shortfall, increased emergency health spending and an economic support package had created an unanticipated fiscal gap of over US$400 million (K1.38b or 1.8 per cent of GDP) in 2020.
The capital budget is expected to be hit harder than the recurrent budget and the government will have to trim non-essential spending.
The report contained a section dedicated to physical infrastructure development in PNG.
The section recommended that the government’s pre-Covid-19 infrastructure investment plans should be amended amid the current crisis, which might result in the government having to resume its “Connect PNG” infrastructure development programme once the pandemic was over while keeping the overall fiscal framework under control.
It also highlights the importance of more equitable access to quality infrastructure once the country moves to the recovery and resilience phase of the Covid-19 response as well as the need to improve the balance between infrastructure investment and maintenance with greater emphasis needed on the latter.
The report concluded that PNG could improve its infrastructure situation by strengthening policy design, investment planning, and coordination among agencies and with development partners.
However, it wouldl be vital for the government to set the stage for more sustainable and inclusive development by strengthening macroeconomic management and accelerating structural reforms while protecting the vulnerable.