Economy expected to rebound

Executive director of Institute of National Affairs and economist Paul Barker gives and overview of how the country’s economy performed last year. Here is his reflection of last year and prospects for this year.

THE start of 2022 is mirroring many aspects of how last year began worldwide, with new variants of the Coronavirus (Covid-19) disrupting lives and markets, and particularly travel and tourism, and global rivalries and hostilities still a major global feature. Yet, there are many grounds for greater optimism at the start of 2022 than a year back.
Last year began with new variants of the virus erupting and spreading worldwide in devastating new waves, including Papua New Guinea, which had been let off lightly in 2020.
Last year, however, also started with optimism over vaccines, which had been developed over short periods in 2020, thanks to the use of genome sequencing and various other new technologies, together with a level of international cooperation.
Last year also started with various commodity prices having recovered since their lows of 2020, and the arrival of a new US administration.

Covid-19 impacts
Globally, economies and markets picked up around the world last year, partly on the back of successful vaccine rollouts, despite the new variants, with even tourism, airline and hospitality industries picking up during the year in those countries with high vaccine access and adoption and new safeguards, like vaccine passports.
Economies and trade picked up, albeit creating some major bottlenecks, notably in shipping, with spikes in oil and transport prices and shortages of various products stuck in queues at ports around the world.
PNG was hit worse by Covid-19 last year than 2020, when it had been protected by early border closures and relative isolation from main travel routes.
Last year’s second wave, following major super-spreader events in the year, caused a surge of cases and deaths, but it was the third wave (seemingly of the more contagious and riskier Delta variant) from late September that really caused case numbers, hospitalisations and deaths to spike across PNG. Sadly, while many of PNG’s neighbours, including Fiji, had rapidly adopted vaccines, enabling them to restore their tourism industries, for various reasons, including a barrage of misinformation mostly sourced from overseas, vaccine hesitancy was high.

Porgera gold project
Last year was forecast to have provided strong growth after the shrinkage of 2020, on the back of wider economic recovery, but also with the Porgera gold mine’s expected restoration and other delayed major projects being rolled out. Some progress has been made towards addressing the situation at Porgera, but reopening a major mine, with multiple players and agreements, apart from restoration work, is a big task requiring considerable determination and cooperation.
It’s now forecast by Government to be reopened in April, but most observers consider that highly optimistic. With its direct and indirect impact on thousands of livelihoods, revenue, foreign exchange and indirect impact on investor confidence, Porgera’s 2020 closure provides a stark reminder of the consequences of hasty or ill-advised decisions.

Covid-19 restrictions
At the start of this year, once again, we have a new and highly virulent Covid-19 variant spreading rapidly across the globe, and inevitably reaching and impacting PNG. It adds uncertainty, and disappointment to all eager to emerge from the two years of the pandemic, travel restrictions and lockdowns.
The good news may be that it may prove milder, although this remains uncertain, but the World Health Organisation chief Dr Tedros Adhanom Ghebreyesus has given optimistic indications that the world should emerge from the grips of Covid-19 this year.
At the end of 2021 prices for many commodities had strengthened, beyond just the short-term impact of shortages. This extended from oil, gas and vegetable oils, like palm oil and coconut oil, to metals like copper; gold remains strong, and some other agricultural crops, such as coffee, have rebounded, with forecasts of stronger cocoa prices as well, in the face of likely production shortages from the two main west African producing nations.

Economy
Clearly, achieving revenue equity over resource projects is critical for PNG between investors, the State and customary landowners and affected communities.
Attractive and stable revenue conditions are critical to attracting investment, but clearly since 2015 revenue to the State has been disappointing, by comparison with earlier years, when mining and oil corporate tax and dividends played a markedly more substantial contribution to revenue than subsequently. Sector revenue started recovering in 2018 and 2019 prior to the pandemic, but were then hit by both the Porgera closure, low oil, gas and copper prices, but most prices are now relatively strong.
Inflation is a growing issue worldwide, including in PNG.
One cannot pump so much capital or purchasing power from the State into the economy, as has occurred across the developed and developing world through the pandemic, whilst seeking to restore economies from the pandemic, or when restoring decrepit public infrastructure, as in the US, without finally triggering some inflation, especially in countries with those limited spare productive capacity.
In PNG, it’s been largely transmitted from higher external prices, including the higher fuel costs and weaker kina, but presumably also from high domestic borrowing.
PNG’s economy grew last year, but not at the pace forecast by the Treasury, so by the end of the year, it will still have shrunk by around two per cent from the beginning of 2020. For this year, the forecast, as in 2021, is for a stronger rebound (Treasury estimates 5.4 per cent).
The actual outcome will depend partly upon the virus and how we (authorities and the public) respond to it this year, and partly upon global market conditions, and whether they continue to improve steadily, or whether health, global tensions and other factors disrupt global outcomes.
It also depends heavily upon how the PNG authorities navigate the economy through this sensitive period with an election mid-year; whether, the current and incoming government provide positive and stable conditions for current and would be investors, large and small, who are the ones who decide whether to commit their money, time and effort, into new business activities, new investments and job creating activities, whether mega-projects or small household ventures.

Acquisitions and mergers
Major business mergers have been rolled out last year, including between one of PNG’s largest and longest established companies, Oil Search with Santos, as well as between Digicel and Telstra.
Although there’s nostalgia for the outgoing companies, the mergers should provide better access to capital and new opportunities to take PNG operations to their next level, fully participating in major forthcoming resource developments and upgrading links between fibre-optic cables and national networks and further rolling out 4G across the country.
The regulators should play an important part in ensuring competition prevails, including after the Telikom-bmobile merger, and with the arrival of Vodafone as a new player.
With the planned Kina-Westpac takeover in 2021, the regulator, ICCC (Independent Consumer and Competition Commission) barred it on the grounds of potentially limiting competition. Nevertheless, the issue of existing weak competition in the banking and finance sector has not gone away. BSP continues to play a dominant, albeit valued role in the economy.

Debt level
There is much concern over PNG’s growing level of public debt to GDP (gross domestic product).
The Government has been financing a large slice of its annual budget since 2011 from public borrowing, from domestic and international sources.
Substantial public borrowing is widely considered sound to stimulate and sustain the economy through troughs in the economic cycle, as well as for needed restoration or upgrade of essential public infrastructure, such as transport facilities and power and upgrading health and education capacity, so long as borrowing is within a sustainable level in a growing economy, and so long as the funds are used cost effectively and accountably.
Wasting public funds, whether provided from loans or from PNG’s small tax base, in unnecessary status projects or over-priced public goods is generally unwise, although during times of crises, such as the pandemic, major public expenditure on enhanced welfare and business support has been considered critical across the world, even if restrained in PNG by limited capacity to target such funds effectively or implement. A positive aspect over the past few years has been the access to relative low interest international loans, replacing costlier international commercial borrowing, although the high level of domestic debt and interest rates, must be restrained, as debt servicing costs have been increasingly displacing other critical expenditure in the annual budget and ultimately needs to be repaid.

National election
We enter this election year with considerable uncertainty. Health, economic, educational and employment, political and geo-political, governance and environmental uncertainty looking forward. 2017 was the worst conducted election on record, with very extensive abuse, few controls and ensuing violence and deaths in various centres.
There was an opportunity following the election to address many of the underlying issues, including the inequitable constituencies, but this was largely foregone. Clearly, electoral and political reform and accountability is challenging, having seen the system increasingly controlled by money, access to weaponry and capacity to influence the final election roll, and where swathes of voters were increasingly denied the opportunity to cast a vote legitimately; there was also the subsequent malpractice in various counting rooms, and gross luring of parties and winning candidates.
This year preparation and capacity for managing the election is not well advanced, and many sitting candidates have accumulated war chests of services improvement programme funds over recent years. Sound and accountable political processes, stronger governance and accountability, the economy and livelihood opportunities and developing PNG as a safe and healthy place for women, children and men to live with sound prospects for the future, are all deeply inter-connected.
Hopefully, the authorities, candidates and country as whole will recognise the need for a much more transparent and credible electoral process in 2022, than in 2017, with enhanced outcomes for the whole of PNG.