Govt must stop borrowing money

I REALISE that the Bank of Papua New Guinea (BPNG) is overdoing its mandated role of lending to the government.
In recent times, perhaps since 2013, just one year on after the 2012 general election, the government incurred large debts largely in anticipation of increased revenue particularly from the mining and petroleum sectors.
However, these revenues weren’t forthcoming as a result of a depressed global economy that was exacerbated by a dry spell in 2014.
To patch the looming debt crisis, the Treasury Department continued to issue debt instruments; including Treasury Bills, Government Inscribed Stocks and a new Sovereign Bond.
The Sovereign Bond was deemed illiquid; meaning it wasn’t absorbable by the domestic capital market as well as by the international capital market because of various reasons including a depressed economy thus less liquidity in the domestic capital market; an underdeveloped domestic capital market; lack of confidence in the PNG government pertaining to a looming public debt crisis amongst others.
Also, the Treasury Bills and the Government Inscribed Stocks were not smoothly purchased in the domestic money market due perhaps to a depressed domestic economy and a deterioration of confidence in the government pertaining to a looming public debt crisis.
Despite these scenarios, the government was continuously backstopped by the BPNG, reinforcing on the function of “lender of last resort” which according to the Australian National University (ANU) to date had absorbed around 50 per cent of government debt.
Given such a saturated investment portfolio, there is risk concentration (as opposed to risk diversification) on the creditor which perhaps can result in loss of business but BPNG is seen to absorb the risks in the pretext of the notion of lender of last resort.
So provided BPNG has absorbed around 50 per cent of government debt, I further note that there is a likelihood of a “crowding out effect” in the domestic market. BPNG is poised to print money which will heat up the domestic economy and exacerbate inflationary pressures which will negate economic well-being.
On the contrary, the government is deliberately negating economic confidence due to a lack of transparency of its transactions and printing of money which will have repercussions on the domestic economy.
Both domestic and international lenders would prefer to place their financial assets with a transparent borrower who has a good track record of debt over those with poor reputation and lack transparency.
Also, the business community and investors will be more pessimistic about investment in the domestic economy as inflation will create adverse effects on decision making.
Therefore, I think the government should get back to basics and stop incurring debts. It should simply cut expenditures to relieve the pressure on the debt level to reestablish economic confidence.

Mike H, Via email