WHILE the Central Bank has hinted a surplus of K387.7 million from preliminary estimates of the Government’s first-half fiscal operations this year, it has warned the Government to be wary of overspending.
Central Bank Governor Sir Wilson Kamit raised this concern after the Government revised its 2009 budget to a higher deficit of 1.2% of the gross domestic product (GDP).
In his monetary policy statement for the first six months of this year released yesterday, Sir Wilson said the matter was of serious concern as it could translate to being a repetition of 2008 and the late 1990s where excessive Government spending resulted in high domestic demand and inflation.
He said the possibilities of this situation being repeated were quite high especially when there continued to be high Government expenditure in addition to an expected increase in domestic demand associated with the liquefied natural gas project.
The four-page lift-out released yesterday also said that while inflation came down to 6.7% in the June quarter of this year due to ongoing inflationary pressures, the Central Bank maintained its tight stance of monetary policy over the period, keeping the kina facility rate unchanged at 8%.
As a result of the tight stance of monetary policy, private sector credit slowed down to 20.8%, limiting the growth in money supply to 5.8% last July, Sir Wilson said.
However, persistently high liquidity remained in the banking system for most of the year, mainly as a result of Government expenditure, he said.
To absorb the excess liquidity, Sir Wilson said the bank issued a substantial amount of central bank bills over the seven months to July and warned that it was important that the Government’s handling of fiscal policy complemented the Central Bank’s effort at managing monetary policy.
He also admitted that the global recession that began last year adversely impacted on PNG’s export sector, resulting in the current account recording a deficit and the kina exchange rate slightly depreciating in the first-half of this year.
“Given the above developments, the bank projects for 2009: inflation to be 6.5%, private sector credit to grow by 15% and real GDP to be around 5%,” he said.
“With these projections and potential inflationary pressures, the bank would maintain its current tight stance of monetary policy over the next six months.”
On inflation, Sir Wilson said: “Over the medium term, inflation is projected to slightly increase due to the recovery in the global economy and increased domestic economic activity.”