Budget Reports by ISAAC NICHOLAS, BARNABAS ORERE PONDROS, SHEILA LASIBORI, FRANK SANGE KOLMA
THE economic condition called inflation, which involves a general rise in the level of prices of goods and services, will be uncomfortably high next year, the Government announced yesterday in the 2010 Budget.
The Government predicts that inflation will peak at 9.5% from 7.4% this year but expects it to settle back to about 7% again in 2011.
The high inflation will be driven in part due to the expected start of construction on the LNG project and in part due to high Government spending – from trust funds and other expenditure measures announced in the 2010 Budget.
In addition, the Government warned that there will be an “exceptionally large current account deficit” anticipated in 2010, which will remain until first production of LNG in 2014.
This reflects the significant increase in imports required for the construction phase of the LNG project.
A stronger economy and increased business activity is likely to force the price of general goods and services imports to increase as well.
In line with stronger economic growth, general goods and services imports are also likely to increase.
The Government is not unduly concerned about the current account deficit in the medium term and expects it to move into a large surplus position once gas production comes on line around 2014 and beyond.
Despite the global financial crisis, which has led to a significant deterioration of the global economic environment, the Government is confident that real economic activity in PNG will grow strongly by 8.5% in 2010.
This represents a significant increase from the 4.5% growth rate forecast in 2009.
A significant factor underpinning this forecast is the assumption that the LNG project will proceed as scheduled in early 2010.
Any significant delay in the start of the LNG project represents a risk to the forecast although the project looks to be on track to proceed.
The project is estimated to contribute 3% to overall GDP growth in 2010.
Higher growth is expected in non-mining GDP growth as well, with further boosts in the communication and construction sectors and to a lesser extent the agricultural, forestry and fisheries sector.
Only the petroleum sector will decline by some 19%.