LNG revenue fallout

Business, Normal

The National, Wednesday July 10th, 2013


THE manufacturing and renewable resources sectors will be affected by the high inflows of revenue from the LNG project, Institute of National Affairs executive director Paul Barker says.

He said the appreciation will have an impact on several sectors, including tourism and service providers.

Barker said this after Papua New Guinea’s Central Bank issued a warning on threats to the agriculture sector in PNG, which may result from the strong kina spurred by LNG sales.

Central Bank Governor Loi Bakani predicted in the March quarterly economic bulletin that there would likely be an appreciation of the kina next year when revenue from the project starts coming. 

He said that if agriculture was not ready or if it did not receive support from the government, it could be killed off by this appreciation, particularly if international prices for food commodities remain low.

Barker said: “We need to be clear on the heavy inflow; if we borrow heavily and pre-commit all the funds, then they won’t materialise for some time and we’ll be operating on a deficit for some time. 

“Also with lower commodity prices for most of PNG’s export products, like gold, petroleum, copper, and now nickel, but also agricultural products like coffee, oil palm, cocoa and copra-coconut oil, then exports earnings and revenue would be well below earlier forecasts.”

Barker explained the commodity prices were down because of lower demand in places like China and lower and more uncertain global economic growth.

“This is reducing mineral exploration and development in PNG. So it’s crucial that the government invest and use the money well to empower and provide opportunities for the people of PNG for better education, health, roads, ports and other infrastructure, law and order,” he said. 

“If too much money flows into the economy and is not absorbed effectively, it would have an inflationary effect … and if it rushes into the local currency (without being partly sanitised offshore in a well-managed and accountable sovereign wealth fund), it would cause the kina to appreciate, as it did in 2012 (during the construction phase).

The effect would undermine the competitiveness of agricultural, forestry and fisheries exports (and import substitution, like fruit and vegetable or sugar production) and also manufacturing and tourism and some other local services.

“In 2012, the strengthening of the kina helped reduce the high local inflation, but it really hurt PNG’s farmers, struggling at a time when agricultural commodity prices were falling already, and PNG’s tourism providers, who saw the products they had per-sold in US dollars bringing them lower earnings in kina.”