PNG faces austere period

Business, Normal

The National, Friday July 27th, 2012

THE next few years are likely to be an austere period for PNG with economic growth slowing down starting next year, according to the latest Pacific Economic Monitor issued on Wednesday by the Asian Development Bank (ADB).
The ADB said government expenditure should be focused on rehabilitating existing infrastructure, rather than creating new assets.“This highlights the need to focus medium-term expenditures on rehabilitating existing service delivery infrastructure, rather than on creating new assets that may further undermine the state’s ability to fund recurrent maintenance,” the report said.
“Strengthening revenue compliance and reviewing resource sector taxation arrangements would help alleviate fiscal pressures over the medium term.
“More broadly, addressing the business constraints identified by the country’s CEOs will be crucial in diversifying the PNG economy, increasing private sector employment, and expanding the revenue base with which to finance future public investments.”
Other key issues highlighted by ADB in the Pacific Economic Monitor are:
n Maturing mining and oil operations and the scaling down of LNG construction will contribute to slower economic growth of 4.5% next year.
A key issue for government will be managing the 8,000 local workers who will be retrenched from the LNG project beginning late this year. Landowner companies have highlighted the potential for social unrest in the absence of alternative work arrangements for their workers.
n Later this year, the government will finalise its third medium-term fiscal strategy (MTFS).
The MTFS 2013–17 will play an important role in establishing the fiscal rules required to balance PNG’s large social and physical infrastructure investment needs with maintaining the macroeconomic stability that has underpinned the last decade of economic growth. 
n A significant challenge for the next MTFS is the likelihood of much slower growth in government revenue. Declining output from maturing mining and oil operations are currently expected to contribute to an 8% decline in domestic government revenue (adjusted for inflation) between now and 2014.
The onset of LNG revenues will offset some of this decline from 2015 onwards.
However, overall revenue growth will remain slow, with the government projecting that there will be no net savings within the newly created Sovereign Wealth Fund during the period covered by the next MTFS.   n Declining revenue growth will further suppress the already low level of revenue per capita generated by the government, currently among the lowest in the South Pacific.
To illustrate, if revenues expected at the peak of LNG production in 2028 were added to the 2011 national budget, government revenue per capita would still be well below that of Fiji, Samoa, and Tonga. n Three main factors contribute to PNG’s low government revenue per capita.
First is a small income tax base. ADB estimates that less than 5% of the population (or 10% of the working age population) is currently employed in the formal private sector.
Second, as a result of tax concessions and the removal of the additional profits tax in 2003, the average effective tax on PNG’s mining, oil, and gas companies is now on the low side of fiscal regimes across the world. For example, the recently opened Ramu nickel and cobalt mine has a 10-year tax holiday.
Similarly, the PNG LNG project is not expected to make a large contribution to government revenue until after 2020, due in part to accelerated depreciation allowances.
The third factor is poor tax compliance and enforcement.
The PNG tax office lacks the human resources to effectively pursue individuals, firms, and industries suspected of not paying their full tax obligations.