PNG must find the equilibrium

IN the 2018 Budget, the Treasury is forecasting a deficit this year of just below K2 billion.
This is just a forecast and if the revenue ended significantly below the revised budget level for 2017, and expenditure slipped well above by the end of the year, as has occurred over recent years, then it imposes greater pressure to try and remain within the 2018 Budget limits.
The Government has been running significant (and in some years substantial) budget deficits since 2012, which means borrowing to make up the shortfall of revenue over expenditure.
This has in turn resulted in a growing level of debt.
Most of this accumulating debt has occurred domestically – borrowing from the local market, notably from the banks and other largely financial institutions, with the domestic lenders in some cases feeling exposed over the level of their lending to the State, and the market expecting higher returns (interest) to reflect that level of risk.
The cost of borrowing has been rising with debt servicing costs now forming one of the largest components of public expenditure.
The Government is keen to diversify its spread of borrowing, to reduce the total cost of debt, and balance the foreign borrowing better with domestic borrowing.
This is particularly with concessional borrowing from the multilateral agencies (notably ADB and the World Bank), plus another attempt to secure funds from the issue of a K640 million sovereign bond, with the market considered to be more favourable now, than when tried in earlier years.
So, it is envisaged in the 2018 Budget for additional concessional borrowing, largely from the ADB and World Bank, of K337.4 million in 2018 under the so-called “development policy options” and “Budget support facilities”.
International borrowing does impose risk associated to high servicing and repayment costs, in the (not unlikely) event of currency depreciation.
But such borrowing also provides needed foreign exchange – needed to lubricate the market where business of all kinds are suffering from long delays and restraint on paying for imported items, whether fuel or food items, or spare parts or services, or the capacity to pay dividends.
In the 2017 INA Business Survey, the shortage and delays in accessing foreign exchange was deemed to be the major impediment to business and investment, undermining the whole cycle of trade and business activity – therefore in turn, also the level of employment and tax payable to the government.
Escaping this downward spiral in business activity, and addressing the key constraints to growth and local economic participation, is both a priority for government and the business community itself.
There is nothing specifically wrong with debt, so long as it’s within manageable and sustainable levels. And particularly if the funds are being utilised effectively for investment and the provision of needed and quality public goods and services – that is, not wasted.
It is, of course, money that must be repaid from taxes collected from future income and economic activity. So it needs to contribute to generating that economic activity and capacity to pay.
That’s the challenge for the PNG Government, working together with the private sector and society, ensuring quality public goods, contributing to a growing but sustainable economy, and preventing the debt reaching unmanageable levels, imposing too great a burden on households and the business sector in future, or forcing a severe slashing of public expenditure in future, with associated social and economic costs.
Plugging the current decline and shortfall of foreign exchange is one thing – but again it needs to be sustainable, or it will need to be replenished again in future from further debt.
PNG currently enjoys a very positive balance of payments and current account surplus, but, partly in view of the funds retained offshore, notably to repay major investment debt and weak revenue generation from resource extraction, it continues to experience a severe shortfall of foreign exchange in relation to the level required.
That shortfall is partly determined by the substantial backlog of outstanding payments due but prevented from being remitted by the constraints on the forex market over the past three years.
So, ensuring that the market finds its equilibrium, encouraging investment and reinvestment to recommence back into the country, and discouraging further speculation or inclination to retain capital offshore, is critically important.
And this should occur, preferably, in the shorter run, although avoiding further inflationary pressures is also a strong policy consideration at a time when prices have already been moving uncomfortably upwards, with market prices already burdensome, particularly for lower income households.