PNG recovering from Covid-19
University of PNG economics lecturer MAHOPA LAVEIL provides an overview on the impact of the Coronavirus on the economy, including negative growth, reduction in personal income, increase in formal unemployment, decrease in exports, the widening deficit and debt levels. But a rebound in 2021 with a growth of 1 per cent has put PNG on the road to recovery, albeit slowly.
The global effects of the Coronavirus (Covid-19) pandemic did not spare PNG and its economy.
The economic effects of the Covid-19 only exacerbated existing trends, with some describing the pandemic as a crisis on top of a crisis.
This article explores the effects on economic growth, individual incomes, employment, trade, and fiscal conditions.
Economic growth
According to the World Bank, the PNG economy contracted by 3.5 per cent in 2020, but recovered slightly with a 1 per cent growth in 2021.
Domestic mobility restrictions imposed to limit the spread of the Covid-19, and the fall in commodity prices in 2020 and early 2021 were factors for negative growth.
Although gold prices were high as global investors switched to gold as a safe haven, the closure of the Porgera gold mine in 2020 added to recessionary pressures.
Income per person
To measure income per person in PNG, Gross Domestic Product (GDP) per capita is misleading given the resource sector (mining and petroleum GDP) which comprises a large share of GDP, is largely foreign-owned and employs few nationals.
A better measure would be Gross National Income (GNI).
But GNI data is lacking in PNG.
The best measure available is the non-resource sector GDP per capita.
Since 2003, the average real (inflation-adjusted) annual GDP per capita growth has been 1.9 per cent, while the average non-resource GDP per capita growth has been lower at 1.4 per cent.
In 2019, real GDP per capita stood at US$2,830 (about K9,811.58).
Although the agriculture sector continued unabated, during the pandemic, the World Bank (2022) estimated a fall in real GDP per capita of 5.7 per cent to US$2,630 (about K9,118.18) in 2020.
Employment (Bank of PNG employment index and TUI estimate, sector hit)
Employment indicators are taken from the Bank of PNG employment index which covers an estimated 15 per cent of PNG’s workforce and excludes public servants.
Formal, private sector employment reached its highest ever in 2013 as a result of the PNG liquefied natural gas (LNG) construction phase.
Employment stood at 305,000.
Employment has since fallen to 12.4 per cent – 270,000 workers by the start of the pandemic.
The pandemic exacerbated this trend, with job loss estimates ranging from 10,000 to 25,000.
According to the BPNG, in the year 2020, employment fell by 4.3 per cent.
Most sectors experienced decreases in employment: the wholesale (13.6 per cent), transportation (5.3 per cent), finance and others sectors (5.9 per cent), mineral (30 per cent, although this includes lay-offs from Porgera) were hit the hardest, with firms implementing job cuts to minimise losses. Throughout 2020, other sectors such as the agriculture, forestry and fisheries, retail, and manufacturing experienced slight increases.
The United Nations Development Programmne (UNDP) socio-economic impact finds that workers switched to agriculture after being laid off in other sectors.
Although employment data from BPNG for 2021 is incomplete, there
is an increase in employment in
all sectors reflecting economic growth.
The 100 chief executive officer survey 2021 and 2022 indicates a bump in hiring, which reflects private sector optimism of the economy.
Trade
According to the World Bank (2022), the Covid-19 crisis and associated containment measures weighed on PNG’s external economy throughout 2020.
A slowdown in global economic activity led to an 18 per cent year-on-year decline in export receipts, from K38.7 billion in 2019 to K32.1 billion in 2020.
Backlogs at container ports and longer shipping times leading to a substantial increase in container prices were among the contributing factors.
In addition, disputes around major mineral projects had a large negative impact on PNG’s total exports.
The lifting of restrictions and recovery of global activity in 2021 saw growth in exports improved.
The increase export receipts were driven primarily by the increases in agriculture prices, as well a surge in mineral prices.
Trade data for 2021 remain incomplete.
By quarter, as shown in Figure 1, export receipts declined the most in quarter two and three of 2020.
Export receipts improved in quarter four, as mineral and agriculture prices improved.
Import values declined in quarter four of 2020 and has remained suppressed following foreign exchange shortages at the backend of 2020 and into 2021.
Fiscal
Between 2017 and 2019, without adjusting for inflation (nominal), expenditure grew from K13.3 billion (18.4 per cent of GDP) to K17.6 billion (21.2 per cent of GDP).
In the same period, revenue including grants grew from K11.5 billion (15.9 per cent of GDP) to K13.6 billion (16.3 per cent of GDP).
Since 2013, revenue actuals have been lower than revenues projected in budgets.
Concerning subsequent fiscal deficits, in 2017 the deficit was K1.8 billion (3 per cent of GDP), and this grew to K4 billion (5 per cent of GDP).
The pandemic hit government hard in 2020 by increasing expenditure above figures projected in the budget, and revenue was lower than previously projected.
Expenditure increases (3.5 per cent) reflected increases under K5.6 billion economic stimulus package of mainly increases in health and security expenditure.
Lower revenue than initially projected (14.2 per cent reduction) reflected decreases in corporate income tax, and personal income taxes below targets.
Higher expenditure and lower revenue widened the budget deficit in 2020, initially projected at K4.6 billion, to K7.3 billion (9 per cent of GDP).
In 2021, with the modest rebound in growth, saw revenue improve beyond budget projections of K12.99 billion, to K13.9 billion, and this reflected primarily improvement in corporate income taxes.
An increase in expenditure from previously projected K19.6 billion to K20.1 billion (increase of 2.6 per cent) reflected increases in health and security expenditure related to restrictions imposed early in the year.
Debt
Subsequent fiscal deficits have increased the public debt levels.
Deficit levels increased from 1 per cent of GDP in 2011, to 9 per cent in 2020.
The need for more debt particularly during the pandemic has prompted parliament to amend the limit in Fiscal Responsibility Act twice, lifting the legislated limit from 35 per cent of GDP, to 60 per cent.
In the same period, debt levels increased from 17.4 per cent of GDP, to 49.2 per cent in 2020.
With further borrowing in 2021, the debt to GDP ratio has risen to 51.6 per cent and K46.8 billion.
Public debt is comprised of domestic and external debt. 52.4 per cent is domestic debt (largely commercial in nature) in the form of treasury bills, bonds, Central Bank bills, and loans.
The rest is external debt, which is largely made up of concessional loans.
Of particular concern is the interest burden on government budget.
While measuring interest costs as a share of total expenditure is useful, as a share of revenue excluding grants is better because it reveals the proportion of internally generated revenue going to repay debt.
In 2011, interest as a share of revenue was 4 per cent, and this grew to 19.2 per cent in 2021.
In other words, for every Kina collected by government in 2021, 19 toea went to pay interest.
Conclusion
The effects of the pandemic were experienced severely in 2020.
This was shown clearly in negative growth, reduction in personal incomes, increase in formal unemployment, fall in exports, and widening deficit and debt levels.
A rebound in 2021 with growth of 1 per cent has put PNG on the road to recovery, albeit slowly.
Following the 2022 General Election, the incoming government must prioritise recovery, especially in formal sector non-resource incomes, employment, and debt levels.