Virus adds pressure on economy

The Covid-19 has hit hard the global communities and slowed economic activities. PriceWaterhouseCoopers comments on the impact of the Covid-19 on Papua New Guinea’s economy and the challenges it presented on top of the already struggling economy. Business reporter DALE LUMA writes

THE stories about 2020 that are embedded in the 2021 Budget are remarkable on any measure, according to PriceWaterhouseCoopers (PWC).
It stated in its 2021 budget insight report that at this time last year, no one could have predicted that Papua New Guinea would be rocked by:

• A global oil price war, with a 65 per cent quarterly fall in the price of oil in the March quarter; and,
• A decline in global economic activity as the Covid-19 rolled around the globe.

This was reflected in a progressive global slowdown of economic activity that put further downward pressure on PNG’s export opportunities and domestic restrictions on activity to suppress the Covid-19 virus.
While the number of confirmed Covid-19 cases in PNG remained low until July, economic activity was dulled by social distancing obligations and restrictions on movement imposed in Port Moresby as cases rapidly increased.
“For a country so dependent on the export of commodities, an oil war and a slow-down in global economic activity provided an incredible challenge, only compounded by the domestic challenges of a pandemic,” PWC stated.
“But for once, PNG is not alone in facing these challenges; all countries, to varying degrees, face the prospect of lower growth, more government debt and higher unemployment.
“Even though the global environment has shifted, the PNG Government still holds out 10 budget and reform priorities against which it wants to be judged, presumably with an acknowledgement that expectations need to be reset as to what can actually be achieved in the midst of a global downturn.”

Priorities:

• Spend the money we have more wisely;
• Raise the revenues more fairly;
• Finance the debt more cheaply;
• Leverage friendly international support more intelligently;
• Focus on growth in the agriculture, forestry and fishing sector, SMEs and the informal economy;
• Distribute resource benefits more equitably;
• Stimulate non-resource growth back to at least five per cent annually;
• Comprehensive Government state-owned enterprise reform programme for cheaper energy, internet and water;
• Getting foreign exchange flowing more freely; and,
• Create at least 10,000 jobs annually.

Economy:
According to PWC, 2020 will be remembered as the year when the global community, almost as one, saw a contraction to the degree that economic growth became negative.
“While growth projections coming into 2020 were less than stellar, no-one foresaw the oncoming pace and depth of the 2020 contraction,” it said.
“It would be convenient to say that this is simply the fault of the Covid-19, but that would miss a couple of key drivers particularly pertinent to PNG.
“First, as we noted in last year’s Budget commentary, even before Covid-19, world trade had stagnated.
“While driven by a range of factors, with ongoing trade tensions between China and the United States at its heart, even before the Covid-19 we continued to see the weakest levels of trade growth since the aftermath of the global financial crisis in 2009.
“Such a poor outlook for world trade is generally a bad omen for a country, as PNG, that is so dependent on the export of commodities.
“Second, the general malaise in trade was specifically challenging for PNG given:

• the fall in liquid natural gas (LNG) prices in 2020 after the late 2019 rally; and,
• A 65 per cent fall in oil prices at the beginning of 2020, triggered by a dispute between Russia and Saudi Arabia in response to Russia’s refusal to reduce oil production in order to keep prices for oil at moderate levels.

“The trajectory of the global economy is wrapped in uncertainty.
“In its October economic outlook, the International Monetary Fund (IMF) noted that the persistence of the shock remains uncertain and relates to factors inherently difficult to predict, including the path of the pandemic, the adjustment costs it imposes on the economy, the effectiveness of the economic policy response, and the evolution of financial sentiment.
“Clearly, the health status of major economies is the fundamental risk to world growth. Here we have contrasting outlooks, with:

• the downside heightened with the acceleration of the Covid-19 pandemic in Europe and North America;
• considerable hope that a vaccine will start to meaningfully roll out in the first quarter of 2021 with distribution over the remainder of the year.

“History tells us that recovery from a pandemic recession traditionally happens faster than from a traditional recession.
“And so the relatively quick return to global growth is plausible (even though growth may be uneven across countries).
“Not unexpectedly given the external shock, PNG’s forecast 2020 economic growth (gross domestic product) GDP of -3.8 per cent is well below the forecast provided in the 2020

Budget of two per cent:
“While the decline is most shaped by the global influences of the oil price war and the Covid-19, domestically the decline was materially shaped by specific events including:

• the indefinite closure of the Porgera mine; and,
• lower gold output from Lihir mine.

“While the growth in 2021 is projected to be higher than the pre-Covid-19 growth forecast for the same year, it is off a lower 2020 base and so recovery is not forecast within the next 13 months; the current downturn will result in a loss of just over two years of growth.
“While forecasting is challenging at the best of times, like last year, we note that the Treasury growth forecasts are broadly in line with other forecasters
“Unlike many advanced economies, the economic position that PNG now finds itself is not unprecedented.
“Unfortunately, instability has been a hallmark of the PNG economy and while the major drivers of this year’s growth drop may be different (an international oil price war and a global pandemic), the challenge to grow out of negative growth remains.
“Non-resource GDP is the best measure for economic activity in which most Papua New Guineans are involved, excluding output from the largely foreign-owned extractive sector.
“The interesting element of the future projections is that the Government is forecasting that from 2023 the non-mining sectors will grow faster than the mining sector, by about one per cent annually.
“While it has certainly been the ambition of governments to grow the non-mining sector faster. We have not seen this as a consistent outcome.
“Such an outcome, if achieved, would be welcomed as a step towards greater needed diversification of the economy.
“But this might not be an outcome given that there is upside in some of the Government’s forecasts in that they do not include:

• full reactivation of the Porgera mine, which itself could add something like 2 per cent to GDP;
• Any new additional resource projects that could come on stream.

“If these come to fruition, the projected shift in emphasis to non-mining GDP growth would likely be swamped.
“Finally, it would be remiss, given the political instability that surrounds this year’s Budget, if we did not also point out that political instability likely has an economic cost that lowers PNG’s growth prospects.

Employment:
“As a consequence, and again not surprisingly, the Government’s objective of creating at least 10,000 jobs annually was not met in 2020, with employment falling in both the non-mineral sector (the eighth consecutive year of declines) and the mineral sector.
“A couple of observations are particularly interesting. One, it appears that the manufacturing and agriculture sectors have improved their employment in spite of the broader economic decline.
“The Government notes that the negative impact of the Covid-19 on formal employment is implied to be concentrated on employees earning below the tax-free threshold’.
“The concern is that informal employment has also been disproportionately hit.

Inflation:
“The Budget reasonably forecasts a small transitory uptick in inflation as the economy picks up in 2021, before dipping down slightly.
“Given the easing of monetary policy in light of the Covid-19 slowdown it is difficult to see inflation moving considerably up.
“We note that the Budget inflation forecasts split the middle between those of third part commentators.

Foreign exchange availability:
“Foreign currency availability continues to be an ongoing challenge for the Papua New Guinea business community and ‘getting foreign exchange flowing more freely’ is again one of the Government’s stated principles underpinning the Budget and its reform agenda.
“The rationing of foreign reserves over the past five years has artificially suppressed import demand for foreign currency.
“Owing to PNG’s high level of dependence on imports for capital and consumer goods, there has been a resultant significant suppression of investment and consumption activity in the economy.
“The measures under the current Budget will both assist and harm the availability for foreign exchange as:

• access to external financing will provide an injection into foreign exchange reserves that will facilitate the easing of the foreign exchange imbalance; and,
• The fiscal deficit financing under a quantitative easing programme run by BPNG will have the opposite impact on FX reserves.

“Indeed, the Budget papers note that legacy issues such as foreign exchange shortages will continue to be impediments towards the improved growth of the business environment in the non-mineral sector.”