WB wants trust funds as part of Govt budget

THE billions of kina stashed away in trust accounts should be integrated into the central Government’s consolidated revenue fund for better control and to help manage PNG’s volatility from external shocks, the World Bank has recommended.
The bank said the economic growth would rebound this year because of the high demand from the LNG project as it swings into construction posing dangers for high inflation and deficit. 
It also raised concerns over the use of trust accounts on projects in villages with little or no accountability.
In its review of the East Asia and Pacific economies released yesterday, the WB said PNG should consider reforming the trust accounts system and fully integrate it with the Government budget.
It said PNG might consider establishing a non-renewable resource fund that, as a single savings and stabilisation fund, would be fully integrated with the macro framework, budgetary system, and spending priorities and that will seek to maximise the long-run development impact of the country’s resource wealth.
“More importantly, the Government needs to strengthen its commitment to its medium-term fiscal strategy (MTFS).
“The strategy aims to enhance the country’s macroeconomic stability by insulating the public budget from volatility in mineral revenues.
“The Government had prudently adhered to elements of its fiscal strategy years before the formal adoption of the fiscal framework in 2008.
“Windfall mineral revenues from the commodity boom years were saved in trust accounts that were built up to 14% of GDP by the end of 2008.”
More expensive public external debt was paid down to 13.2% of GDP in 2008 from a high 54.2% of GDP in 2002, the bank said.
“And, the non-mineral budget deficit was kept within bounds, until 2009 when the global financial crisis and the collapse in external demand warranted a fiscal response.
“While a looser fiscal policy stance was broadly appropriate during the crisis, breaches in MTFS commitments may risk undermining fiscal credibility,” the bank said.
Stimulus spending in 2009 far exceeded the limit imposed by the MTFS on expenditures out of accumulated mineral revenues, sending the non mineral budget deficit past its MTFS bounds to 11.4% of GDP, it noted.
“Concerns have also been raised about the quality of the stimulus spending as some involved village level projects for which project and financial reporting have historically not been forthcoming.
“Moreover, the 2010 budget surprisingly lacks any provision for using the accumulated mineral revenues for debt reduction this year.
“As the implementation of the LNG project will make attaining macroeconomic stability more difficult, it has become imperative that authorities exert tighter fiscal discipline in the years ahead.
“The 2010 budget still features a ramp-up in development spending that, when combined with sizable private investment for the LNG project, will be expansionary.
“Growth is projected to rebound strongly this year, as the construction of the LNG facility begins and the project directly and indirectly stimulates domestic demand.
“Estimates suggested that real GDP growth could increase by 0.8 percentage points a year during the construction phase alone and then perhaps by 15%-25% per year during the 30-year life of the project, doubling the country’s GDP in three to five years after the project becomes operational, the bank said.