World Bank concerned over mounting deficit

THE World Bank has warned PNG of increased budget deficit this year and revealed that a large
portion of funds that were held by the Government in trust accounts have already been spent in the first half of the year.
The WB’s East Asia and Pacific Update, “Transforming the rebound into recovery”, released yesterday in Washington, DC, noted that PNG fared well during the global financial crisis.
However, it needs to be careful in the years ahead even with the expected growth from the LNG
project.
“Prudent macroeconomic management during the 2005-08 commodity boom helped PNG build large buffers to cope with the global economic crisis.
“During the years  preceding the crisis, the Government prudently capped growth of its spending, saved windfall mineral revenues and paid off more expensive external debt,” the report said.
“The non-mineral budget deficit, a key indicator of the fiscal stance in a resource rich economy, remained largely steady around 5-6% of GDP, close to the estimated long-term sustainable level.
“The overall budget was in a large surplus that peaked at 10% of GDP in 2007.”
The bank cautioned that PNG needed to be careful in calibrating the fiscal response to the global economic crisis, given the already robust growth performance of the economy and the volatility of PNG’s future mineral revenue stream.
“It is understood that one-fourth of the total savings in trust accounts, or 4%  of GDP, were used to finance Government spending in the first half of this year.
“Assuming the expenditure trend  from the first half continues, the non-mineral budget deficit might increase to 10-11% of GDP next year.
Additional fiscal pressures may emerge over the medium term, including from Government external borrowing to finance its stake in the PNG LNG  project and meet substantial public investment commitments to landowners in conjunction with the project,” the WBsaid.
It said the prospect of a major extractive industry project the PNG LNG Project is also helping buoy PNG’s economy.
The project would be implemented by a consortium of international and domestic investors led by ExxonMobil at an estimated cost of about US$17 billion (about K35 billion) including finance charges, or more than twice PNG’s annual GDP.
The project was currently at the front-end engineering and design stage with the final investment decision expected by next month.