PAPUA NEW GUINEA FORCASTS 2011-2012

Economic Intelligence Unit

The political scene in Papua New Guinea (PNG) will remain unsettled during the forecast period (2011-12). After weeks of political uncertainty, the prime minister, Sir Michael Somare, temporarily stepped down from office on December 13th to face a leadership tribunal regarding his alleged misconduct in office. Sir Michael has come under intense pressure to resign in recent years, amid a host of scandals in which he is alleged to have been involved, but he has refused to leave office permanently. His administration could yet collapse before its term ends in mid-2012.

The opposition remains determined to proceed with a no-confidence motion, having been thwarted on a number of occasions in the past year or so most recently in July 2010, when Sir Michael abruptly adjourned parliament for almost four months, thus preventing the opposition from tabling a motion against him. A motion could be tabled in early 2011; parliament is due to reconvene by January 20th after the Supreme Court ruled that it must sit by this date to nominate new candidates for governor-general (the court earlier declared the June 2010 election for this post invalid). Having failed in its previous attempts to table a no-confidence motion, the opposition, which is now thought to number 45 members of parliament (MPs), up from the previous bloc of 21, will continue to try to attract the support of the ten additional MPs that it requires for a majority in the 109-member legislature, in the hope that it will then succeed in toppling Sir Michael’s government.

Although Sir Michael has hinted for some time that he intends to bow out of politics altogether, he has yet to give any indication of when he might do so. He appears determined to safeguard his legacy, as shown by his desire to clear his name in the leadership tribunal and cling on to power. In November 2009 he unveiled a long-term social and economic development plan, PNG Vision 2050, describing it as a “beacon of fresh hope” for generations to come. Sir Michael may have still have time to groom a chosen successor if he is successful in fighting off the recent charges that led to his temporary resignation.

However, his authority within his party, the National Alliance (NA), has also been called into question, especially since the departure in July 2010 of Sir Puka Temu, who served as deputy prime minister and the party’s deputy leader for the southern region. NA officials have reportedly expressed fears for the party’s future if Sir Michael does not step down permanently. Potential contenders to succeed him as party leader include the previous deputy prime minister, Don Poyle, Samuel Abal, who succeeded Mr Poyle in the recent reshuffle and is currently acting prime minister, and one of Sir Michael’s sons, public enterprise minister Arthur Somare (although he has denied any leadership ambitions).

Although it would signify a return to the days of unstable government if the opposition were to succeed in bringing down Sir Michael and forming a new administration, this would not necessarily spook investors. There are several experienced and respected politicians on the opposition benches, including Sir Mekere Morauta, who was prime minister in 1999-2002, and Bart Philemon, who has served as treasurer and finance minister in Sir Michael’s cabinet.

Election Watch

The next parliamentary election is due by mid-2012. Given the difficulty that the NA will have in holding its administration together, the poll is likely to lead to a change of government (assuming that Sir Michael’s administration has not already been ousted by then). As yet, however, there are no clear favourites to succeed Sir Michael as prime minister.

International Relations

There is little likelihood that the current administration or its successor will introduce major changes to foreign policy. It is likely that the government in Australia led by the prime minister, Julia Gillard, will aim to maintain its close relationship with PNG, although it will also persist in efforts to reduce PNGs dependence on Australian aid and trade. Attempts to expand economic links with China will continue, as will PNG’s adherence to the One China principle, which rules out diplomatic ties with Taiwan and affirms that the latter is part of China. However, relations between PNG and China may come under strain, given a rise in anti-Chinese sentiment among local residents, in response to the number of Chinese workers employed in the country

Economic policy outlook

Policy Trends

The policy outlook is relatively positive. The government has targeted a balanced budget for 2011 that features large rises in recurrent and development spending. These increases have been made possible by a swift recovery in global commodity prices from the lows of 2009, growth in tax revenue and the fact that the government set aside in trust funds a large proportion of the windfall revenue that it accrued during the commodity price boom in 2005-08. The government avoided increasing recurrent expenditure during these years, instead setting the funds aside for “additional priority spending” on social and infrastructure development programmes. A large proportion of the windfall revenue was used to provide fiscal stimulus in 2009, but the government aims to divert Kina723m (US$263m) from the 2011 budget to top up these accounts.

The high level of government spending has alarmed the Bank of Papua New Guinea (BPNG, the central bank), which has recently reiterated that it is worried about the possibility of a sharp rise in inflation. Given this outlook, it is likely to keep monetary policy fairly tight for the next two years.

Fiscal Policy

The fiscal position remains healthy, buoyed by strong growth in taxes and royalties from projects in the mining and petroleum sectors. In November 2010 the government approved a supplementary budget worth more than Kina650m that will disburse additional funds accrued from high minerals revenue to a large liquefied natural gas (LNG) project in the Southern Highlands and Western province, as well as to other infrastructure developments. As a result, the Economist Intelligence Unit estimates that the government recorded a balanced budget in 2010. In the same session, parliament also passed the budget for 2011, which features a rise of 13.1% in total expenditure compared with the revised estimate for 2010.

However, the Government expects a similar rise in total revenue as a result of greater tax receipts, which will be generated by higher personal income arising from continued strong economic growth, and an increase in construction activity at the LNG project. We believe that the fiscal position will be stronger than the government expects in 2011, as the budget is based on conservative assumptions for global commodity prices. This will enable the government to launch a supplementary budget at the end of the year to balance its fiscal position. A further acceleration in economic growth will swell tax revenue in 2012; we forecast that the government will post a surplus of 0.1% of GDP in that year.

Monetary Policy

The BPNG has kept its main policy interest rate, the kina facility rate, at 7% since December 2009. However, the central bank is determined to keep the year-onyear rate of inflation in single digits, and is wary of a rise in inflationary pressures stemming from the current high level of government spending and the development of the LNG project. A slight tightening of monetary policy is therefore possible in the short term, but subsequent interest rate movements during the forecast period are expected to be moderate.

Democracy index: Papua New Guinea
The Economist Intelligence Unit’s 2010 Democracy index ranks Papua New Guinea (PNG) 59th out of 167 countries, a slight improvement from its position in the 2008 index, putting it among the countries classed as “flawed democracies”. This designation also includes Indonesia, the Philippines and Malaysia. Although elections in PNG are technically free, election related violence and electoral fraud are serious problems. Nevertheless, the election in 2007 demonstrated improvements in these areas, and was generally regarded as being one of the most peaceful in PNG’s history.

Democracy index
	Regime type	Overall score	Overall rank
2010	Flawed democracy	6.54 out of 10	59 out of 167
2008	Flawed democracy	6.54 out of 10	61 out of 167

Political participation receives a poor score
Although the large number of political parties winning seats in parliament causes a lengthy period of post-election horsetrading, the transfer of power is typically orderly. The poor score for political participation reflects low voter turnout, a lack of women in parliament and low adult literacy rates. PNG scores well in terms of civil liberties, with the media regarded as free and the judiciary independent. Although there are concerns over human rights abuses, politically motivated killings and disappearances at the hands of government agents are rare.

Independence of legislature continues to be undermined by executive 
Corruption remains a serious problem in PNG, undermining government effectiveness, while the government’s manipulation of parliamentary procedures often prevents the opposition from questioning the government over its performance. In mid-2010, the speaker of parliament, Jeffrey Nape, followed the government’s recommendations (rather than those of the parliamentary clerk) regarding the vote to elect the governor-general—a process that was subsequently declared invalid by the Supreme Court. Mr Nape has also come under heavy criticism for adjourning parliament at the request of the prime minister, Sir Michael Somare, effectively saving him from having to face a no-confidence motion