Country Notes: Papua New Guinea - United Nations Economic and Social Commision for Asia and Pacific

UNESCAP

Strong economic growth continues
•  Pacific island developing economies experienced sharp declines in GDP growth in 2009 on account of the global economic crisis. For 2010, t he results appear to be mixed, with only Papua New Guinea , Solomon Islands , and Palau recording improved GDP growth performance. Most of the other Pacific economies virtually stagnated, with the economy of Tonga actually contracting.
•  Papua New Guinea is the star performer with 7.1% GDP growth in 2010 compared with 5.5% growth in 2009.
•  The economy benefited from higher commodity prices as a result of a strong demand for its exports (oil, gold, copper, coffee, cocoa, and palm oil).
•  The economy was also boosted by the commencement of Papua New Guinea liquefied natural gas project.

High inflation is a major concern
•  There was some deceleration in inflation in some major Pacific island developing economies in 2010. However, prevailing inflation has been driven by higher global prices for oil and commodities and by accelerating price pressures in some of their trading partners, particularly Australia and New Zealand .
•  Papua New Guinea recorded the highest inflation rate among Pacific island developing economies at 6% in 2010 compared to 7.0% in 2009.
•  Inflation in 2010 is attributed to the global economic recovery with higher food and commodity prices and increasing domestic demand associated with the LNG project.
•  Inflation in non-traded goods and services remains relatively high. Non-tradable inflation is due in large part to the development of the LNG project. 

Current account deficit widened as growth of imports outpaced growth of exports
•  Most Pacific island countries had current account deficits for 2010 with deficits widening for Kiribati , Papua New Guinea and Samoa as growth in imports of goods and services outpaces that for exports.
•  In Papua New Guinea , the kina was stable against the US dollar while it depreciated by 14% against the Australian dollar in 2010. In the first nine months of 2011, Papua New Guinea's total exports increased by 20.8% and imports by 26.3%. Current account is estimated to have widened considerably in 2010. 

Fiscal and monetary policies
•  Available data suggest a mixed picture in terms of budget performance for Pacific island developing economies in 2010, with Samoa and Tuvalu recording larger budget deficits, while others, such as Fiji , Papua New Guinea , Solomon Islands and Tonga were expecting improved budget performance.
•  In Papua New Guinea total expenditure and net lending increased in 2010 by 23.3%, based on strong growth in development expenditure for national projects. Recurrent expenditure recorded 1.6% growth. Papua New Guinea Government projections see total government revenue (including grants) increasing by 24.0% with tax revenue contributing more than 92% of total revenue. Papua New Guinea government estimated a balanced budget in 2010 after a small budget deficit of 0.2% of GDP in 2009.
•  The Bank of Papua New Guinea has kept its main policy interest rate, the kina facility rate, at 7% since December 2009.
•  The Bank of Papua New Guinea is determined to keep the inflation rate in single digits, and is wary of a rise in inflationary pressures owing to the current high level of government spending and the ongoing development of a large liquefied natural gas project.
•  There was also a growing concern of inflationary pressures emanating from imported inflation, with the kina depreciating against its major trading partners and the excess liquidity within the economy.
•  A slight tightening of monetary policy is possible in the short term in Papua New Guinea . 

Future outlook and policy challenges
•  The Pacific island countries are strongly linked to the neighbouring major economies of Australia and New Zealand . Both of these economies are projected to grow by 2.3% and 2.4% respectively in 2011 and contribute to the positive outlook for small islands developing economies.
•  Papua New Guinea is again expected to lead this growth with 8.0% growth in 2011, boosted by rising commodity prices and growth in domestic demand coupled with acceleration in investment in a large gas export project and several mining projects.
•  One factor that could affect the Papua New Guinea 's growth prospect is movements in the prices of primary commodities and oil products. While some countries with rich natural resources such as Papua New Guinea and Solomon Islands have benefited from rising commodity prices, their economies remain fragile due to wide price volatility.
•  One key challenge for Papua New Guinea is to manage the resource boom well so that rapid economic expansion does not translate into continuously high inflation.
•  Food and oil prices are showing an increasing trend. Therefore, the challenge for Pacific governments would again be to devise appropriate social protection policies to protect the poor. While many governments adopted some good social protection policies in 2009 and 2010, they ought to evaluate further and refine them to ensure the maximum positive impact for the poor.
•  The ever-present challenge for the Pacific island developing economies including Papua New Guinea is to diversify their economies. One area that offers potential for diversification for them is agriculture.
•  A large proportion of the population in Pacific island economies lives in rural areas and produces largely for a subsistence economy. However, a number of problems exist which must be addressed as a priority if they wish to increase the productivity of the agricultural sector.
•  The involvement of the private sector is very crucial. In this connection the role of government as a facilitator in improving agricultural productivity is important.
•  Pacific island economies need to invest heavily in physical infrastructure (roads, ports, water, and electricity) and in research and development.
•  Papua New Guinea Government must also ensure that farmers have access to finance, markets and information on prices of commodities.

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