O'NEILL CONTINUES TO LIE ABOUT THE ECONOMY

by BRYAN KRAMER

Prime Minister Peter O'Neill continues to issue misleading statements about the real state of the economy including the Government's true debt levels.
On 3rd March 2016 O'Neill delivered a speech before Australian National Press Club in Canberra where he highlighted serious decline in world prices for our oil and gas and our minerals over the last 12 to 18 months has had a serious impact on our economy.
"I do not want to sugar coat the pressures that we are facing with our people. We have an open dialogue on what we are doing to confront these challenges" he said.
He went on to explain just a couple of years ago - "royalties and taxes from the resource sector totalled close to two billion Kina. Last year it amounted to just 260 million Kina - barely one eighth of the previous year’s revenues, and we expect the same in 2016" he said.
He said as a result his Government was forced to revise his budget estimates downwards and live within the new normal.

"We are deliberately running a deficit budget because we are committed to the promises we have made to our people. Our debt level is manageable - about 35 per cent of our GDP. Our government had to make tough decisions while making sure that Government itself is held responsible for those decisions. That is an approach that is well accepted by our citizens. We have cut spending and we have done so in a careful way that ensures the delivery of basic services." he said
Meanwhile he and his infamous Secretary of Treasury Dairi Vele have no problem sugar coating the issue in PNG.

In January 2016 Vele issued a press statement to Post Courier claiming the Government should be given credit for prudent management in tough conditions.
"Our economy is in a much better shape than many countries in the world facing similar challenges. Our growth rates are among the highest in the world, while our debt to GDP is amongst the lowest in the world. Inflation is stable and low, and our foreign exchange balances are constant with nine months coverage, which is again better than most countries in the world" he said.
So are they telling the truth or deliberating making misleading statements?
Firstly you will note both O'Neill and Vele's statements on the issue of our economy will always avoid providing any real comprehensive view or extensive data to support their claims.
Lets look at each statement in some detail to verify their claims
So what does the global economy and decline in world commodity prices like oil, gas and minerals have to do with our economy.

Well annually PNG receives revenue in the form of mining and petroleum tax from mining and petroleum resource companies. The amount of tax we receive is dependent on how much profits these companies make. Their profits are dependent on annual output (sales) as well as global prices for their products eg. oil, gas and gold.

In 2011 prior to O'Neill Government taking office PNG's total revenue was K8.2 Billion of which K2 Billion was collected from Mining and Petroleum Tax.
In 2012 total revenue was K9.7 Billion, Mining and Petroleum tax receipts was just short of K1 Billion (K981 million).
In 2013 total revenue was K9.8 Billion, Mining and Petroleum tax receipts was only K666 million.
In 2014 total revenue was K11.5 Billion, Mining and Petroleum tax receipts was just short of K794 million.

In 2015 final budget outcome is yet to be released. The total revenue is expected to be around K9-10 Billion, O'Neill explained the Mining and Petroleum tax receipts were only K260 million.
In 2016 the O'Neill Government expects total revenue to reach K12.6 Billion. Mining and petroleum tax receipts to remain the same as 2015 at K260 million.
In summary in 2011 mining and petroleum tax receipts was K2 Billion where the commodity prices were as follows; oil price US$104 per barrel, Gold $1,569 per ounce and copper US$8,823 per tone.
At the end of 2015 Oil was US$36.6 per barrel (down 75%) Gold $1,068 (down 32%) and copper US$4,364 (down 50%).

So there is no question commodity prices have dropped significantly resulting in sharp drop in mining and petroleum tax receipts from K2 billion in 2011 to only K260 in 2015 (down 87%).
However PNG's total annual revenue in 2011 was only K8.5 Billion estimated to be K9.8 Billion in 2015. PNG's derives incomes from a number of sources not just mining and petroleum tax. So if the countries overall revenue or income remained relatively the same why would severe drop in commodity prices effect our economy? I will answer this question later on in the article.
So O'Neill claims due to the drop in community prices his Government was forced to revise his budget estimates downwards and live within the new normal.

By law the Government is required to prepare an annual national budget to explain how it intends to manage the country's economy. Essentially the budget explains how it plans to spend public funds earned from tax revenue or borrowed funds in the following year. Treasury Department is responsible for this function. It will review actual revenue, loans and spending in current and previous years and project next year's revenue and spending needs. Once the budget is prepared the Minster of Treasury will present it to Parliament to be passed. By law the Government is restricted from expending any public funds unless it is specifically provided for in the National Budget and approved by Parliament. Any spending or loans obtained outside the budget without Parliament's approval is considered unlawful. This strict process is to ensure transparency and accountability of public funds. Meanwhile O'Neill has the worse record of expending millions of public funds including borrowed funds outside the Budget appropriation. In 2012 he allegedly directed K71.8 million in payments to Paraka Lawyers. In 2013 he directed the Secretary of Treasury to pay K50 million to LR Group to acquire the two gas turbine generators. In 2014 he approved K3 Billion USB loan; In 2012 he approved K6 Billion Exim Chinese Bank loan.
So O'Neill claims to address the shortfall in revenue he revised his 2015 budget estimates downwards to live within the new normal.

O'Neill only revised his budget estimates (2015 Budget) in supplementary budget passed in November 2015, the financial year was already ended. The reality is the O'Neill Government was forced to reduce their spending because they ran out of funds in fourth quarter of 2015. To keep afloat and meet their loan obligations they borrowed a further K3.5 Billion between September 2015 to December 2015 in domestic short term loans (Treasury Bills). In December 2015 alone O'Neill borrowed K1.5 Billion.

O'Neill said "we are deliberately running a deficit budget because we are committed to the promises we have made to our people."
When a Government spends according to the revenue it earns in a given year it is referred to as a balanced budget, spending only what it earns. A budget surplus is when revenue earned is greater than what is spent. Deficit budget is spending beyond what it earns.

Since O'Neill took office in August 2011 he has been on a reckless spending spree racking up record deficit budgets. In September 2011 following his unlawful appointment as Prime Minister his Government passed K778 million supplementary budget to spend the surplus revenue earned under Somare Government. Had Somare Government remained in office in 2011 it would have recorded a budget surplus of K710 million. Instead O'Neill spent the surplus resulting in a budget deficit of K63 million.

In 2012 O'Neill over spent by K340 million. In 2013 the deficit blew out to K2.3 Billion. In 2014 it reached K3 Billion. The 2015 final budget report is yet to come out however its expected to confirm a deficit as high as K2.8 Billion. The Central Bank January 2016 monthly economic report confirmed Government revenue earned in the 10 months to October 2015 was only K8.2 Billion and budget deficit had already reached K2.1 Billion.

If you add the total deficits during O'Neill's term is reaches a staggering K8.5 Billion. So how did the Government spend K8.5 Billion it didn't earn in revenue? By racking up massive debt.
So O"Neill claims our debt level is manageable - about 35 per cent of our GDP Lets review the facts to confirm if this is true.

GDP stands for Gross Domestic Product is represents a country's annual economic activity in any given year. The total goods and services consumed; exports less imports; foreign investment; what each individual or business consumes and government spending. The IMF report projected PNG's GDP in 2015 to be around K45.3 Billion. So according to O'Neill PNG's total debt is 35% of K45.3 Billion which equates to K15.8 Billion.

So why is O'Neill saying our debt is 35%? It's because by law our debt is not allowed to exceed 35% of GDP. In 2006 Somare Government passed PNG Fiscal Responsibility Act to promote economic and financial transparency and accountability through sound financial management. It was also to avoid repeating the same financial crisis during 1999-2000 created by Skate (PNC) Government where our debt exceeded 80% of GDP.

So if the debt is not 35% what is it? IMF Report which O'Neill released a press statement praising the findings of the report for presenting a frank assessment of the economy and he welcomed the comments and observations.

Page 9 of the report raised concerns there has been a significant increase in overall public debt, which amounts to about 56 % of GDP. This includes K2 Billion owed to Namabawan Super, State Owned Equity liabilities and K3 Billion UBS loan which the Government is not taking up in the Budget paper. 56% of GDP equals K25.4 Billion

However the report was made up to August 2015. Since that date O'Neill has borrowed a further K6.2 Billion in domestic loans (Treasury Bills & Inscribed stock) bringing the total debt to around K30 Billion mark and 66% of GDP, almost double the legal limit.

Part 2 of this article will discuss what it all means to ordinary Papua New Guineans, and short and long term effects including real solutions to avoid a major financial crisis.