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Sunday, January 01, 2017

PNG TOO SHY TO REVEAL REAL STATE OF ECONOMY TO IMF

by PAUL FLANAGAN

PNG’s government must be embarrassed by the International Monetary Fund’s (IMF) assessment of its economic performance. In an extraordinary step, and the first time in PNG’s 41 year history of Independence, the PNG government has refused to release the IMF’s 2016 summary of the PNG economy. 98% of countries agreed to release this information in 2015 – so the PNG government has moved to the bottom 2% of governments when it comes to economic transparency.

In the IMF’s final press release (see here) before Christmas (generally seen as a good time to bury bad news), the International Monetary Fund indicated that “The [PNG] authorities need more time to consider the publication of the staff report and the related press release.” This appears to be polite IMF diplomatic speak for the PNG government not wanting to release the information. The IMF mission visited in mid-2016. An early draft asking for PNG government comments would have been provided about two months ago. A draft report was considered by the IMF Board on 29 November which would have included PNG’s comments on the staff papers. There has been more than enough time for the IMF’s views to be considered and for the PNG Government to respond.

If there is some genuine reason for needing more time then this could have been provided. In the absence of any explanation for this unprecedented delay for PNG, and an action so out of step with nearly all other countries, it is impossible to conclude other than the PNG government disagrees with the IMF’s assessment. Rather than engaging in open, democratic public debate, it simply doesn’t want alternative views published (at least until after the January Parliament session or the mid-year elections).  This just adds to the emerging pattern of reduced transparency from the O’Neill/Dion government.

Release of the IMF Board’s assessment and the related IMF staff documents is considered “voluntary but presumed” according to the IMF’s transparency procedures. Specifically, these transparency guidelines (see here) state “In 2015, 98 percent of member countries agreed to publish a press release, providing the IMF Executive Board’s assessment of the member’s macroeconomic and financial situation…”. So PNG has joined a very, very small set of countries at the bottom of transparency tables.

Why does this matter?

First, PNG has been actively seeking international financing to cover its foreign exchange and budget financing shortfalls following the largest budget deficits in PNG’s history.  With such a lack of transparency, the chances of obtaining a Sovereign Bond are effectively zero. International investors will be looking for adequate information from a trusted international source (the IMF) to assess the risks of investing in a PNG bond.

Second, such actions will also flow into assessments of PNG by other international lenders – not through formal requirements but through growing concerns about PNG falling back on central bank financing of deficits, moving to a fixed exchange rate and having a medium-term fiscal adjustment path that lacks credibility.

Third, international credit agencies will view this development with concern. Countries with similar or even lower credit ratings do allow this information to be published. The question always becomes “What are they trying to hide?”

Fourth, this will affect broader investor confidence in PNG. It is not just the quality and availability of the resource riches in PNG that attract investors – it is a broader set of issues including economic management and transparency. Hiding information will affect future economic growth possibilities.

Finally, and most importantly, the people of PNG have lost a key source of reasonably independent information for judging the performance of the O’Neill/Dion Government. During 2016 there have been growing doubts about the credibility of information being provided by the Government. More detail on the concerns that could have been alleviated by the IMF assessment are provided in the appendix at the end of this article. They cover issues such as: the Treasurer’s confusion about the actual size of PNG’s economy; the severity of PNG’s falling growth performance; PNG’s unfortunate retreat to printing money; serious credibility issues around budget revenues, expenditures and financing; the move to a fixed exchange rate and linked foreign exchange shortages; and what are increasingly seen as anti-growth policies. If the O’Neill/Dion government was doing as well as it claimed on such issues, it should have been in a position to welcome the IMF report.

Conclusion

I have been critical of many of the PNG government’s numbers during 2016 (details below).  In my blogs, I have talked of recent PNG figures lacking credibility, policy confusion, and even of fraudulent practices in the latest budget. The IMF report could have proven the PNG government was right and that I was wrong.  Instead, the O’Neill/Dion government has chosen a dishonorable path of suppressing information by a well-recognised international source – the IMF.

In 2015, the only two IMF members that did not publish a press release with the Board’s assessments (indeed, they did not publish a press release at all) were Suriname and Dominica. Ironically, less than 12 months later, both countries were in IMF programs trying to sort out economic crises. If there is a change of PNG’s government in mid-2017, it is likely that assistance will have to be sought from the IMF and other concessional sources of finance to help deal with PNG’s partially hidden economic mess. If there is no change of government, and even with the boom of another few big resource projects, PNG is likely to continue down a slippery slope of poor economic outcomes for its people and declining transparency on economic management. That the O’Neill/Dion Government felt the need to hide the feedback from the IMF is a shameful way to start 2017.

Appendix: Detailed issues requiring clarification

GDP size: In March 2016, the government suddenly announced that the size of the economy had increased dramatically – by 53% in 2006 alone and still a magical 40% higher by 2013.  These higher estimates are the entire basis for the government claiming its debt to GDP ratio is just below 30% and thus under the legislated limits under the Fiscal Responsibility Act. But there has been on-going confusion as to what figures to use – the 2017 Budget document used multiple versions (see here).  Even at the recent PNG Mining and Petroleum Investment Conference, the Treasurer stated in his 2 December speech, when talking about the strength of the PNG economy, that it will grow from K47.3 billion in 2015 to over K57 billion in 2017. If we use these nominal GDP numbers with Treasury’s official debt numbers for 2017 of K21.6 billion, the government would be exceeding its debt to GDP limit imposed by the Financial Responsibility Act with a ratio of 37.7% – well above the 30% limit (official central government debt of K21,623.3m from Table 12 of Appendix 3 in 2017 Budget Volume 1 divided by K57,337.6m from Table 1 of the same appendix).  This would directly contradict what his Prime Minister said just 15 minutes earlier to the audience of over 1,000 potential investors. The on-going trouble is that PNG is using two very different sets of GDP numbers.  It is confusing for others, and it appears to be confusing for even PNG’s Treasurer and Prime Minister.  An IMF view on the updated GDP figures would have helped clarify matters for everyone.

GDP growth rates: the government has admitted that GDP growth rates have fallen from their inevitable PNG LNG highs down to a level below or at similar levels to population growth rates. However, there are many other indicators that are so negative that it is almost certain that PNG’s non-resource GDP has gone through a serious recession during 2014 and 2015. The official government figures on growth include real growth in the agriculture sector in 2015 of 1.9%. Such claims were counter-intuitive given that PNG’s subsistence agriculture sector was suffering from its worst drought in 20 years, widespread hunger was being reported, and key cash crop exports had dropped by minus 56% for tea, minus 36% for rubber, minus 20% for cocoa, minus 12% for coffee, minor drop in palm oil, a large increase in copra and copra oil (but the latter account for only around 3% of the total value of agriculture exports – BPNG QEB tables 8.4 and 8.3). The IMF report would have helped clarify the growth story – without such clarification, the conclusion is that the official numbers simply lack credibility.

Printing money: PNG’s central bank started buying large amounts of government securities from the beginning of 2016 (see here).  This is equivalent to printing money. It means that there is no short-term cash shortage, but it also is a very risky approach that undermines confidence, threatens high levels of inflation, exacerbates foreign exchange shortages for the private sector, and puts stress on the entire banking system. The IMF’s views on such developments would have been extremely useful. Without them, it is hard to argue against a view that PNG is heading on a slippery slope towards a Zimbabwe style economic crisis (the author of this article observed this downward drift as Director of AusAID’s aid programs to Africa and the Middle East from 1997 to 1999).

Budget revenues: PNG’s budget revenues have collapsed over the last four years. The main cause has been a fall in domestic revenues reflecting mainly the end of the PNG LNG investment boom and the resultant recession, but also the diversion of dividends to an ambitious government petroleum development company (Kumul Petroleum) and the fall in international commodity prices (see here). Revenue forecasts for 2017 appear to be over-estimated by more than 10%. New tax measures are required to balance out the excessive level of cuts imposed in key areas such as health and education. An IMF view on budget prospects would have been useful, as well as any comments about what has been going on in off-budget funding for state owned enterprises (including the purchase of a 10% government stake in Oil Search shares).

Future budget expenditure: The 2017 budget continued forecasts of very significant cuts to key areas of expenditure such as infrastructure, health and education expenditure (these cuts have exceeded 45% in real terms from 2015 to 2017). The expenditure cutbacks are more severe than those imposed on Greece as part of its austerity program (they balanced expenditure cuts with revenue increases). The move to a more sustainable budget position is necessary after PNG recorded its largest fiscal deficits ever in 2013 and 2014. A shift towards lower deficits is a welcome policy development, but the actual pattern of planned cuts does just not seem credible or appropriate. Specifically, the 2017 budget assumed that there would be identical real cuts in expenditure in all sectors apart from Provinces over the next two years. Such uniform cuts are illogical as they assume, for example, that interest costs will go down despite the continuing growth in public debt. The IMF’s views on these approaches would have been useful, including views on the level of accountability of the extraordinarily high constituency funding through the District Improvement Support Program and the lack of reductions in spending on public service administration. In addition, its views on the actual costs of hosting the APEC conference would have helped deal with differences of view.

Budget financing: PNG is on a treadmill of increasingly short-term public debt that must constantly be re-financed. Using the 2017 budget figures, and excluding the very unlikely K2,800 million assumed from the Sovereign Bond, PNG needs to finance through its domestic auction of Treasury Bills and Bonds nearly K1 billion per month.  The total required financing challenge in 2017 totals at least K13.075 billion  – 106% of total PNG government expenditure.  With the growing likelihood that the private sector will retreat even further from providing financing (for example, the 14 December 2016 weekly auction only raised K218 million of the K726 million being sought) there is likely to be even greater use of printing money – and all of its inevitable risks for PNG’s future. Credit Suisse appears to be the only source of potential external financing – and there is no transparency on the terms of such loans. The Opposition could reasonably argue that it should not honour the servicing costs of loans that were excessive and not in the interests of the people of PNG.

Exchange rate: PNG and the IMF had a disagreement in 2015 as to whether the Kina was based on market-determined levels. With PNG effectively moving from a moving peg against the US dollar to an unquestioned fixed peg since the middle of 2016, this disagreement has been clarified. However, the IMF could have usefully provided some views on how best to deal with the foreign exchange shortages that flow from this fixed pegging.

Growth policies: In what appears to be moves towards pre-election populist policies, the government has put forward policies in areas such as agriculture, land and SMEs that are regarded as undermining PNG’s growth potential. Even PNG’s National Research Institute has expressed concerns about some of these proposals. IMF comments on how these could be improved would be valuable.
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