By Carl of BPNG and Pat of Treasury Department

Peter O’Neill, Patrick Pruaitch, James Marape, and Loi Bakani have not told Papua New Guineans the real causes of our economic crises and the effects that should be expected.  

PNG’s economic crisis is far worse than what it appears and we are dumbfounded by the silence of the people in the know. Learned Papua New Guineans continue to zip their mouths and eyes whilst Prime Minister Peter O’Neill continue to peddle his lies across our simple minds. Two of us have compiled this report together for the love of our country. Most of these information are already available to the public. We hope that all equally concerned Papua New Guineans will be enlightened by this article, for an enlightened citizenry never remain silent.

We have four interconnected yet separate problems on hand at the moment:
  1. Government Coffers without Money
  2. Bank of Papua New Guinea without Sufficient Foreign Reserves (Forex)
  3. Extremely High National Debts
  4. Deficits Budgets Spiraling

Here is what actually happened, where we are and what we should expect.

  1. Expenditures outside of Budget

All raising of revenues and expenditures of public funds for any fiscal year is as authorized by Parliament and that is by law. PM O’Neill goes out of his way to direct payments outside of the Annual Budget. Some of the many examples are: K144 million PNG Power Generators, exorbitant inflated contracts such as the Pacific Games, NCD Roads, and many more.

  1. Supplementary Budgets

At the close of each fiscal year, 31st December, every residual amount in all the government accounts are regarded as savings and reverted to the consolidated revenue fund. These amounts are then carried forward to January 1 to start the following fiscal year. At the start of the fiscal year (January/February), no tax money etc comes into the coffers hence these carried over funds are used to meet the government’s financial obligations.

Supplementary Budgets are passed to mitigate two things. 1). to cater for some unanticipated windfalls, say, the Government projected its oil revenue on $70 per barrel but during the course of the year the price rose to $100 per barrel. The Government has to pass the supplementary budget to reallocate the excess ($30) revenue.   2). To plug a black hole. There may have been unanticipated shortfalls such as the downturn in commodity prices; say the oil price slumped to $40 per barrel.

What the country witnessed in Peter O’Neill’s Government is an unprecedented and threatening trend. In November 2013 and November 2014 when the Government passed the annual budgets for fiscal years 2014 and 2015 respectively, two separate Supplementary Budgets were imperceptibly inserted. The MPs were kept occupied with the bulky National Budget documents while O’Neill, Marape and Pruaitch pushed the supplementary budget through.

In the 2013 Supplementary Budget, about K380 million was reallocated and transferred to PM’s Department for the Pacific Games at the close of Government accounts.

In the 2014 Supplementary Budget, more than a K1 billion was reallocated on the eve of close of Government accounts.

These two unusual supplementary budgets left nothing in the Government coffers and caused a serious strain on the government liquidity at the start of the following fiscal years respectively.

O’Neill trialed the uncommon supplementary budget in 2013 and saw little effect in 2014 fiscal year so he decided to go for a bigger amount -K1 billion. The effect of the 2014 reallocation was felt right from the beginning in 2015 fiscal year. There was no money in the Government accounts so the government had to wait for funds to come in from tax collection and other sources. Any revenue inflows were immediately consumed by awaiting expenditure commitments.

The two weeks Pacific Games event costed the taxpayers of Papua New Guinea more than K2 billion. No amount of gold medal could outweigh the price the people paid for all the inflated infrastructures. It is believed all the facilities were built at a price triple the actual costings.  Not only did the funds come from the Government, funds were also channeled from various other entities such as PNG Forest levies, National Gaming Board, and many others.

  1. What Happened to the LNG Revenue?

National Petroleum Company (NPCP), the holder of State’s equity in the PNG LNG project, was forced to raise and declare some early dividends to rescue the Government’s liquidity problem in January 2015. NPCP declared and paid K415 million to the Government that was advanced by a syndicated loan arrangement with BSP and other banks. Yes, NPCP borrowed to declare an “advance profit”. Does it make any business sense? Yes it does, according to Peter O’Neill.

NPCP was again forced to declare a mid year dividend of K86.4 million in the middle of 2015 as the Government continued to face deteriorating cash flow problems.

The illegal K3 billion UBS loan originally obtained by Treasury Department under PM O’Neill’s signature to secure a 10% interest in Oil Search Ltd, was transferred to NPCP in the beginning of 2015. Substantial amount of capital was raised AGAIN for that transaction to occur and the following excerpt is from NPCPs website that explains the details of the transaction:

The NPCP is pleased to announce a series of transactions totaling USD 1.342 billion (at the prevailing exchange rates during the transactions) completed prior to the end of 2014. These transactions have enabled the Company to receive the States interest of 149,390,244 Oil Search shares, which is equivalent to 9.81% in Oil Search (intact and as purchased by the State during March 2014) and to repay the existing Bridge Facility to UBS, as well as to fund existing working capital requirements (stemming from its existing licences).
In order to facilitate these transactions, NPCP Group arranged new financing of circa USD 520 million (at the prevailing exchange rates during the transactions) through a syndicate of Banks comprised of ANZ, BSP and Westpac, in addition to separate UBS funding in relation to the Oil Search Shares.

It is believed that NPCP is engaging in a series of transactions in anticipation of the LNG revenue, which is in fact tied to the UBS loan at the moment. NPCP is believed to have an offshore account where the LNG proceeds are held and directly deducted to UBS for the loan repayments. If that is what’s happening according to my sources, then O’Neill, Wapu Sonk and Loi Bakani are deceiving us big time.

Aside from O’Neill’s indirect investment model through Oil Search, The State through NPCP still has to raise the 22.5% direct equity participation for the Elk/Antelope LNG project should it go ahead as scheduled. Given that NPCP is already incurring debts beyond its means, one wonders whether it would raise the capital. Don’t be surprised if the Elk/Antelope LNG is delayed, and if it is, it would be at a cost to the State for the delay.

  1. Illegal Borrowings Escalating Debts out of Control

There are a number of Borrowings directly and indirectly on behalf of the State during O’Neill’s three year term, most of which are illegal, as they weren’t approved by Parliament.

The known ones are:

  • K3 billion UBS loan
  • K6 billion Exim Bank of China
  • Over K4 billion loan by NPCP as stated above
  • K800 million loan obtained to pay for the Motukea dry wharf from Sir Mick Curtain (IPBC obtained loan from BSP, ANZ and Westpac)
  • K375 million borrowed by Petromin Holdings to participate in the controversial Nautilius Deep Sea Mining.

Imagine the amount of interest on all of these illegal loans. O’Neill recently claimed that the national debt stands at around K15 billion. Is that the true reflection of our debt? It seems that amount is the cumulative amount captured by the National Budget. What about the illegal ones listed above that had not been found in the National Budget? The aggregate of the above list is well over K13 billion and since most of these illegal loans are obtained at market rate, their interests would be well above. Are we looking at a figure of K3-4 billion in interests? Is it not safe to suggest that PNG’s real debt stands at well over K30 billion? Now BPNG and Treasury can calculate the GDP-Debt ration calculations.

These, whether procured through State owned companies or directly by Treasury, are National Debts and affect the overall fiscal ability of the State. The State bears the obligation to repay those funds. However hard O’Neill may want others to view that the loans obtained by State owned enterprises are different from the State, they are not. When State owned companies are committed to debts repayments, they will not pay any dividends to the State to fund its annual budget.

Considering also that State owned enterprises had been on life-support from the national budget all these years, one wonders whether the loans attached to their balance sheets are actually in the interest of the companies or as a disguised way of excluding the amounts in the overall GDP-debt ratio calculations.

Look at this Mid Year Economic Outlook report released by Department of Treasury:

Currently, the June outturn Debt to GDP ratio stands at 33.5 per cent of GDP. If there is no adjustment to aggregate expenditure, on current trends total public debt could increase to K21,239.0 million, which would lead to a Debt to GDP ratio of 41.3 per cent. If this was to occur it would exceed the debt limit of less than 35 per cent of GDP as set out in the amended Fiscal Responsibility Act 2014.

Dep’t of Treasury did estimate that if current trend of aggregate expenditure is not adjusted, we might have a total debt of more than K21 billion by the end of 2015 fiscal year. If that represents the amounts captured by Dep’t of Treasury (excluding those branded above as illegal worth K30 billion), PNG’s actual national debt value is far higher.

In May 2015, Singapore based Moody's Investors Service reported that Papua New Guinea's B1 foreign currency (FC) and local currency (LC) issuer ratings changed from stable (B1) to negative. Key drivers of the ratings are: (1) Fiscal deterioration resulting primarily from a step-up in spending since 2012 and (2) A weakened external payments position and increased external vulnerability.

  1. Depleting the Forex Basket

Bank of Papua New Guinea, through Jacob Weiss (Israeli long time BPNG advisor and O’Neill’s economic advisor) and Loi Bakani, is heavily compromised. The once independent institution is deliberately producing misleading and untruthful information. Its very scary, to say the least.  Here is what part of what Loi Bakani said when he attempted to water down the Treasury Mid Year Economic Outlook.
“The only protected areas from reductions in expenditure will be the appropriations to the priority areas of Health, Education, Law and Order, Economic Development especially Agriculture, and Critical Infrastructure. He said all other expenditure areas will be revisited and adjusted to the new realities that the country is facing.”

If one looks closely at the above statement, it is a type of statement that the Prime Minister should be saying, not the Central Bank Governor. Is the Prime Minister breathing into the Governor of BPNG?

Last year, BPNG, without any monitory policy reasoning, artificially perked the kina to an exchange rate higher than the market rate. That decision took most of the foreign exchange dealers such as banks by surprise and to this date, BPNG has not offered any explanation on this dark moment. Since then, the kina has reverted to its rate at the pleasure of the market forces.

The actual funds in US dollars for the UBS and Exim Bank borrowings were not remitted to PNG. Transactions were conducted overseas. Instead, BPNG foreign reserves were used to make repayments of these illegal loans. PNG is mainly an importing economy and as such the importers were placing demand on the same reserves. Loi Bakani further lied that the proceeds of the LNG revenue did flow into BPNG when in fact these funds had not been. If these funds were, we would not have had the current forex problem, don’t you think? Exonn does not keep its revenue in PNG, nor does Oil Search or Santos for that matter. NPCP has an offshore account for that. Nobody knows where the Landowners equity proceeds are.

Post Courier reported on 11th September 2015 that the Australian PNG Business council was concerned that there is about K1.5 billion worth of foreign currency orders pending clearance by the BPNG. Guess what, that is not the exact position. The figure is well above K2.3 billion pending clearance. BPNG has less than the requests in US dollars and if BPNG uses them, it would have serious implications including the exchange rate.  

Most of the big multi-national companies including banks were quietly requested by O’Neill personally to bring some of their overseas kept funds to prop-up the reserves. Seeing that the country was already facing problems, not many were inclined to take the risk. O’Neill and Bakani are contemplating on regulating and limiting offshore accounts. That will however add more problem than a solution.  

All the major importing companies are not speaking out on this. Puma Energy was a new comer on the scene so did not know how to shut its mouth. Puma opened its mouth and the next day got penalized through ICCC.
If this situation continues, and it seems it will, it will have serious consequences. Papua New Guineans should brace for some treacherous times ahead.  

  1. Overblown Deficit Budgets

According to the Mid Year Economic Outlook released by Department of Treasury in 2015, the fiscal outlook has deteriorated in the first half of 2015. With no adjustment to budgeted expenditure in 2015, the fiscal position is expected to be a deficit of K4,817.4 million or - 9.4 per cent of GDP which is an increase of K2,545.6 million compared to the initial deficit of K2,271.8 million or - 4.4 per cent of GDP at the time of the 2015 Budget. Doesn’t look so rosy, does it?

O’Neill and Pruaitch were very defensive on embarking on an ambitious consecutive deficit budgets, asserting that we should be getting back to a balanced budget by 2017. With the precarious fiscal situation we are in now and the reckless management skills of O’Neill, one wonders whether we will ever get back on a balanced position in the near future.

  1. Comparing the Greek Economic Crises

The Greek government-debt crisis was triggered by structural weaknesses in the Greek economy, and a sudden crisis in confidence among lenders. In late 2009, fears developed about Greece's ability to meet its debt obligations, due to revelations that previous data on government debt levels and deficits had been misreported by the Greek government. This led to a crisis of confidence, indicated by a widening of bond yield spreads and the cost of risk insurance on credit default swaps compared to the other Eurozone countries – Germany in particular.

The Greek economy was one of the fastest growing in the Eurozone from 2000 to 2007: during this period it grew at an annual rate of 4.2%, as foreign capital flooded into the country newly backed by the euro. This capital inflow coincided with a higher budget deficit. Huge fiscal imbalances developed over the years reached an unsustainable stage.

PNG has all the hallmarks of Greek in the current situation. The debt figures are not accurate, the deficit budget had been blown out of proportion and there is structural breakdown.

  1. Options to Rescue the Situation

O’Neill was time and again advised to revise the budget in light of the downturn in commodity prices and cut down on exorbitant inflated expenditures. He was too ignorant and arrogant. Instead, he violently attacked the messengers instead of taking heed of the message. His EGO seems to be bigger than the country.

Patrick Pruaitch indicated last month (August 2015) that he would be issuing Treasury Bonds worth K2 billion to refill the public coffers. PNG is a small capital market and only three commercial banks plus two major Superfunds seem to dominate the industry. All of them have exhausted their risk limits already and cannot take further risks. If Treasury manages to sell the bonds successfully, then they will raise K2 billion within the domestic market, which means that the forex problem will not be alleviated.

So if ever investors would want to lend to PNG under this scenario, they will have to do so at higher interest rates to compensate for the risks. The higher the borrowing costs, the harder the PNG economy from growing itself out of the current turmoil.

Raising finance in the international markets would help ease the problem of forex and cash flow but on the other hand, the debt will be spiraling out of control. It appears that with the debts PNG has at the moment, no international financier would be comfortable to invest. PM O’Neill led a team of 200 delegates to England and Europe in July 2015 under the guise of trade roadshow together with Bakani to raise capital but were unable to convince international financiers there.

We might resort to International Monetary Fund as the world’s lender of last resort for a rescue. Off course IMF lending will come with strings.

  1. Conclusion

PNG economic crises has all the hallmarks of Greek economic crises and will worsen. All Papua New Guineans should brace for the tough times ahead.

  1. Recommendations

PM O’Neill is too arrogant, too reckless and too corrupt. He is destroying this country big time. All the citizens should force him to resign immediately before it’s too late. That is what happened to Greek.

How much information and time do Papua New Guineans need –how many people have to be out of their jobs – how many more people do we want to see running out of fuel –Do you actually wanna see your rice supply running out before you rise up??????


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