STATE SPONSORED DESTRUCTION OF THE PRIVATE SECTOR
by BIRE KIMISOPA MP
The economic malaise created by the government is constricting the private sector to the point that it is now sponsoring the gradual destruction of the private sector in Papua New Guinea.
Company profits are shrinking, an increase in retrenchment and job losses, a general fall in valuations on businesses, rising cost on consumables as a consequence of the falling kina, and a soaring debt burden where the government is hoping would be paid off by some innocuous tax measure such as the controversial residential accommodation tax.
The Central Bank is equally to be blamed for the demise of the private sector given the fiscal failings of this government. The central bank monetary interventions have exacerbated the pain inflicted on the private sector through the rationing of the foreign currency where it is the sole arbiter between winners and losers in the supply of foreign currency in Papua New Guinea.
The managed float of the PNG kina has no end in sight. The depreciation of the local currency has presented a number of economic challenges and the private sector appears to be victimized in this fiscal and monetary mismatch. Without the Central Bank carefully articulating its position on what the real cost and benefits are to the economy the private remains a bystander denied of any confidence to operate in a space where it should record positive growth
Repatriation of income from Papua New Guinea is unprecedented. Given the spike in public spending on new public infrastructure and the unwarranted surge in external borrowings has increased the government interest cost to approximately K1.4 billion in 2015 and 2016 exceeding allocations to health and education respectively.
The foreign Currency debacle is PNG is now hardcore that the present import cover is insufficient as the order book far exceeds what the commercial banks are able to provide.
The recent announcement by the Central Bank on tightening of foreign currency availability and the strict protocols being enforced is a bit too little too late given the existing bank run which has been going on for the last few years. It is a knee jerk reaction by the Bank who in its own capacity should use its monetary tool to curb public consumption since 2013 instead of being the cheer squad leader of the O’Neill Dion government.
For how long can the Central Bank manage the outflow of foreign currency and when can we expect the situation to normalize?
Unfortunately this question cannot be answered by the Central Bank as it is now held hostage by the government effectively losing its independence as the economy worsens. The Central Bank has become an extension of the PNG government by trying to mimic the role of an outrigger whilst the canoe is taking in too much water.
The PNC led government and its coalition partners have inadvertently placated prudent economic management and advocated a cargo cult mentality by driving up public consumption to the roof underpinned by a debt and deficit binge over the last five fiscal years.
It is quite disappointing that the government has created winners and losers in the economy. However what is vividly clear is that the country is now facing two separate crises running simultaneously. It is facing an economic crisis as well as a cash flow crisis and unfortunately they have reached down the bottom of the policy barrel and have come up empty.
Tax revenue has tanked over the last four years at approximately K 9 billion per year and is expected to fall in 2016 and in 2017 respectively. Any dividend from the SOEs will be subject to the prevailing adverse economic conditions and may erode the strength of their combine balance sheet.
The extraction of loans from SOEs disguised in the form of dividends will not exonerate the SOEs from fraudulent and deceitful conduct. The difficult economic condition presents an opportunity to resist any attempt to fund a leaking budget and cannibalize the effective operations of the SOEs in this country.
The much publicized LNG revenues remains a mystery and only the Prime Minister and the operators of the Escrow Account in Singapore including UBS are privy which renders the much anticipated Sovereign Wealth Fund inoperable in the short to medium term.
The huge cost of the public service is a drag on economic growth and will continue to increase despite any wage freeze proposed by the government as inflation or CPI will increase the overall costs to run the public service. Furthermore, compulsory superannuation contribution must be maintained regardless of the government’s intentions to curb expenditure nullifying any real efforts in cost savings.
What should have been obvious is a genuine need to cut government expenditure, which has to be properly explained to the population at large. There should be an urgent need to undertake economic modeling so as to cap public expenditure on the so-called social experiment of free tuition fee education and free basic primary health.
Given the bleak economic forecast and the loss of confidence in the economy it is now imperative that the Central Bank embarks on a one on one campaign with the private sector right throughout the country and explain its position in the management of the foreign currency as soon as possible.
It must be open and transparent and cannot hide behind the veneer of its independence when it is quite obvious it has already lost it. The government has enough problems on its plate, which it is incapable of fixing and therefore should not be enamored anymore by a recalcitrant Central Bank as a matter of public interest.