2016 budget “realistic”, but obstacles remain: ADB

Stormclouds gather of the coast of Port Moresby Stormclouds gather of the coast of Port Moresby. Image courtesy madNESS Photography.

PAPUA New Guinea Treasurer Patrick Pruaitch’s 2016 Budget has positioned the nation’s fiscal policy on more realistic grounds, according to the Asian Development Bank (ADB).

However, the ADB says PNG could still find it difficult to finance a forecast deficit of K2.03 billion in 2016 as domestic sources of finance dry up.

In its December 2015 Pacific Economic Monitor analysis, the ADB said PNG had adjusted to lower revenue expectations in light of what it said were “overly optimistic assumptions on global oil prices and inflows related to liquefied natural gas (LNG).”

Papua New Guinea’s 2015 budget had projected K1.7 billion would be earned in revenues from the mining and petroleum sector during the year, assuming an oil price of US$89.70 per barrel.

With oil prices averaging US$50 over the course of the year, sector revenue had been reduced to K300 million, the ADB said.

“Although the 2016 budget revises commodity price assumptions, these still remain optimistic. Using long-run average prices for commodities—particularly oil and gold—would have reduced the risk from negative commodity price shocks,” the analysis said.

PNG has forecast an overall budget of K14.21 billion in 2016 against an expected revenue of K12.18 billion, leaving it with a deficit of K2.1 billion, or 3.7 per cent of its forecast gross domestic product.

The nation’s debt to gross domestic product ratio will then lift from 34.7% to 35.8%.

In his budget speech, delivered in early November, Mr Pruaitch said revenue projections had been adversely affected since oil prices fell in late 2014.

“The 2016 Budget has been framed amidst a weak global economy, relatively slower economic growth that has been constrained by the current El Niño drought and low commodity prices,” he said.

“Despite this, the Government remains committed to ongoing priority expenditure programs that are important for future growth.”

The government will fund transport infrastructure developments to support longer term prospects for economic growth, with K1.25 billion being allocated to the sector.

Mr Pruaitch said this would comprise K200 million being allocated to work on the Highlands Highway, K45 million to the Lae Nadzab road and K20 million to upgrading the East/West New Britain Highway among other projects.

In addition, the government would maintain its commitments to free education, free primary health care and assistance for agriculture and for small to medium enterprises, Mr Pruaitch said.

“Funding is also assured to prepare PNG for hosting of domestic and international events such as the African Caribbean and Pacific Group (ACP) meeting; the 2017 National Elections and APEC in 2018,” he said.

In its statement, the ADB said that the government’s commitment to these expenditures could pose a challenge to its fiscal discipline – a trait the government would need if it were to achieve its aim of achieving a balanced budget by 2020.

To help fund this, the PNG government will hold its first ever sovereign bond issue in a bid to raise US$1 billion, mainly for debt restructuring.

Pursuing this course of action could expose PNG to high financing costs, with nominal debt rising in tandem with movements in the exchange rate, the ADB said.

“Debt service costs are increasing and are now estimated at K1.5 billion, or 10% of the 2016 budget,” the ADB said.

“More severe cash flow constraints are likely in 2016, placing a premium on improving cash flow management through regular reconciliation of checks issued against warrants and through monitoring delays in budget execution.”

Mr Pruaitch said PNG would work with the International Monetary Fund to review its debt management strategy, setting new debt benchmarks for 2017.

At the same time as the 2016 budget was released, Mr Pruaitch launched the nation’s 2015 supplementary budget, in which expenditure cuts of K1.38 billion were implemented.

“Cuts were made to projects that are behind schedule in terms of implementation and idle funds that had not been used,” Mr Pruaitch said.

In his announcement, PNG prime minister Peter O’Neill said the 2016 budget was a responsible, fair and balanced response to difficult times, addressing short-term problems while laying foundations for future growth.

“When export prices decline by around 14 per cent in a quarter, the economic and social impact is massive,” he said.

“But it is largely beyond our control – the more we export, the more international factors have an impact on our domestic economy, on government revenues, and on the income of our farmers and the community generally.”

However, Mr O’Neill warned against what he said was unjustified doom and gloom, saying inflation had declined, lending to the private sector had grown, and employment had risen even though there had been significant job losses resulting from the end of the construction phase of the nation’s first LNG project.

“The basics of our economy are strong – and we will benefit when commodity prices recover and the export environment grows,” he said.

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