Papua New Guinea: an economy in transformation
- Christopher Prince
- Oct 3, 2017
- 4 min read
Papua New Guinea is currently experiencing a transition from a commodity-based economy heavily reliant on minerals and oil to a more service-based economy. This is accompanied by persistent fiscal deficit and shortage of foreign exchange, especially since the downturn in commodity prices in 2014. The IMF mission who visited Papua New Guinea in September 2017 highlighted the need for a reduction in the fiscal deficit and greater exchange rate flexibility. The Fund also welcomes a 100-Day Economic Stimulus Plan introduced by the newly elected government, as a way to address both the short-term macroeconomic challenges and the longer-term promotion of sustainable and inclusive growth. Papua New Guinea also has great potentials to grow its economy, especially with the development of mobile phones, phone banking and drones, but should also think of preserving its greatest asset: its environment.
Papua New Guinea’s economy slowed down in 2015-16 due to falls in major export commodity prices
Papua New Guinea was hard hit by the weakening in commodity prices in 2015 as its economy depends on minerals for 41% and on oil for a further 11% of its GDP. The economy was also impacted by the end of the works on the huge 292-km onshore LNG pipeline in 2014 and a severe drought in the highland region in 2016. This sluggish trend lasted well into the 2016-17 fiscal year and is expected to continue well into the 2017-18 fiscal year according to the IMF.
The Fund sent a mission to Papua New Guinea between 31 August and 14 September 2017 in the framework of its Article IV consultation. They came back with recommendations to increase PNG’s exchange rate flexibility to resolve foreign exchange shortages that are delaying economic recovery with a gradual approach aiming to restore a competitive level of the exchange rate and the to complete elimination of foreign exchange shortages by 2020. In this perspective, it welcomes the 100-Day Economic Stimulus Plan as it will help cut the deficit.
The new government is launching a 25-point 100-Day Plan
General elections were held from 24 June to 8 July 2017 and resulted in the return in power of Prime Minister Peter O’Neill with a new government. Following the formation of the new government in August, Treasury Minister Charles Abel initiated a 100-Day Plan to kick start the implementation of the Alotau Accord 2. Mr Abel launched the plan on 29 September 2017, saying the 25-Point 100-Day Economic Stimulus Plan is expected to turn the economy from its downward plan and put it back on the path to recovery and growth.
Mr Abel says the government has placed the plan into five categories which will see them maintaining fiscal discipline and boost foreign exchange, grow the country's revenue, strengthen the economic base, improve its governance record and acting strategically to turn back the economy.
The objectives are to cut the 2017 fiscal deficit to a little over 3% of GDP and to curb the public debt-to-GDP ratio below 30% of GDP. To help achieve this, the government plans on improving tax compliance.
The country's Treasurer also plans to overhaul and simplify the tax system, making it fairer and easier to collect, as well as reducing some of the government’s highest expenditures. To this aim, it plans to move to self-reliance by generating energy from the oil, gas and hydro, grow rice domestically or find locally-sourced alternatives.
Papua New Guinea has new technology opportunities and great ecological treasures to preserve
Papua New Guinea also harbours ecological treasures that should be preserved and its economy would benefit from the development of smartphone and drone uses.
The futurist Mark Pesce estimates that PNG could raise its GDP per capita by four times with the development of smartphones as he considers that “the smartphone is the most important tool since the invention of the metal axe handle”. Indeed, smartphones can be used for communication, commerce, education, community and culture and significantly increase activity in all these sectors. As of January 2017, 40% of New Guineans own a mobile phone. Mr Pesce hence recommends the build-up of mobile infrastructure so that the entire nation has mobile coverage and mobile broadband capacity. He also points out to the association between telcos and banks to get adequate return on investment and further revenues. Allowing PNG telcos to go into banking and banks into telecommunications would help the emergence of mobile money that would also be very beneficial to the PNG economy. Moreover, according to Deloitte’s Robert Hillard, phone banking is proving to reducing theft and boosting saving levels, particularly in remote and rural areas.
Besides, there are a lot of other benefits to be found in e-commerce and mobile retailing as they will reduce the cost of doing business, the price of goods and services and the cost and frequency of travel for remote consumers.
Mark Pesce also believes in economic benefits from the transformation of logistics in PNG with the introduction of “high capacity autonomous drones, capable of carrying several hundred kilograms” across the country and through the use of connected and intelligent robots in farming in the longer term. But the government should seriously look at the social consequences if they are ever to be replace farmers by robots as currently 85% of New Guineans rely on semi-subsistence agriculture.
While developing these new technologies, Papua New Guinea should however take care of preserving its most precious asset: its environment. Few places on Earth boast such a high concentration of different ecosystems and landscapes. It should preserve its rainforest, biodiversity and unique wildlife for future generations as they may conceal the solutions to many of today’s and tomorrow’s environment, climate and health issues.
