PNG's economy in trouble

Budget

By Sam Vulum

PAPUA New Guinea’s ail ing economy appears to have taken a downward slide in recent months although the Government says other wise.

A widely publicised economic state ment by Prime Minister Bill Skate on May 15, which downplayed the gloomy out look, strongly contradicts public percep tion and independent expert commentaries about the reality of the situation.

According to one observer, professor and head of the Economics Department at the University of Papua New Guinea, Dr H G Mannur, the economy is in “deep dis tress, if not in serious crisis”.

Dr Mannur said in a recent column in the university’s newspaper, the Uni Tavur, that the kina was sinking fast, foreign reserves were not enough to keep the cur rency stable, the inflation rate was rising, unemployment was defiant and there were chronic power and water shortages. He said that investor confidence was also declining on the face of the falling kina and

rising crime.

Skate’s statement announced there had been considerable improvement in the eco nomic outlook during the first three months of 1998 and the pace of improve ment should increase during the next few months. He said the budget was on target and fiscal disciplines were taking hold.

The PM said there had been improve ment in the prospects for mining and agri cultural exports following the breaking of the drought. He added that there had been

an improvement in commodity prices and

about $US150 million in investment has come into the country. Also a sale of $US50 million in overseas shares was being remitted to PNG over the next few weeks. Among other things, the PM touched very lightly on what has been the most worrying concern for many Papua New Guineans - inflation.

“I have recognised that the exchange rates have caused inflationary pressures which are hurting our urban dwellers who rely on imported food and we are moving to ease the problem,” the PM said. “At the

same time, the exchange rate has helped the rural population and began the neces sary processes of opening up urban areas for rural produce.”

Despite these assurances, economic developments in recent months portray a very gloomy future.

The cost of most imported goods in the major retail outlets has rocketed since April. Two major local manufacturers also plan to increase the price of their food stuff between eight and 35 per cent. Sugar Producer Ramu Sugar was expected to increase its prices by 10 per cent by the end of April and the price of James Barnes, the producer of canned meat, is expected to rise about 15 per cent by the beginning of July. International Food Corporation shut its doors in April after the Price Controller turned down three requests for a price reprieve.

In what appears to be direct response to the worrying economic trend, the govern ment has recalled a displaced former department of finance secretary, John Vulupindi, to the public service as Governor of the Bank of PNG. Vulupindi replaced a promising young career officer Koiari Tarata who, until his dumping, had performed extremely well. The govern ment had only just reappointed Tarata for a second term “in the interest of continuity and stability in the key financial institu tion”. The sacking quickly drew criticism from former finance minister Chris Haiveta who said the timing was inappro priate. Haiveta’s short tenure in office saw a significant increase in foreign exchange reserves to nearly KBOO million in September 1997. He said “this will lead to a total loss of confidence in the market place.” Haiveta was sacked from govern ment following controversy over the Mujo

Sefa videotapes.

By early 1998, the reserves suddenly

fell to K2OO million, putting downward pressure on the kina. The government ini tially appeared to be at a loss over what to do to safeguard the currency. Skate announced that government would let the market forces determine the value of the kina. “There will be no move by my gov ernment to peg the kina,” said Skate. “We are advised by the World Bank to allow the

kina to remain around 50 US cents. In fact, it remains around that rate without inter vention but guided by market forces. Our policy is to allow the market to continue determining the rates based on supply and demand.”

The government is also seeking about SUSI7S million in loan support from the World Bank and another SUS7S million from the IMF to bail out the economy.

Both institutions are understood to be still analysing the 1998 budget to see if govern ment has complied with loan conditions set

by them. Both imposed structural adjust

ment programmes four years ago geared towards restructuring certain institutions and apparatus of the PNG economy.

The sale of oil and gas exploration and production assets of a major investor, BP, to local company. Oil Search, in May is another indicator of the worrying econom ic trend. The transaction, worth SUS4OO million, is believed to be the biggest deal ever by a PNG company. The deal does not include BP’s other commercial activities in PNG - retail and wholesale businesses including petrol stations and other busi nesses.

Skate said “the transaction shows that investors and financiers have great confi dence in PNG in general and our oil and gas industry in particular”. Opposition leader Bernard Narokobi warned this may be the “beginning of an end” for PNG’s

mining and petroleum industry.

In a further attempt to explain the situa tion, Skate agreed the main concerns now are the rate of exchange, particularly with the Australian and United States dollars, and the high interest rates. He blamed the World Bank and IMF for contributing to the problems. “While the drought was a major factor in our problems, another fac tor was the failure by the World Bank and

the IMF to provide expected budgetary

support of SUSIBO million to the 1997 budget following the Sandline incidents.

Because this money was not forthcoming, we had to borrow K3OO million on the

domestic market, causing a liquidity prob

lem and pressures on both exchange and interest rates. Another factor is the nation al reliance on imported foods. For every kina which is spent, over 60 toea goes into purchasing imported goods. Thus the wealth of our mining industry, instead of circulating within our own economy, is

rapidly being spent on imports”. ■