East Asia & Pacific Update – April 2009

By Emmanuel Narokobi

https://i2.wp.com/discuss.worldbank.org/files/1451_image_Vikram_Nehru.jpgWas invited again on Tuesday, to the World Bank office in the Deloitte Tower for a video conference with Vikram Nehru, the World Bank Chief Economist for the East Asia and Pacific Region. 11 countries were online for the video conference so again was a good global turn out to go over another economic update on our region by the World Bank.

You can download the reports here:

In summary you could say that 2009 will be the year that we experience some slowing in the PNG economy. However don’t look at the number of people in employment as indicators because PNG has such a large informal sector, but rather look at how much you get paid for work to reflect how the economy is going.

There has been some small indicators that China is recovering, which again highlights the fact that a real recovery will only be seen when China and their recovery plan and the developed nations with their 1.1 trillion G20 package begins to gain traction.

Although we may see some recovery towards the end of 2009 and into 2010, our Government must still remain prudent (like not buying private jets). Globally we are seeing more trends of investments going into developing countries ‘Majority World’ countries and if we couple that with our PNG LNG and InterOil Gas projects being developed we may have something to look forward to but that does not mean we should begin relaxing our current fiscal policies. Even though we will see recovery it may be allot slower than what we experienced before.

Vikram Nehru simply stated that for PNG to have a balanced economy the government needs to put money into infrastructure and it must support its Small to Medium Businesses. The overview for PNG in detail is as follows:

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update_april09_fullreport-1“Prior to the global economic slowdown PNG was enjoying some of the strongest economic performance since independence.

In 2007 economic growth was 6.5 percent rising to about 7 percent in 2008, the highest in over a decade. Both mineral and non-mineral GDP have been expanding. Through mid-2008, world prices for copper, gold, petroleum and tropical agricultural products, which account for over 95 percent of PNG’s merchandise exports, rose substantially, triggering an increase in output and affecting positively the rest of the economy. Macroeconomic management had been prudent: the government was pursuing a restrained fiscal policy, saving a portion of windfall revenues in trust accounts or paying down debt. By August 2008, foreign exchange reserves reached an all time peak of $2.7 billion (5 month of imports of goods and services and more than 12 months non-mineral project imports), up by $0.6 billion from the start of the year. The economy was in fact starting to show signs of overheating, with capacity bottlenecks reached in some of the sectors and inflation accelerating to 13.5 percent year-on-year in the third quarter.

The global downturn and sharp declines in prices of PNG’s key exports since mid 2008 have clouded PNG’s economic outlook but several factors have softened the impact. The economy is beginning to slow, with the growth in 2009 projected to ease to 4 percent as businesses take a more cautious view on new investment and construction, and cash crop incomes in rural areas
and exploration activity decline along with commodity prices. The factors that should cushion the impact of the financial and economic crisis include the lack of toxic assets held by the banking system and its reliance mostly on domestic deposits to finance lending. Pension funds did have investments overseas, but still managed to produce positive returns in 2008. Moreover, the consumer and business confidence in PNG has not been as badly hit as in many other countries as the prospect of the $17 billion Liquefied Natural Gas Project receiving a go ahead in late 2009 has supported domestic asset prices, particularly of real estate.

Windfall revenues prudently saved during the commodity boom years can provide support to the budget in the medium term but the government needs to guard against fiscal loosening. During the years of high commodity prices, the government prudently adopted a restrained fiscal policy, curtailing expenditure growth and saving part of budget surpluses in trust accounts (for investment projects to be implemented in the medium term) as well as through public debt prepayment. The key measure of a fiscal stance in a resource-rich economy, the non-mineral deficit, was relatively steady at around 5 percent of GDP. By end-2008 the balances in trust accounts reached around 14 percent of GDP and a substantial portion of non-concessional external public debt was prepaid. The sharp decline in commodity prices since mid-2008 has had a heavy impact at PNG’s fiscal position, effectively wiping out windfall revenues. Thanks to prudent fiscal restraint during the boom years, however, government spending did not need to be immediately cut and windfall saving in trust accounts can allow for a smooth adjustment of government fiscal stance to the lower level of mineral revenue. The 2009 budget, however, envisions fiscal loosening, with an increase in the non-mineral fiscal balance of at least 3 percent of GDP (equivalent to a nominal increase in government spending of 15-20 percent), financed by net drawdowns of trust accounts. Drawing down on local currency trust accounts poses the risk of increasing pressure on foreign exchange reserves.

The monetary policy response to the global economic downturn has been mixed. Even before the financial crisis intensified, the monetary authorities had been focusing on combating inflation and during the second half of 2008 tightened the monetary policy by raising interest rates (by 2 percent) and stepping up sales of central bank notes and foreign exchange. The exchange rate had also been maintained largely steady relative to the U.S. dollar to limit the pass-through to inflation. However, the PNG kina appreciated sharply in real effective terms in the second half of 2008, reflecting the strengthening of the dollar against other major global currencies, especially against the Australian dollar. Buoyant domestic demand, helped in part by real appreciation, contributed to foreign exchange reserves declining by one-fourth, or $0.7 billion from their peak in August 2008. With prospects for further pressure on reserves from the projected shift of the current account surplus of 3 percent of GDP in 2008 into a deficit of 6-7 percent of GDP in 2009, the central bank allowed the exchange rate to weaken in November to arrest the decline in reserves.

The kina fell by 13 percent against the U.S. dollar from November to March.

Increased domestic and external economic pressures in recent months underscore the need for careful macroeconomic management and continued structural reforms. Recent mutually offsetting macroeconomic policies – fiscal loosening while monetary policy is being tightened – indicate the need for better macroeconomic policy coordination. The government also needs to continue with the restrained fiscal policy of recent years and allow an adjustment in the exchange rate in order to limit a decline in reserves and maintain external sustainability. Management of the windfall revenues saved during the commodity boom also needs to be improved. Among the key structural challenges that remain, the key ones include ensuring the integrity of the public financial management, adequate expenditure mix for sectoral service provision, strict control over the size and performance of the civil service, and transparency and accountability in budget management. To stimulate private sector investment, particularly outside the mining sector, the critical priorities are maintaining law and order, establishing a level playing field and improving the business climate, especially through opening more markets to competition, commercializing parastatals, reducing the regulatory and licensing burden, clarifying property rights (especially for land. Developing infrastructure – electricity, telecommunications, road and other transport – through private sector involvement and greater efficiency of public investment is also a crucial precondition for accelerated private sector-led growth.

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