2018 National Budget – Economic & Development Policies

FOREWARD

It is my great pleasure to deliver the 2018 National Budget which is my first substantive budget as the Treasurer in the new O’Neill-Abel Government. The 2018 Budget marks the beginning of the new Medium Term Fiscal Strategy 2018-2022 that aims to confront the current set of challenging fiscal conditions with vigour, including the current subdued economic conditions and depressed revenue, strengthen the macroeconomic and fiscal fundamentals of the economy, and get the economy moving forward.

At the same time, the Budget will the Government’s social spending priorities and improve the opportunities for people and the standard of living for ordinary Papua New Guineans.

In recent years the PNG economy has endured a series of economic shocks following the rapid growth brought about by the commodity boom and the construction of the PNG LNG project. Commodity prices have fallen and remain relatively low and the severe drought in 2015 added to the difficulties.

A foreign exchange imbalance has developed which has further constrained economic growth, together with rising debt levels and domestic financing constraints. We have had to respond to these shocks by cutting discretionary spending, mostly from the capital budget, which has further suppressed economic conditions.

The shocks have had a much greater impact than initially anticipated and continue to have an adverse impact as we end 2017.

Total government revenue has collapsed as a share of the GDP from 20 per cent in 2012 to 13.4 per cent in 2016 and is expected to decline further to below 13 per cent by end-2017. This has resulted in larger than anticipated budget deficits and delayed the projected return to a balanced budget.

Furthermore, within the overall expenditure envelop, a number of categories have expanded, particularly personnel emoluments and interest costs. As part of its decisive and responsible management of the economy, when the lower economic growth rates were realised, the Government pursued fiscal consolidation with a significant reduction in expenditure over the past few years.

However, given the difficulty of even slowing the growth in these rigid categories of expenditure, especially against a backdrop of the continuation of subdued economic conditions, most of the burden of adjustment fell on the much-needed and productive capital expenditure Budget.

The 2018 Budget and medium-term strategies we have formulated will combat these adverse trends and get the economy moving forward again with some momentum. The strategy will pursue three parallel paths: (i) to halt the declining revenue trend then lift collections onto a higher sustained rising trend over the medium term; (ii) to reign back locked-in and less productive expenditure categories onto more sustainable paths to create space for a lift in more productive capital spending that will get the economy moving significantly forward again; and (iii) improve debt management and cost of financing and extinguishment of the foreign exchange imbalance.

The international outlook is becoming more positive, commodity prices have started to trend higher and international capital, particularly into emerging markets, is starting to expand as investor’s appetite for risk improves. We need to be ready to capitalise on these more positive international developments. The APEC summit in 2018 will allow PNG to showcase its

readiness for enhanced capital and trade flows. The 2018 Budget will provide the platform for fixing our fiscal problems and then building optimism for growth and development.

The Government announced its intentions in a 100 Day Plan to kick start the Alotau Accord 2. The 25 policy actions of the Plan were specific interventions aimed at restoring fiscal discipline, addressing the foreign exchange imbalance, enhancing revenue, strengthening our economic base and improving governance and were reinforced in the 2017 Supplementary Budget. The 2017 Supplementary Budget and 2018 Budgets are Points 1 and 2 in this Plan.

The Accord also operationalises the longer term development plans based on Vision 2050 and StaRS. These will be articulated against specific indicators and sectoral interventions in the upcoming Medium Term Development Plan 3, according to the National Planning Act, 2016. There is a specific focus on reinvigorating growth through SMEs and the tourism and agricultural sectors that will underpin broad based and inclusive economic growth structures.

In the 2018 Budget the Government will establish in the commercial banks a dedicated SME fund of K100.0 million for concessional lending, and an agricultural commercialisation fund of up to K100.0 million. Furthermore, a number of key policies associated with the 2018 APEC agenda will be progressed, such as advancing financial inclusion through financial literacy programs, adopting digital financial services and spreading mobile banking capabilities.

Importantly, the Government will continue to invest in key national infrastructure programs in 2018, particularly, the Highlands Highway, coastal jetties, the missing link roads program, hydro and gas power generation stations, and the international submarine cable project. These are important transformational projects that will reduce the cost of doing business, improve market access for rural farmers, and improve and lower the cost of communications for businesses and consumers.

The Government’s key policy priorities and programs, such as the Services Improvement Program, tuition fee free and free health care programs will be maintained to ensure the board- based consumption and delivery of goods and services to our people.

The 2018 National Budget Expenditure envelope is set at K14,718.0 million against a revenue projection of K12,731.0 million. This translates into a fiscal deficit of K1,987.2 million, or 2.48 per cent of GDP. This is expected to maintain the total debt-to-GDP ratio at just above 32 per cent of GDP, which is well within the approved range of 30.0 per cent to 35.0 per cent of GDP prescribed in the Fiscal Responsibility Act (amended 2017).

The 2018 Budget is consistent with the stringent and prudent fiscal anchors established in the new MTFS 2018-22 which comprise:

  • Lifting the total revenue (excluding grants) to GDP ratio to 14.6 per cent in 2018 and to target 14.0 per cent by 2022;
  • reducing government expenditure from 18 per cent of GDP in 2018 to 16 per cent in 2022;
  • reducing the government debt to GDP ratio to 30 per cent by 2022 and ensuring the sustainability of the debt profile, including the shift towards external financing through budget support loans from the World Bank and ADB and through an inaugural US Dollar bond issuance program;
  • maintaining the non-resource primary fiscal balance on a trajectory that will achieve a zero annual average balance over the medium term (to 2025);
  • ensuring that Personnel Emolument costs are contained and brought down from 49 per cent of total non-resource revenue in 2017 to 31 per cent by 2022; and
  • ensuring that two-thirds of primary expenditure is allocated to key MTDP Enablers and that the public investment to GDP ratio is lifted from 4 per cent of GDP in 2017 to at least 6 per cent by 2022.

To fund the adjustment costs and lift the economic growth momentum, yet stay within the set medium term fiscal anchors, the 2018 Budget will focus decisively on revenue through the first ever Medium Term Revenue Strategy which has been developed with the International Monetary Fund.

The Strategy has had substantial input from the Government’s 2015 comprehensive Tax Review and recent technical assistance from an International Monetary Fund team. Some of the key initiatives to be implemented in 2018, include the establishment of a large taxpayers’ office to improve compliance and tax service, a number of tax measures to raise additional revenue and the announcement of the drafting of a new Tax Administration Act to modernise and simplify tax administration.

The Government is also introducing legislation per the 100 Day Plan compelling all statutory authorities and other government agencies collecting non-tax revenue under statute to remit the collection of those funds to the Consolidated Revenue Fund. The Government has also commenced the process of transferring trust fund balances and assets back into the Consolidated Revenue Fund and enhancing the dividend flows from state-owned enterprises.

Financing the 2018 Budget will be critical and much will depend on the portfolio shift towards lower-average cost external debt and this will be achieved by seeking highly concessional World Bank and ADB budget support funding that will be combined with a US Dollar commercial bond program. The portfolio shift will also: firstly, relieve pressure on the tight domestic security market allowing the development of the less risky, longer term domestic bond market; secondly, increase the level of credit to the private sector; and, finally facilitate the extinguishment of the foreign exchange imbalance.

There are important adjustments to the tariff regime and housekeeping tax legislation.

Overall, the 2018 Budget is a forthright step towards strengthening the resilience of the PNG economy to withstand future economic shocks. It lays the groundwork for fiscal consolidation and it will reignite the economic growth momentum and boost optimism for the future. It will provide the platform to showcase the best of PNG to the world at the upcoming APEC summit.

It is “Time to pull our socks up and go for it”.
I commend the 2018 Budget to the Honourable Members and to the people of Papua New

Guinea.

……………………………………
HON. CHARLES ABEL, MP
DEPUTY PRIME MINISTER AND MINISTER FOR TREASURY

http://www.treasury.gov.pg/html/national_budget/2018.html

 

 

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Is the 100 Days – 25 Point Plan Practical and Achievable ?

By Francis Hualupmomi



It appears that the government has admitted that there has to be a macroeconomic discipline in rescuing the current economic situation. And it has put forward a 100-Days 25-Point Plan economic rescue package for the country based on the Alotau Accord II. But is this package realistic and achievable? Therefore, this article seeks to respond to this question.
The Current Economic Situation

Source: ADB 2017 Outlook https://www.adb.org/countries/papua-new-guinea/economy



According to the Asian Development Bank Economic Outlook (2017), the PNG economy has slowed down to 2.0 percent compared to the last four years (see the figure above). But it is predicted to pick up again at 2.5 percent by 2017 driven by mining and agriculture. The slowdown in the economy has been attributed to low commodity prices. This has increased inflation and unemployment, decreased foreign reserves, and affected the national budget.

Macroeconomic Landscape
It appears that the economic approach undertaken by the government over the last four has been one of an Expansionary. At the fiscal policy level, it has been driving the economy with high spending and borrowing at the backdrop of a decade long economic growth. The rationale is simple – utilise the surplus to expand the economy through infrastructure development which will, in turn, stimulate the economy. As a result of this approach, the economy has experienced an infrastructure boom in the economy as has been so far.
At the monetary level, it has been responding to the fiscal policy to ensure that the economy remains stabilised. It is important to note that in a country like PNG, monetary policy approach responds to fiscal policy to ensure stability. In so doing, it controls exchange rate and interest rates which tend to influence inflationary (inflation) behaviour.
Unfortunately, this macroeconomic policy has been affected by an unfavourable condition. There are two related factors, apart from others, that affect this behaviour. First, is that our commodities have been hit hard by low prices in the global market, which we have no control over. As a result of this price fluctuation, the revenue sources have been affected to sustain the fiscal capacity (budget). Because PNG is a resource-dependent economy that relies heavily on mineral and petroleum sectors, a price fluctuation in the global market will directly affect the economy in terms of growth and development. That is one of the reasons why the budget has been cut in certain social and economic sectors.
The second factor is that while the expansionary approach has been good it has not been managed at a sustainable level. What it means is that as the commodity prices slowly began to pick up again there has been a steady increase in the spending and borrowing. The reason is that there is an expectation that price will pick up again as in normal business cycle and sustain the expansionary approach. The downside of it is that it is quite difficult to predict the price fluctuation due to the complex interaction of market forces. As a result of this fiscal behaviour, the budget spending and borrowing has increased the deficit. However, the budget deficit can be improved and incrementally restored to normalcy through a sustainable macroeconomic policy package. Therefore, the next part will discuss this.

The Viability of the New Macroeconomic Rescue Package
The new Deputy Prime Minister and Treasurer, Hon Charles Able, has realised the downside of the expansionary macroeconomic approach. And he has proposed a 100-Days economic package to rescue the economy from further sinking. In essence, this is a 25-Point Plan which has been widely consulted with the private sector and led by some of the senior ministers and economic advisors. While this package may seem unrealistic to some critical commentators, in my view, it is a workable and achievable one.
The 100-Days 25-Point Plan intervention is based on these key strategic economic priority areas:


• Maintain Fiscal Discipline and Boost Foreign Exchange; Growing Our Revenues;
• Strengthening Our Economic Base;
• Improving Our Governance Record, and;
• Acting Strategically
.
First, maintaining fiscal discipline and boost foreign through the growing of revenues. Given the issue of the fiscal problem, practically maintaining a fiscal discipline in a prudent manner will help boost the foreign exchange in many ways. That means controlling and spending behaviour as compared to previous years. And this must be balanced with growing revenues through multiple sources. Incoming revenues must be prudently managed in a sustainable way. What is collected should be spent on strategic priority areas that can bring in higher returns.
In addition, the tax cut will be a balanced strategy. This is because no new taxes will be imposed on ordinary people despite declining revenues. However, this can be recovered through those who avoid or and evade tax. The country has been missing out on the billion dollar extractive industries through tax. For instance, a lot of companies in the mining, petroleum and logging industries have been avoiding or exempted from tax. As result of this, billions of Kina have been going out of the country. These lost revenues could be recovered and help support the budget.
Secondly, strengthening of the economic base is an innovative plan to invest in economic areas that have been ignored. This implies that the economic base must be diversified to boost the economy by way of revenues sources and invested in a lot of baskets to cushion economic surprises. Apparently, the focus on agriculture is pragmatic going forward. It has been a neglected billion dollar sector. Therefore, it is hoped that this will incrementally support and sustain the budget. 
Moreover, while the plan sounds practical, the governance aspect of it is fundamentally critical. The government has been widely criticised by the public for governance issues. And this approach is a noble plan to improve its credibility and international standing. In so doing, it will help its approach in prudently governing and managing the economy. Because investor confidence attracts investment and helps build the economy. Political governance is the strategic driver of economic growth and development at this time and in the long run.
Finally, these plans must be pursued in a strategic way. Every decision requires calculated available options to maximise optimal outcome. The government has chosen the best strategy therefore, it is Directionally Correct.



In conclusion, the economy has been affected due to the changing economic conditions and governing approach. And this has been evident in the current economic situation the country is facing. But this can be arrested through a sustainable macroeconomic approach. Therefore, the 100-days 25-point plan package is a practical one and needs to be incrementally governed and managed in a strategic way.

Francis Hualupmomi is a PhD Student in Public Policy in the School of Government, Victoria University of Wellington. He is a Political Scientist in the area of political economy of energy security, geopolitics of resources, international security, and strategic policy. Views expressed here are his own. francishualupmomi270@gmail.com