Economists warn of PNG fiscal crisis

3:31 pm on 6 August 2015

Economists are warning that Papua New Guinea is verging on a fiscal crisis amid a spiralling budgetary blow-out.

This follows the release of the PNG government's mid-year economic and fiscal outlook, which revises the 2015 budget deficit from 4.4 percent of GDP to 9.4 percent.

Overall, PNG government revenue is expected to shrink by 20.7 percent this calendar year.

A former Australian Treasury officer, Paul Flanagan, claimed that - while driving factors such as the fall in international commodity prices and a growth slow-down were forecast some time ago - the big surprise is the fall in PNG's non-resource revenues.

Writing for the DevPolicy website, Mr Flanagan said the Peter O'Neill-led government must make tough choices about implementing spending cuts.

Papua New Guinea's capital, Port Moresby

Papua New Guinea's capital, Port Moresby Photo: RNZI / Johnny Blades

The Sydney Morning Herald reports economists saying PNG could either slash spending on crucial services, risking a humanitarian crisis, or seek a bail-out from international partners.

The looming crisis has been undermined by last week's announcement that state-owned electricity provider PNG Power is bankrupt, and the halting of operations at the Ok Tedi mine in Western Province.

Ok Tedi was a major source of revenue for PNG but, since the government takeover in 2013, its operations been unable to manage dry conditions and the slump in the prices of gold and copper.

More on PNG's future

PNG opposition leader Don Polye this week slammed the government for mishandling the economy.

The Treasury puts the 2015 budget deficit at around $US1.7 billion but the opposition believes the actual deficit figure should be about $US2.8 billion, taking into account the controversial $US1 billion UBS state loan that the prime minister arranged last year.

Mr Polye said the government had been too secretive about its cash-flow shortage problem, keeping government institutions, business houses, financial institutions and the people in suspense.

He cited the case of schools closing down in various parts of the country, as well as major budget cuts to the health department, as a sign of the government's priorities.

Members of the Papua New Guinea government, including Treasurer Patrick Pruaitch (centre) and Prime Minister Peter O'Neill (right)

Members of the PNG government, including Finance Minister James Marape (left), Treasurer Patrick Pruaitch (centre) and Prime Minister Peter O'Neill (right) Photo: RNZ / Johnny Blades

In response, Finance Minister James Marape urged people to stay calm. He said there was no need for a supplementary budget because the national economy was being well managed.

PNG newspaper The National reports Mr Marape admitting that revenue forecast in the 2015 budget has been affected by the drop in global commodities, which he says "is something we can't control".

He said what was within the government's control was to manage the economy by curtailing waste and recurrent expenditures as well as deferring some development agendas to future budgets.

However, Mr Flanagan warned that much more was needed for the government to avert a crisis.

He said the country may need to look overseas for significant foreign borrowing, something which brings big risks, including foreign exchange rate vulnerability if PNG's kina depreciates to "more sensible market-based levels".

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