PNG needs more ambitious expenditure plan, says ADB

Transcript

The Asian Development Bank says Papua New Guinea's medium term economic outlook is fairly strong but that more ambitious expenditure reform is needed.

PNG's economy has been feeling the pinch due to the slump in global commodity prices and an increasing rate of debt as well as a sharp rise in the cost of debt.

Yurendra Basnett of the Asian Development Bank in PNG says further re-prioritisation of expenditure would help the government to close the gap in public finances.

YURENDRA BASNETT: The government's expenditure plan if I can put it very simply is more than the revenue coming in so there is a gap, the deficit. And to finance that deficit is becoming increasingly more difficult and expensive and I think reducing that gap is quite important. We have also pointed out that given the expenditure plan if we can introduce some reforms to make it more effective in the selection of expenditure, the government could reduce that gap, reduce the size of the deficit. So some of the things we have been highlighting is that safe-guarding social expenditure, social outlays and also safeguarding infrastructure which are all part of the governments national development priority. If that is the focus and that is the drive then we think that the gap can be substantially reduced. Funding things that are perhaps longer term in nature and giving it more, giving it time for the design, proper design and proper costing could perhaps improve the public finances. So I think if the gap remains then naturally there is going to be problems in a very basic term that is a mismatch at the moment between cash in and cash out.

JOHNNY BLADES: So is the government getting to far in debt for a country in its position, in order to finance that gap you speak of?

YB: The size of that debt has been increasing, that is it is very difficult to pinpoint as to where would you say or provide a benchmark you know whether it is too high or too little. The government came out with their own assessment of what the size of the debt is for a comparable country a country of PNG's economy. I think the stock of debt that is the total size of that debt I think is still within limits. But what is perhaps concerning is the rate of growth of that debt first of all. The second issue is the cost at which each additional debt comes in that is the second issue or the interest that the government has to pay on additional borrowing and the third factor that I would like to highlight is the usage of that debt. So if the debt is used for productive activities then it would in theory be and with higher growth and higher income earning. And so I think those are the three factors that I would place in trying to assess the debt. Clearly what we have been seeing in the last few quarters is that the cost of debt has risen very sharply so that is a concern.

JB: Does the government need to revise its expenditure plan?

YB: Well what we have highlighted and what we have said is we think that the government has in its 2016 budget. It has identified a medium term fiscal plan that is how it sees expenditure and revenue growing. I am fairly confident with that overall plan, the problem is that the baseline figures where these things start from are slightly off mark and we have again highlighted this. So in that context yes there is a need for a more ambitious plan to re-prioritise the expenditure. So the government seems to have started that last year once the impact of the commodity prices came to the fore in around July last year. And I think that some measures have already been put in place but it is clear that there needs to be more.

JB: The foreign currency reserves issue which we are hearing a lot about and the government says it disagrees with critics who claim that the reserves are problematically low. It says that the country has enough. Does the country have enough?

YB: The foreign reserve and I have stated by the data from the central bank, the foreign reserves have fallen quite sharply. At the moment it is enough to provide import cover. I think what I would also sort of highlight is there are a couple of dynamics happening within that. Firstly we are seeing imports slow down so that should ease off some of the pressure. We also in the last year there was a you know the impact also came with the closure of one of the mines. So the earning dollar earning had reduced so there are some of these positive signs that we are seeing into 2016. They will help reduce the pressure but they are likely to eliminate it. So again I think we need expenditure prioritisation again. Public expenditure contributes to that import demand. So if public finance, public expenditure remains high, that is again contributing to the import demand and hence the demand for dollar. So re-prioritising that expenditure would ease of that expenditure again.

JB: The resource wealth of PNG seems to stand it in good stead for the future but is that all at risk?

YB: We feel that the medium term outlook is still fairly strong. When we speak to the private sector we do get this view that they feel that this is a growth market. So that remains, but of course there are large downside risks now and indeed if some of these measures are delayed it starts to chip into that confidence. So the quicker these measures are implemented it will help sort of put a floor under the confidence and put PNG back onto that growth path.