Transcript
PAUL FLANAGAN: It is a very worrying trend. The Bank seems to essentially be backstopping in saying that whatever government bonds that can't be sold on the foreign market they are going to buy to fund the deficit. And what that does it essentially starts overheating the economy. Like every single government in the world would love it if they never to actually worry about raising taxation or taking out a loan that they needed to repay to the private sector. They could just print money, but history shows that that just overheats the economy, leads to higher inflation and sometimes leads to hyper-inflation.
DON WISEMAN: I suppose one of the effects of higher inflation is going to be increased tax take - that would be something coming from it wouldn't it?
PF: There is an effect I guess in terms of nominal values that, yes, I guess there would be an increased tax take but with hyper-inflation you will also end up with problems affecting your overall growth in the economy. Essentially when you are at a stage when inflation is going up very, very strongly business confidence starts to drop, generally the ability to borrow any money starts to drop , borrowing becomes much more problematic in terms of banks lending money to the private sector, because the values keep dropping so much in real terms. So it undermines confidence in the economy and that is a real problem for improving well-being.
DW: I guess the Bank of PNG found itself in a difficult situation here because as you say these bonds weren't being taken up internationally. It had no other choice did it?
PF: Well these are certainly difficult choices for government. What was needed to be done was to try and get the budget deficit under control. And in the first place the deficit should never has been as large. There were huge risks they took back in 2013 to try, on the assumption of large revenue flows. When those revenue flows didn't come in they needed to look at reducing expenditure, but they haven't done enough in terms of lifting taxation and improving outlook for the economic growth in the economy. So there are a couple of areas where the government certainly has fallen down.
DW: This situation as it is now, there could be fairly significant inflation. What can the government do, or what should the government do to reverse this?
PF: Well part of it is just being more transparent as to exactly what's going on. We know that at the end of June are the latest numbers we have got and at that stage the bank, the central bank, essentially purchased half of the entire year's deficit. We don't know what has happened since then so some of it is about transparency, that would be a very easy first step. beyond that they need to hold on to some of the taxation measures they did introduce in the Budget. But they are now talking about meeting again in january and possibly unwinding some of those tax increases, in areas such as on the logging industry and the forestry sector in Papua New Guinea. So in these sort of circumstances where there isn't enough transparency about what is happening with the government's borrowings, it is a circumstance where international lenders will be very very cautious if they don't understand their risks, if there isn't transparency and if there is a risk of high inflation, forcing down the exchange rate - because that is another consequence. This will make it so much harder for them ever to finance a sovereign bond.
