An economist says the Papua New Guinea government faces ballooning debt servicing costs and the main reason is an enormous lift in public debt.
Paul Flanagan, an Australian with a long association in PNG economic matters, spoke with Don Wiseman about the debt levels and what the incoming government is going to have to deal with.
Papua New Guinea Kina. Photo: RNZI
PAUL FLANAGAN: The level of debt in PNG overall has increased very significantly from about 10 or 8 billion to a bit over 22 billion kina on official figures. Unofficial figures put that even higher. But what is most significant and most risky for the PNG economy is that it has massive repayments it is having to make every year on its domestic debt stock.
DON WISEMAN: So we are talking here about money owed by the government?
PF:This is right. Money owed by the government. In the case of PNG that is mostly owed to other PNG banks as well as the PNG Superannuation Fund. They are the biggest funders for this type of debt to the PNG government.
DW: Why has it ballooned?
PF: So there are two primary reasons. Number one - the government has been running the largest deficits in PNG's history and they have to be paid for. The latest, the Budget Outcome indicated that the level of deficit in PNG had climbed to over 3 billion kina or about 4.5% of the economy. So this deficit has to be financed. On top of that they are financing it with shorter and shorter term securities. So it used to be the government would borrow and go to the market and issue a three bond or a one year bond. Increasingly, because of the market, they are having to issue one month and three month bonds. And that means they have to turn them over every month or every three months - much, much more frequently than in the past. And this has really lifted the level of repayments. In fact lifted it by over 1000% through 2012 to 2016.
DW: So how significant is that in terms of the overall government budget?
PF: It is almost the same size. The total budget runs at a bit over 13 billion kina and now the total of public debt charges are also 13 billion kina. So it is a massive impost and it has to be appropriated by parliament. If you can keep turning over your debt, if the banks are prepared to say, 'We lent you 500 million we are happy to just roll it over in an ongoing basis' - that's OK but it's a rollover risk and this has become so large now that it is a very significant factor that could trigger default with banks not willing to continue to lend those funds and turning them over every so often, and that would produce a very significant debt crisis and cash crisis for PNG.
DW: So an enormous task for any incoming government. What is it that they can do?
PF: Well they have to deal with the two parts of the problem. So they need to look at options to bring down their deficit - that is looking at areas of expenditure that simply aren't high enough relative to other areas [there can't be] massive cutbacks in health and education - they need to be protected, so we need to look at areas such as the size of the public sector and maybe some local government financing. The other area that they need to do, they need to change the structure of the debt so it becomes longer term again. This is actually, one of the formerly PNG policy is not to have the debt at such short term maturities, because it is recognised as a massive risk. So assistance from outside sources such as the IMF can provide bridging finance to lengthen the debt portfolio again, to reduce the massive levels of payment that are having to be made each year and to really remove that roll over debt risk that PNG is facing.
DW: Is it likely that an organisation like the IMF will help? Do we know how they are disposed towards PNG?
PF: Well the IMF won't come in unless they are asked and any government that asks would need too recognise that they will probably be asked to make some policy changes to deal with the problems that got a country in the same situation. PNG and Mongolia have got quite a few similarities - resource rich economies, they are both having adjustment difficulties. Mongolia in some ways is doing better than PNG but they did ask earlier this for financing from the IMF and they received very substantial funds. And once the IMF comes in you tend to get funds from other sources, such as the World Bank too. So this is almost like a bridging finance to try and pare the problems that sit there in PNG - both the management of its debt and the management of its budget.
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