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Papua New Guinea Economy: Outlook and Challenges

Papua New Guinea Economy: Outlook and Challenges. Presentation to: Port Moresby Chamber of Commerce and Industry Dominic Mellor Asian Development Bank 29 March 2011. Presentation Structure. Cost of Doing Business – Inflation Income Prospects – Drivers of Growth Risks and Assumptions

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Papua New Guinea Economy: Outlook and Challenges

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  1. Papua New Guinea Economy:Outlook and Challenges Presentation to: Port Moresby Chamber of Commerce and Industry Dominic Mellor Asian Development Bank 29 March 2011

  2. Presentation Structure Cost of Doing Business – Inflation Income Prospects – Drivers of Growth Risks and Assumptions Other Issues and Challenges 2

  3. A. Cost of Doing Business 3

  4. Low official inflation … Decomposition of CPI inflation (%) Source: National Statistical Office 4

  5. … 1-2% higher if adjust for rental prices Annual Consumer Price Index Inflation, 2005Q4 – 2010Q4 Source: National Statistical Office and ADB Estimates 5

  6. Trust fund drawdowns yet to be expended? Fiscal Balance, 2006Q4 – 2011Q4 Source: National Statistical Office and ADB Estimate 6

  7. Strong Australian dollar but … Nominal exchange rate, 2009M1 – 2010M12, (Base Index = 100 in 2009M1) Source: Bank of PNG 7

  8. … diversification of imports … Origin of imports from Asia-Pacific, 2005Q1 – 2010Q4, % Source: Calculated by ADB using Bank of PNG data 8

  9. … and substitution helped anchor inflation Index price of imported and domestic staple, 1979 – 2010, (Base Year = 1977) Source: National Statistical Office; ADB Staff Calculations 9

  10. NFA contributed notably to money growth Contributions to Money Supply, 2005Q1 – 2010Q4, % Source: Bank of PNG 10

  11. Inflation expected to trend up Consumer price index inflation, 2005 – 2012, % year-average Note: ADB calculates underlying by variance-weighting CPI subgroups based on historical volatility Source: Bank of PNG and ADB estimates 11

  12. B. Indicators of Growth 12

  13. LNG construction boosted growth … Agricultural and mineral exports, 2006Q1 – 2015Q4, US$ million Source: Bank of PNG 13

  14. … and also strong commodity prices Agricultural and mining export price and volume, 2004Q4 – 2010Q4 Source: Bank of PNG and ADB for 2010Q4 14

  15. Supported by other indicators … Source: Pacific Economic Monitor 15

  16. … which are good indicators of growth Source: ADB Pacific Economic Monitor 16

  17. Near-term GDP boosted by LNG construction, commodity prices, strong investor sentiment Change in real GDP (%) Source: National Statistical Office, PNG Treasury, ADB staff estimates

  18. … but uncertain medium-term outlook Agricultural and mineral exports, 2006Q1 – 2015Q4, US$ million Source: Bank of PNG and the 2011 National Budget 18

  19. C. Risks and Assumptions • Upside • 2nd LNG project valued at $4 billion starts earlier then planned • Higher commodity prices • Increased mining activities • Trust fund expenditures ahead of 2012 National Election • Downside • Further delays in large resource projects due to landowner compensation disputes and land access issues

  20. D. Other Issues and Challenges 20

  21. Need for flexible supplementary budget that allows for funding of rehabilitation Historical budget revenue forecasts, 2003 – 2010, outturn-to-budget ratio Source: ADB estimates using PNG budget documents, 2003 to 2010 21

  22. Large flows to social sectors but stagnated for infrastructure as %GDP Government expenditure by functional classification, 2002 – 2010, Kina million Source: ADB estimates using PNG budget documents, 2003 to 2010 22

  23. Other Issues and Challenges • Risk of accumulating public liabilities until resource revenues are realized • Agree SWF working group findings • Welcome decision to move new trust funds to BPNG. Eventually should consolidate all existing trust funds with SWF • Delay non-priority projects until after peak construction phase of resource projects • BPNG to balance need to accumulate foreign reserves against impact of liquidity injection

  24. Thank you Contact: dmellor@adb.org Website: www.adb.org/pnrm Pacific Economic Monitor – Mar, Jul, Dec Asian Development Outlook – Apr, Sep

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