The PNG 2005 budget should place top priority on economic growth

Finance and Treasury Minister Bart Philemon and his bureaucrats have done a superb job in managing the national budget. They have virtually erased the memory of the 2002 budget blow out, the worst in this nation’s history. The latest estimates released by the Bank of Papua New Guinea (BPNG) show a fiscal surplus in the last six months of K157.2 million compared with a K18.6 million deficit in the same period last year.

Total government revenue, including grants, was K1.6 billion in the half year, up 12 per cent on the same period last year. Total spending was K1.44 billion, 0.3 per cent lower than the same period last year. According to the 2004 budget, total revenue had been targeted at K3.84 billion and expenditure at just over K4 billion for an overall deficit of K195.5 million.

Whether this is still the likely outcome we have no way of knowing because neither the government nor BPNG have made any forecast of revenue and expenditure outcomes in the final six months of this year. However, judging by last year’s performance the eventual budget deficit should be much lower than the target figure and revenue and expenditure could almost be in balance. However, the outcome could be quite different if large external debt repayments are made, or if there is a revenue shortfall or expenditure increase.

Because this country has been through a few tough years it has been easy for some critics to blame the government because most people are not feeling the benefits of an economic recovery. One of the more ridiculous criticisms has been to point to the record levels of foreign exchange and to relate this to difficult living conditions in rural areas.

To a relative new “Johnny-come-lately” with only a few years in the country like me, this reeks of the cargo cult - the widespread hope that the next balus flying overhead or the submarine due in Kieta is about to unload its pot of gold for everyone to share.

Foreign exchange reserves are made up of the balances left over from the country’s trade and financial dealings with the rest of the world. This money does not belong to the government to use at its whim. These are the balances left over from a soundly working economy. They provide confidence to global markets that an individual nation’s currency is sound - one of the key reasons why the kina today is worth US31 cents rather than the US19 cents it fetched in August 2002.

Two years is really not a long time and if the reserves were anywhere near what they were at times in the 1990s the kina could well be closer to US15 cents instead and everything imported would be twice as expensive. Adequate foreign exchange reserves also means that if and when the price of crude oil and/or gold suddenly plunges and badly affects our export income, the country will still have a financial cushion to protect the kina from oblivion.

A sound fiscal policy, like the one we’ve had in the past couple of years, together with healthy foreign exchange holdings, have provided the climate for low inflation. The record on the inflation front in the past year has possibly been the best since independence.

But out there in the real world the situation has not improved all that much although BPNG assures us that employment in the formal sector has risen by around 4 per cent in each of the past 2 years. More jobs, of course, are the single biggest contributor to improved living conditions and reduced poverty.

To have a significant impact, jobs should be growing by close to double digit figures, something one would hope Papua New Guinea can achieve even before two mega-projects - the gas pipeline to Australia and Ramu nickel - get the green light.

I would like to appeal to Mr Philemon and the experts in Finance and Treasury to ensure that the 2005 budget places the greatest priority on economic growth while trying to keep a tight rein on the budget.  It should target for growth of at least 5 per cent. We predict this will be easily achieved if Treasury takes heed of the incentives Prime Minister Sir Michael Somare ordered for the agriculture sector in 2004 but which were watered down.

The year of lost opportunity will never be recovered. NBPOL and its parent company, Kulim (Malaysia), were looking at a number of green-field agricultural projects that may never eventuate. Instead it could be spending up to K100 million to rehabilitate palm oil plantations in neighbouring Solomon Islands. The tragedy resulting from that foolhardy decision is caused by economists who count chickens before they are hatched. They go through an exercise to decide how much the government might lose in excise and other taxes because of concessions for duty free imports of agricultural equipment and tax holidays.

This creates a response from everybody - “gee isn’t that terrible”. Not enough consideration is given the fact that nothing is actually lost if no project eventuates. Literally there is nothing to tax.

But imagine what would have been gained if NBPOL was starting to spend K100 million on new palm oil plantations in East Sepik, Sandaun or in Western province. Over time thousands more jobs would be created and taxes paid, not just on imported equipment, but on company profits. Last year NBPOL paid the National Government K20 million in company tax, not counting the taxes paid by their employees and on imported items and the K4.5 million in dividends it paid the West New Britain Provincial Government.

What about the intangible benefits caused by NBPOL putting Papua New Guinea on the world map as one of the most technologically advanced companies in its field - in terms of its research activities, its environmental initiatives and the scope of its integrated oil palm operations. The fallacious arguments used to kill key parts of Sir Michael’s agricultural initiatives were the same ones previously used to jack up taxes on the mining and petroleum sectors, chasing most investors away. Why come here when you are faced with less taxes in Australia, the US, Canada or Indonesia?

Fortunately because those laws were changed in the first year of the Somare Government, the mining sector now faces its healthiest outlook for 10 or 20 years.

Exploration spending is up - almost every toea of it is used locally - and a variety of mining projects are being developed. The government budget must look beyond the agricultural incentives - they may take longer to generate interest this time - in its push for increased economic growth. Providing some seed capital for worthwhile ventures in various parts of the country could be one idea. This could be in the form of provision of rice seedlings or other potential crops to farmers in appropriate places around the country.

Urban councils, such as NCDC, could be encouraged to consider ways of using more labour and companies could be provided with tax breaks to hire more workers.

Beyond such initiatives it will be difficult to achieve much, for as long as the private sector shies away from the commercial banks' onerous interest rates. Only the foolhardy would borrow when they have to face interest rate charges of 14 per cent annually when inflation is running close to zero and deposits are only earning an average of 1.5 per cent. But this situation will improve unless the banks decide to downscale their operations!