Why PNG's GDP will grow by more than 4 per cent

The recent 8th PNG Mining and Petroleum Investment Conference in Sydney on December 6 and 7, 2004 has been described as the most upbeat meeting ever convened by the PNG Chamber of Mines and Petroleum.

There was one major discordant note struck during two days of discussions and this occurred when the final speaker, Australia's former Deputy High Commissioner to PNG, Nicholas Coppell, provided his Foreign Ministry's view of The Road Ahead for PNG. Basically this involved four prospective scenarios drawn up by the highly reputable Australian Bureau of Agricultural and Resource Economics on the PNG economy.

Even the best of these was totally bleak. It suggested gross domestic product (GDP) would grow by 1 per cent real annually in the coming decade, translating to steadily declining per capita incomes for Papua New Guineans. Many PNG attendees at the conference were annoyed at the views of the Economic Analytical Unit of Australia's Department of Foreign Affairs and Trade, though it was in keeping with various academic and other commentaries on PNG coming out of Australia. Generally these promote a view of PNG as a failing state, which is possibly a fair interpretation of a country faced with steadily declining incomes over long periods of time.

Such bleak views have one thing on their side. PNG's recent historical performance has not been good, providing grist for the mill of economists and other commentators who have an overwhelming tendency to be part of a bandwagon.
And, of course, it could be argued that the government's mishandling of the partial privatisation of Telikom PNG supports the view of those who believe the future will not be much different from the past.

I prefer to view the Econet fiasco as an aberration, although this would not be the case if new players, who only recently sought to topple the government, replaced key current players in the new Cabinet line-up that will be announced shortly.

PNG certainly has a history of excessive budget deficits and poor economic management followed by a government that fixes things up for someone else to mess up. Fortunately in the past five years there have been some positive changes that have a permanency about them, such as the greatly improved regulatory climate and performances of our superannuation funds. The jury is still out on whether improvements in terms of excessive government borrowings and big budget deficit blowouts are things of the past.

The present government had to rescue the nation from what would have been the worst deficit ever in 2002, a grim reminder of the big deficits in 1992 and 1993 just as large quantities of Kutubu oil entered world markets. But to get back to DFAT's The Road Ahead - its four scenarios are total bunkum where the computer dictum, "garbage in, garbage out", fits perfectly.

Why is this so? Even the best scenario we believe is unrealistic. It only factors in nickel mining at Ramu and gold at Kainantu, the gas project and an assumed increase in agricultural productivity. This is fair enough, but if Ramu is good enough for development so are at least three other medium and large-scale projects. The Hidden Valley gold project (about three times the output at Kainantu) and the even bigger Wafi gold and Golpu copper-gold projects are safer bets.

There will also be several small mines started up in various parts of the country and possibly some other large projects.

There will certainly be other major spin offs from the gas project. Among those being contemplated are a petrochemical plant to produce alternate energy fuels, another plant to convert gas to diesel and a proposal to export compressed natural gas (CNG) to New Zealand. With the availability of natural gas on the domestic market there are other potential benefits, including the possibility of more competitively priced electricity supplies.

It is ironic that Australia spends hundreds of millions of dollars every year on grants to PNG but does not seem willing to carry out more meaningful analysis on the PNG economy, or even to report on the efficacy of its annual aid programs.

If the Australian Government does that there would have been no need for the four simplistic scenarios published in The Road Ahead although they provide a clear message that there is no room for complacency.

The report does make a case about how bad the recent past has been. GDP declined in all but 2 of the years from 1995 to 2002 while per capita income fell 18 per cent compared with gains of 50 per cent for Samoa and 30 per cent for Fiji. Nevertheless PNG's economic turnaround since 2002 has been dramatic in terms of the strengthening of the kina, a sharp decline in the ratio of public sector debt to GDP, sharply reduced inflation and modest economic growth.

Treasurer Bart Philemon has predicted the economy will grow by 2.9 per cent next year but I think this will be a gross under-estimation.

If the Econet deal had gone through, economic growth would have comfortably topped the 5 per cent mark, due to the injection of K150 million in capital works and a solid upturn in sectoral employment. But even without Econet, current projections are extremely conservative although the government has adopted fairly "safe" price projections for oil at US$35 a barrel and gold at US$400 an ounce.

Among the factors that will provide a stronger than anticipated growth will be the first full year of production and exports from the Napa Napa oil refinery, the start of gold production at Kainantu and new development spending and production from the North West Moran and SE Manada oilfields. Something like K800 million will also be spent on construction of the Hidden Valley gold project in Morobe.

There will be some limited spin-off benefits from spending linked to Australia's Enhanced Co-operation Program, as well as locally conducted work on front end engineering and design for the gas project. There will be further increases in exploration spending both for minerals and oil spread across several provinces.

In short, the spurt in economic activity will largely be due to an upturn in resource activities but this will have the capacity to underpin long-term growth. There will be no major new investments in the agricultural sector because incentives that have been announced are unrealistic although they could provide benefits to large companies in the areas of research and extension work.

While GDP growth should approach the 5 per cent level next year, the period from 2006 to 2010 could see this rise further to around 7 to 10 per cent due to the gas project, new mines, increased construction activity as well as an increasingly robust fisheries sector.

Confidence in such a robust outcome is underpinned by the work now being undertaken by Treasury to open district treasuries that will be responsible for making out government cheques to officials in 89 districts throughout the country. Each of these centres will also provide banking services to the neighbouring population with the increased deposit base for Bank South Pacific likely to encourage the bank to adopt even more aggressive lending policies.

I have to admit to very questionable skills as a forecaster and will have to be totally apologetic to Mr Coppell if growth next year is closer to the 1 per cent mark rather than 4-5 per cent. But we live in hope.