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***aCe*** 18-03-2005 03:20 PM

Economic Overview of Papua New Guinea
Papua New Guinea has two main sectors of the economy, formal and informal.

Formal sector is small component of the economy, which is predominantly urban. The informal sector is overwhelmingly in Papua New Guinea's rural areas, those persons and families engaged in subsistence and semi-subsistence activities. Both of these types of activities are usually carried out under traditional communal tenure arrangements.

This informal sector supports 80 percent of the population. In 1980, 65 percent of coffee, 54 percent of cocoa, 49 percent of copra and 13 percent of rubber was produced by smallholders of the informal sector. At present, 82 percent of coffee, 75 percent of cocoa and 83 percent of copra. 68 percent of rubber and 32 percent of oil palm is produced by smallholders. Hence, it is clear, the growth in the informal or subsistence sector is promoting the agriculture sector as well as the livelihood of the majority of the people.

Gross Domestic Product (GDP)
In 2000, Papua New Guinea's Gross Domestic Product was estimated at K9.8 billion, yielding a per capita GDP of K2053 or US$ 744. In 1994, per capita GDP was above US$ 1300 and the highest to date. Between 1994,and 2000, the kina depreciated against US dollar 66 percent. The Government devalued the kina by 12 percent in September and subsequently floated the kina in October 1994, in order to strengthen the position of international reserves. Once floated, the kina depreciated. In 1996, the economy was turned around and as result, the per capita GDP was at US$ 1208, the second highest to date. Official estimates show that total real GDP grew by 3.2 percent in 1999, following falls of 3.8 percent in 1998. The growth was mainly due to higher production of oil, minerals, some of the major crops and stronger demand for logs following the recovery from the Asian financial crisis. Also in 2000, agricultural growth slowed as a result of the decline in coffee and copra production. Crude oil production also fell significantly due to lower production at the Kutubu oil project as a result of declining reserve levels, combined with a lower extraction rate at the Gobe Main and South East Gobe Oil fields. As the result of these conditions, total real GDP growth was estimated at 0.8 percent in 2000.

Over the period 1990-2000, total real GDP grew by 56.4 percent, total non-mineral GDP by 40.3 percent, mineral sector GDP by 176.8 percent, manufacturing sector GDP by 79.1 percent and agriculture, forestry and fisheries sector by 35.8 percent.

The production and export of minerals and oil played a major part in Papua New Guinea's economy. In 2000, mining and petroleum sector accounted for an estimated 28.8 percent of GDP and 77.3 percent of total exports. The GDP was estimated at K2839.6 million and mineral export revenue was K4494.6 million in 2000, compared to 1999, respectively increasing by 20.5 percent and 27.5 percent.

Mining export receipts totalled K2572.9 million and petroleum sector earned K1921.7 million in 2000. Compared to 1999. it increased by 20.1 percent and 39 percent respectively. Mining sector growth reflected the increased production of gold at the Porgera. Ok Tedi and Misima mines, resulting from the mining of higher ore grades, increase in labour productivity, technological improvements and increase in the copper export price combined with the depreciation of the kina against the US dollar. Copper export volume declined from 143,900 tonnes in 1999 to 126,800 tonnes in 2000, due to fewer shipment as the result of major maintenance work at smelters in Europe combined with the mining of lower ore grades. But this was offset with the higher international price combined with depreciation of the kina against the US dollar. Crude Oil export volumes declined by 22.9 percent in 2000. compared to 1999, due to lower production at the Kutubu Oil project as a result of declining reserve levels, associated with a lower extraction rate at the Gobe Main and South East Gobe Oil projects. But the export price of crude oil rose significantly by 80.3 percent compared to 1999, due to higher international prices as a result of higher demand from North America and Europe, together with a decline in stock levels at United States strategic petroleum reserves. The increase in the export price more than offset the decline in export volume and resulted in an increase in the export values by 39 percent. The GDP share of the mining and petroleum sector has assumed greater significance over the 1990-2000 period with 14.7 percent in 1990 to 24 percent in 1992 and 28.8 percent in 2000. The most significant development during 1992 was the commencement of crude oil exports from Kutubu Oil fields, which is Papua New Guinea's first petroleum development project.

Agriculture, forestry and fisheries sector, which is a source of income, employment and livelihood for over 85 percent of the population of Papua New Guinea, contributed 26.3 percent of GDP and 14.8 percent of total exports in 2000, excluding manufactured agriculture products. Compared to 1999, GDP fell by 4.2 percent to K2593.9 million and exports declined by 12.1 percent to K861.9 million. This fall is largely the result of lower coffee and copra production, and a decline in export receipts for agricultural products due to lower export volume and lower export prices. The share of agriculture, forestry and fisheries, which is the mainstay of the majority of the people, has maintained its contribution to GDP, though there has been a small decline from 29 percent in 1990 to 26.3 percent in 2000. Manufacturing Manufacturing sector accounted for 8.9 percent of total GDP (12.5 percent of total non- mining GDP) and 7.5 percent of total exports in 2000. In the same period, GDP for manufacturing sector was estimated at K879.9 million and manufactured exports were K436.1 million compared to K778.9 million and K481 million in 1999 respectively. Manufactured exports decreased by 9.3 percent in 2000, mainly due to decline in export volume of copra oil combined with lower international prices of copra oil and palm oil. The volume of copra oil exported declined by 4.6 percent due to Copra Marketing Board's contractual obligation to supply external buyers and decrease the volume of copra sold to two domestic copra processing mills. The decline in international prices was due to increase in supply as a result of higher copra production by world's major producers, Philippines and Indonesia. The value of palm oil export was K 337.9 million in 1999 but only K306.6 million in 2000. The export volume increased by 32.5 percent to 336,300 tonnes in 2000, compared to 253.800 tonnes in 1999. The average export price decreased from IC1331 per tonne in 1999 to K912 per tonne in 2000. The lower export prices more than offset the increase in export volume and resulted in a decline in export value by 9.3 percent. The international price of palm oil declined due to higher production of palm oil in Malaysia and expectations of a reduction in export tax by the Indonesian Government on palm oil exports. Palm oil exports have shown the most rapid growth in recent years, with substantial increases in both the volume and the value and become the second important tree crop export, following coffee. Within 10 years, from 1990 to 2000, palm oil exports value increased from K.32.7 to K306.6 million and export volume rose from 142,700 tonnes to 336,300 tonnes. The increase was due to higher production from the oil palm producing regions as a result of improved varieties, increased yields, and fevourable climate conditions combined with new plantations. Apart from that, PNG exports palm kernel oil, copra cake, black tea, sugar, canned meat, canned fish, fish meal, fish oil, biscuits, cigarette, coconut oil based cosmetics, toilet paper, furniture, mattresses, cement, paints, sawn timber, woodchip, veneer and steel products. Over the period, 1990-2000, real manufacturing GDP grew by 79.1 percent, from K193.3 million to K346.3 million. As the substantial growth of mineral sector GDP, the share of manufacturing in total GDP remained unchanged; 9 percent in 1990 and 8.9 percent in 2000. But in the non- mining GDP (excluding mining and petroleum sectors), manufacturing contribution to GDP was 10.5 percent in 1990 to 12.5 percent in 2000. This sector ranked fourth in 1990 to third in 2000, behind agriculture, forestry, fisheries and mining and petroleum sectors.

The 1999 level of employment in the formal private sector grew 1.2 percent in mining and petroleum and 2.6 percent in non-mining sectors compared to 1998. By sector, the growth was in all sectors except building and construction and transportation sectors. The decline was generally due to lower casual employment, laying-off of some staff as a cost saving measure, rationalisation of operations, completion of some civil and building construction projects and lack of new projects. The level of manufacturing sector employment increased by 3.8 percent in 1999 compared to 1998. This occurred due to the expansion of production by several manufacturing companies, increased staff levels, introduction of additional work shifts to meet the international market demand, seasonal demand and casual employment. Over the period, 1990-1999, employment in formal private sector excluding mining grew by 6.2 percent, mining by 36.5 percent, manufacturing by 35.6 percent and agriculture, forestry, fisheries declined by 11.8 percent.

Foreign Equity Investment
Foreign equity investment in Papua New Guinea increased by 18 percent to K2625 million in 1998. from K2225 million in 1995. The increase mainly reflected foreign equity inflow into the mineral sector. The increase in 1996 was a result of the floating of Orogen Minerals Ltd and the privatisation of the Government's interest in the New Britain Palm Oil Development to non-residents. The increase in 1997 reflects the equity financing for the construction of the Gobe Oil project. The 0.8 percent decline in 1998 was due to the absence of new major projects and the withdrawal of equity investment by the manufacturing sector combined with a substantial growth in nominal GDP.

The mineral and manufacturing sectors accounted for 80.2 percent and 1.7 percent of the total equity investment in Papua New Guinea in 1998, compared to 79.6 percent and 2.5 percent in 1997, respectively. There was a decline in manufacturing sector due to the redemption of preference shares by a manufacturing company. Of the major investors, Australia holds 64 percent of the foreign equity, followed by Bahamas 7.2 percent. United Kingdom 6.4 percent and United States 4.2 percent in 1998. Over the period, 1995 to 1998 Australia, United States, United Kingdom and Malaysia increased investments while Singapore declined. The ratio of foreign equity holdings to GDP decreased from 37.4 percent in 1997, to 33.4 percent in 1998. This reflected the completion of major mineral projects, the absence of new major projects and the withdrawal of equity investments by the manufacturing sector combined with a strong growth in nominal GDP.

Balance of Payments/Exchange Rate/CPI
Papua New Guinea's balance of payments recorded a surplus of K359 million in 2000, compared to a surplus of K160 million in 1999. The higher surplus was-due in the current account as a result of a higher trade surplus which more than offset higher net services and transfer payments. The depreciation of the kina against the currencies of major trading partners, resulted in an increase in the kina value of all balance of payment transactions. The level of foreign exchange reserves at the end of December 2000 was K909.6 million, sufficient for 4 months of total imports and 5.4 months of non-mineral import cover. Compared to 1999 level of foreign reserves K550.8 million, there was a rise by 65.1 percent. In 2000, the kina exchange rate appreciated against the Australian dollar and Euro dollar, while it depreciated against the US dollar, the Japanese yen and the UK pound sterling. Against the Australian dollar and the Euro dollar, *the kina appreciated by 2.8 percent and 7.2 percent respectively; while it depreciated against the US dollar by 7.6 percent, the yen by 12.8 percent and sterling by 0.7 percent. Lower agricultural exports and reserve money accumulation under the IMF program reflected the depreciation of kina while weakening of the Australian dollar against the US dollar appreciated the kina .The depreciation of the kina against the major trading partner currencies caused increase in the prices of imported goods, but this was partly offset by the appreciation of kina against Australian dollar as most imports originated from Australia. Inflation rate in 2000 was 15.6 percent, compared to 14.9 percent in 1999. The higher rate of inflation was mainly due to the depreciation of the kina, an increase in public servants wages of 5 percent, the impact of excise duty on cigarettes and tobacco, and increases in the price of some price controlled items.

The value of Papua New Guinea's total trade (import plus export) rose 10.6 percent to K8.6 billion in 2000. compared to K7.8 billion in 1999. There were significant increase in the value of exports particularly in minerals, where exports are dominated by primary products. The total value of merchandise exports in 2000 was valued at K5.8 billion and imports totalled K2.8 billion. Compared to 1999. exports increased by 16.1 percent while imports also increased by 0.7 percent. PNG's trade surplus increased from K.2.2 billion in 1999 to K.3 billion in 2000. The higher surplus was due to an increase in the value of merchandise exports. In 2000. mineral exports including crude oil accounted for 77.3 percent of total export values. followed by agricultural exports excluding processed goods by 9.4 percent, manufactured exports. 7.5 percent, logs exports. 4.9 percent and marine exports, 0.6 percent. Total mineral export receipt was K4494.6 million in 2000. an increase of 27.5 percent. compared to K3524 million in 1999. This was due to the higher export volume of gold. higher international prices of crude oil and copper associated with the depreciation of kina. Agricultural product exports, excluding processed goods was valued at K544.7 million in 2000, compared to K694.3 million in 1999. a decrease of 21.5 percent. The decline was due to the lower export prices of most of the agricultural goods together with lower export volume of coffee. Log exports grew by 10.9 percent in 2000 to K283.5 million compared to K255.6 million in 1999. The combined increase in the export price and export volume rose the value of log export. Marine exports were valued at K33.7 million in 2000, up 10.9 percent from K30.4 million in 1999. The increase in the export value was a result of higher export prices, which more than offset the decrease in export volume. The value of manufactured export receipt was K436.1 million in 2000. a decrease of 9.3 percent, compared to K481 million in 1999. with lower values of copra oil and palm oil. This was due to the lower export prices combined with the decline in export volumes of copra oil.

In 2000, the volume of trade with trading partners and the direction of trade slightly changed, compared to 1998. The top ten trading partners are Australia. Japan. United States. China, Republic of Korea. Singapore, Germany. United Kingdom. New Zealand and Hong Kong. China became one of the top trading partners, ranking fourth in 2000 with total trade valued at K327.6 million compared to K44.5 million in 1998. Indonesia was one of the top ten trading partner in 1998 with a total trade volume of K172.2 million in 1998 traded K48.1 million worth of goods in 2000. Australia remained PNG's largest trading partner, just ahead of the United States. Total trade was valued at K4.6 billion, representing 53.4 percent of PNG's total trade. Australia is still our largest export market with exports valued at K3 billion, representing 52 percent of total exports. Also. Australia is the principal source of imports, which is valued at K 1.6 billion and represents 56.2 percent of total imports. Australia represented our largest bilateral trade surplus, valued at K 1.4 billion in 2000. Japan was PNG's second largest trading partner in 2000 with total trade valued at K732.7 million, representing 8.5 percent of total trade. Japan was also PNG's second largest export market, with exports valued at K614.2 million, or 10.6 percent of total exports. Japan is the fourth largest source of imports during the year, with imports valued at K118.5 million. PNG sourced 4.3 percent of total imports from Japan in 2000 with a trade surplus of K495.7 million. The United States was PNG's third largest trading partner in 2000, with total trade valued at K671.^) million, or 7.8 percent of total trade. The United States was the sixth largest destination for PNG's exports, which was valued at K251.8 million or 4.3 percent of total exports. It was the second largest source of imports, which was valued at K419.8 million or 15.1 percent of total imports. At K168 million. PNG's trade deficit with the United States was the largest bilateral deficit with any trading partner. China was PNG's fourth largest trading partner in 2000. rising from thirteen in 1998. Total trade was valued at K327.6 million or 3.8 percent of total trade. China was PNG's fourth largest export market, which was valued at K296.6 million in 2000 and represented 5.1 percent of total exports. PNG imported K31 million from China, representing 1.1 percent of the total imports. PNG's trade deficit with China stood at K1.9 million in 1998 but the surplus rose to K265.6 million in 2000. The Republic of Korea was PNG's fifth largest trading partner in 2000 with total trade valued at K318.6 million. 3.7 percent of total trade. Korea was the third largest destination for PNG's exports, which was valued at K303.8 million, representing 5.2 percent of total exports. It imported only K14.8 million from Korea, which is about 0.5 percent of total imports. PNG's trade surplus with Korea rose from K 162.9 million in 1998 to K289 million in 2000.

Other major trading partners in 2000 included:
Singapore, with total trade volume ofK306.7 million: Germany K281.8 million; United Kingdom K260.4 million; New Zealand K 138.4 million and Hong Kong K99.7 million. APEC is PNG's largest regional trading group, traded a combined volume of K7.4 billion in 2000. representing 86 percent of total trade. In the last 4 years since 1996, trade has increased by an average 14.5 percent per annum. In the same year. exports to APEC members rose 67 percent to K4.8 billion compared to 1998. and accounted for 83 percent of total exports. Exports to APEC partners increased 18 percent annually on average between 1996 and 2000. Compared to 1998. imports from APEC members rose 27 percent to K2.6 billion, representing 93 percent of PNG's total imports. Imports increased 10 percent on average per annum between 1996 and 2000 to this regional group. The combination of stronger export growth over import growth resulted in an increase in the trade surplus with the APEC. which surged to K2.2 billion in 2000, from K0.8 billion in 1998. While the surplus was broadly based, higher exports of mineral and logs combined with the depreciation of kina was significant. Compared to 1998. PNG exports to ASEAN fell 22 percent and imports rose 26.5 percent in 2000. The decline in exports was due to significant decreases in export to Indonesia. During this period, exports to ASEAN members accounted for 3.8 percent and imports 10.1 percent of PNG's total trade.

Cool_Guy1 28-10-2009 09:54 AM

Latest Decvelopments
Ace, It was an interesting read. This were developments taking place during that time in 2005. The latest development trend since 2005 has been substantial. PNG has experience positive economic growth since then, due to better international prices of Papua New Guinea's export commodities.

The government has collected huge amounts of money through tax because of the substantial price increases in crude oil and gold. The government consecutively ran budget surpluses since 2006, and the PNG economy is still growing at a pace that far outweighs any growths that were experienced in the short history of the country.

The prospects for PNG to achieve double digit growth figures are there, given the proposed trillian dollar LNG project, the Ramu NIckel Cobalt project, other new mines. As you can see, that the growth in PNG has been driven primarily by the increase in international prices of crude oil, gold and all major agricutural commodities. Measure growth in terms of GDP has it short comings, because it does not take into account the benefits and disincentives faced by the local subsitant farmer.

This is to say, positive growth in GDP has any impact in the small subsistance farmer in the village? GDP does not take into account the social or welfare impact growth has on individual persons and thats the short coming. Why do i say that? Did the growth in GDP, filtered into the rural population? did it have an impact on individual small subsistance farmers?

Nepal uses something they call "Happiness Index" to measure the impact of such growths experienced in their country. PNG and other countries dont have that index to measure, whether everyone in the village up to the urban areas are content and happy with the current economic groth situation and the growth has filtered equally to every sector of the economy.

In PNG's case, growths have been concetrated in the urban areas, while the rural areas have been neglected for so long. Road in the rural areas are deteriorating, which is making it impossible for coffee growers to bring their prioduces to market them in towns, consequently coffe cherries are rotting away in the villages. While most of the growth has been concentrated in the urban areas, the rural area pays the price for the constant price increases in imported items, and other input prices.

The future looks really bright. One minister spoke of the LNG project as the answer to all the problems faced in PNG. I believe the same sentiment was shared by former ministers, when the Porgera, Ok Tedi, LIhir Gold mines and even the Kutubu and Moran crude oil projects were going into full swing. Did this impact projects had any kind of real impact on the people of our nation? Absolutely not. Roads still are inaccessible in the rural areas, while those that represent them in Parliament, live in luxury in the cities, neglecting the suffering rural population. So the answer the the question raised by the minister about the LNG project being the answer to PNG's problem, is rhetoric an nonsense, because there is no equal distribution of productive capacity which would allow a fair share of the wealth distributed to the rural population where, good health, education and road services are desperately needed.

The LNG project poses a major challenge for PNG. Currently, the influx into the city of landowners trying to claim their share in the project, and to make quick bucks to live extravagant lives in Port MOresby while the real landowners sufffer back in the village trying to figure out what happened to their share of royalty payments. A huge influx of so called local landowners and con-artists have decided to take the city by storm, virtually occupying small guest houses, and pokies and prostitution venues, to show their prowess as the wealthy and rich tycoons. So the problem, of prostitution, debt burdens, lawlessness has been promted by such influx of so called local landowners.

I am of the view, that this problem, will continue on when the actual LNG project kicks off. The government has pumped in a lot of cash into the system, and i wont be surprise, if PNG faces double digit inflation outcomes towards the end of this year.

Cool_Guy1 03-12-2009 09:00 AM

Possible Impact of the LNG Project
The LNG project in PNG is one of the largest investment projects that the country is about to see in its short history. The LNG project can not be compared to that of the mineral and petroleum projects. The impact that the LNG project will have on the economy can not be predicted, making Government departments and other economic agencies unprepared for one of the biggest projects to hit the shores of Papua New Guinea.

From history and expereince from other countries, one of the main impact such large enclave industries have on the economy, is that it mops up existing resources from other sectors. The booming sector becomes a "pull-factor" for most of the resources in an economy. Such resources as labour tend to move towards the booming sector, with the lure of bigger and better benefits. When this happens, the other smaller sectors like the agriculture manufacturing sectors, shrink, because they can not compete against the booming sector. They call this "Dutch Disease". It was first found in the Dutch economy, when, there was a mineral sector boom, and most of the other resources in the economy were pooled into the mineral sector due to higher benefits and other sectors could not compete with the booming sector. Is it likely that this will happen in PNG?

Has it happened with the current mineral projects? Speaking to some big agricultural companies, i have found out that, most of their engineers were lured out of their major projects into the mineral sector and the staff run over was high, especially for technical people. Even, it is evident today, with the mining boom in Perth, when most of our mining engineers and geologist who were trained at Uni Tech and UPNG, tend to be lured by big money from mineral companies in Perth, and there is a brain drain in the country.

What would happen with the LNG project. With the shortage of technical people in PNG, the few engineers (mining), geologist and other techinical people, even lawyers, accountants, economist will be lured to this major project and the other sectors will shrink. Speaking to a person with lots of expereince with the Agricultural sector, he feared this might happen, and i knew he was right. It will happen and what next? The shrinking of the agricultural sector that employs more that 80 percent of the population, will be greatly affected. It is not only the brain drain, but, when the LNG project hits the shores, it is likely that, the exchange rate will appreciate.

An appreciation of the Kina against the other currencies will make PNG's exports more expensive. Small growers will receive less kina for their commodities. With the infux of foreign currency from the foreign developers of the project, it will bid up the price of kina, hence, exchange rate appreciation. When this happens, the agricultural sector suffers, hence more than 80 percent of the population. Unless the government set up something to maintain a reasonable price level, surely, the agricultural and other sectors will expereince tough challenges ahead, with shrinking margins which would lead to dis-incentives in re-investment.

On the other hand, such project also makes other sectors of the economy more cost efficient and maximize their profits. It can weed out slumberness, etc, raising productivity levels. What real impact the LNG project will have on the other sectors and the economy as a whole hasnt been established. Most people have been speculating about the impact of LNG, without actual analysis of the situation. A economic impact study was done by the company who is operating the LNG project, but, most companies are bias in their reports. An independent reports or study is needed to estabish the real impact of the LNG project, in order for policy makers to be more geared towards steralising any negative impact and providing a buffer for positive spill-overs from this investment.

Sometimes, such large investments are a blessing and a curse at the same time. With the current trend of spending by the government on the BSA, etc, and the spending spree by the landowners from the BSA, indicates the sort of trend most of the income generated from this large project will be directed towards. Research has to be done on an holistic approach, from social, developmental, economical to health issues, to counter any form of negative spill overs from this project. Negative things have spiralled from the BSA agreement in Rabaul, where young girls were being lured by money to do anything, is this the sort of trend we will see when the project is up? Will this sort of social behaviour impact on the HIV status of the country? How can the government assist in educating the landowners to invest in fruitful investments, which would benefit them for a long while? how much of this spending spree will impact on inflation? How much tax collection will hit the government coffers and affect its budget? how much of this foreign currency will impact the foreign exchange market? Is the public service ready to provide buffer for such a large project? how well equiped is the government to get the maximum benefit from this project?

This are some pressing questins that have lingered in my mind, because, nobody seemed to have done their homework. The decision to allow LNG project was political, has beauracracies done its part in doing an impact study? to date there is none, and we are entering uncharted territories in this major project without any idea what sort of impact the country will experience from such projects.

a few thoughts to stimulate discussion

Nuriel22 23-06-2010 06:10 PM

So many information! thanks for the link!

Cool_Guy1 24-06-2010 02:56 PM

What's new in the development agenda?
After a shrink of 1/2 percent in global economic growth in 2009 due to the sub-prime mortgage crisis in America, most of the advance economies and emerging developing economies, such as China and India are picking up in growth. America also has recovered well from the crisis and global growth is expected to be around 4.5 percent in 2010.

Historically growth in PNG tend to be driven by the external sector. When the external sector of PNG does favorably, so does economic growth. However on the flip side, the external sector also plays an important role in the determination of inflation outcomes. Imported inflation and developments in the kina exchange rate tend to play an important role in determining the direction of PNG's inflation outcomes. With the pick-up in global growth, international prices of of all agricultural and mineral products are likely to increase and would result in favorable current account balance.

With a favorable current account balance and the inflow of foreign direct investment earmarked for the LNG project, the country is faced with a prospect of growth.

The challenge however faced at the moment is the high liquidity in the banking sytem due to the prime-pumping of cash into the system by the Government to fulfill their obligations to landowners of the LNG project. Most of the trust funds that we saved from previous years surpluses have been almost depleted due to the constant drawing down of this trust accounts to pay landowners of the LNG project. Consequently, the banking system is flushed with cash, and how much is inflationary and how much is not is a matter for the Central bank or the Department of treasury to work out.

If anticipated growth is dwinddled by the inflation, negative growth can ensure. Such high liquidity floating in the banking system can be inflationary. If anticipated growth rate in PNG is less than inflation, we could end up with a negative real growth. In this regard, the government has to control its expenditure patterns to make sure the Central bank sterilises the liquidity in the system to control inflation. When the government keeps on pumping money into the banking system without consideration of inflation, the central bank is faced with a gigatic task of sterilising liquidity at the cost of its own balance sheet. It is apparent that this can happen if the current trend continues.

In the private sector, the anticipation of the LNG project has been the main force behind the increase in business activities especially in Port Moresby and the LNG project site provinces. Growths in this provinces are led more on expectations, with building booms and high real estate prices. One precaution real estate owners have to take heed is that, are the price explosion in the real estate industry moved by economic fundamentals (demand and supply) or are they speculative (Price bubbles). Home buyers who have a mortgage on a property, during a price bubble tend to loose when the bubble burst. How can that happen? For instance, a home owner might take out a loan based on prices during the price bubble, however then the bubble burst, the price of the house comes down dramaticaly, while the home loan still remains stable. The home owner's liability becomes higher than its asset (the home). No one has done any work on the cause of the increase in real estate price in PNG, and it is a vague area, which is a cause for concern. With the promised institutional houses and private home ownership schemes that are coming up, presummably, prices might tumble down-wards and the people that have committed themseves to loans during the price bubble time might be the ones who loose out.

to be continued......

Cool_Guy1 27-07-2010 11:46 AM

Continued from previous post
The US sub-prime crisis was caused by defaults in securitised home loans. What it means is that, banks and finance companies increased their mortgage lending to homeowners without proper due diligence. In order to avoid taking the risk, the banks then package these loans and sells them to other players like citibank. They call these packaged loans sold to others to diversify risk by banks as, securitised loans. Even though some of those loans are at the tail end of the risk structure meaning, "easily to default", when it is packaged they are given an AAA rating by rating agencies, which then becomes lucrative for investors to purchase these securities. When the initial borrower defaults, (because due dilifence was not done properly by the bank), the entire system collapes. That is what happened in the states.

Most of the world wide financial crisis, like the Mexican crisis, Asian financial crisis and lately the sub-prime crisis are caused by "asset price" bubbles. Asset price bubbles mostly are driven by expectations and not by real economic fundamentals of demand and supply. This means that, prices dont follow fundamental law of demand and supply, i.e. short supply would cause prices to increase, while an increased supply would cause prices to decline. In PNG the real estate industry is a cause for concern. With the building boom that is expereinced in Papua New Guinea, today, would be home owner need not be driven by the hunger for money by the real estate industry who are pushin the prices up the roof, without substantiating the price increases by economic fundamentals.

My warning to would be real estate owners is to be careful in commiting oneself to buying a property worth K1 million today, and find out in a few months time that the real price is K500,000, when the bubble burst. I am an avid real estate price watcher and a participant at the same time so, it is better to inform people who are interested in buying a property to be cautious in their approach. When an asset price bubble burst, it leads to bank wide panic, and people start to default on their loans, when they know that, they are repaying loan on an under-valued asset.

How can someone repay a loan on a negative asset? When people start to see the reality that, they are endowed with a negative asset, they will move away from their repayment obligations, and when the bank sells the asset to recoup its debt, the bank also makes a loss, when it becomes a system wide phenomenon, its results in a financial crisis. This is one area where the banks need to be vigilent in their lending to the home buyers.

On another note, one of the lucrative areas of investment for would be investors would be the service industry. A lot of would be investors anchor their investments on other tangible investments, however the service industry is a neglected business venture. With the LNG project, the influx of people from all over the world would see the need for services, such as laundra mats, car wash, cafe's, interent cafe's, parks, private picnic spots, outdoor restaurants, etc. It has been found that, the spin off benefits from big mineral booms can be catured by the service industry. A smart business man would invest his money in service industry to tap in from the huge mineral boom.

Few thoughts.......

Cool_Guy1 14-04-2011 01:25 PM

Latest Economic Outlook
The Bank of Papua New Guinea, in its bi-annual monetary policy statement projected the economy to grow this year by 8.0 percent, while Treasury Dept. projecttions for the year was 8.2 percent. Both institutions alluded the growth to the construction phase of the LNG project. Headline inflation has been forecasted to remain high at 8.5 percent for 2011. Export prices of non-mineral products were forecasted by Treasury in its budget document to decline while mineral prices were forecasted to remain stable. According to BPNG, export prices would increase in 2011 due to the recovery from the Global financial crisis. Mineral prices were forecasted by BPNG to increase this year. A balance budget has been forecasted for the government.

What does all this mean for the PNG economy?

The current fuel price increase that are experienced in the country tend to validate the inflation projections, however, are the projections too conservative? Fuel prices increase in the past have been thought to be more short term shocks which would be smoothed out as time passes. This isnt the case, as fuel prices have been high since 2006 and has been persistant. This persistant increase in fuel prices can impact on the underlying economic fabrics of a nation and it can drive trend inflation. Headline inflation can be affected by persistant fuel price shocks and i believe that is what is happening now in Papua New Guinea, as prices tend to move higher and higher.

The persistent gorwth in inflation pushes the cost of doing business higher as unions demand for pay increase as their real income become squized by the persistent inflation trends. This also gives rise to other factors of productions such as land and capital becoming more expensive. Such factors cointegrate together to move prices higher and higher causing hyper inflation.

Expectations driven price increase is another factor that can result in actual increase of prices. The LNG project has people guessing when people expect the outcome of such big projects. Expectations of people can drive up market prices. It can be seen from the property market in PNG, that prices have been sky rocketing for rentals and purchase of properties in Port Moresby. Has this been driven by deman? i guess not. There is a building boom in Port Moresby, which rationally would bring down rental and property prices, but it never did. This sort of market is expectations driven and it could result in a burst which would creat a mini crisis in the country.

With the distribution of the Business Development Grants and the anticipated windfall for the country as a result of the LNG project, opportunities need to be provided for people to invest excess funds. The financial market in PNG is dominated by 4 banks and does not have enough competition among themselves. With less competition, financial innovation can be stagnant and results inefficient financial services to the people. The Stock market on the other hand is also shallow and does not have the capacity to encourage people in the country to save extra cash.

with this factors given, where would all this money go to? how would people invest in profitable businesses etc? This is one thing the government needs to look at.

As for the hyper inflation situation that can be created by persistant oil price shocks, the Government should intervene to bring stability to the oil price market. Other countries, subsidies fuel because its a component that is seen to cause short term volatilities when it persist can be detrimental to the nation. With the current cash flow situation of the government, it should look at subsidising fuel, which will in turn bring prices down to a reasonable level where all the citizen will enjoy.

Two things here the government can do, either it subsidises fuel or increase the salaries of its employees, which would benefit a few.

rmoea 14-04-2011 07:04 PM

Hi there,
I am a new user. Can anybody enlighten me on the economic impacts the tourism and hospitality industry will have on the PNG economy due to the trillion kina LNG project??
Your help is appreciated.
Thanks,still learning...

Cool_Guy1 15-04-2011 04:33 PM

Economic Overview and the Service industry in particular
This is in response to your post.

Today's national newspaper, the editorial comment was on the "Dutch Disease" phenomenon and the editor was right in pointing out the facts about this particular phenomenon. A shift of resources from other resource sectors to the booming sector and subsequent real appreciation of the local currency which would result in making exports from PNG more expensive. Shifting of resouces, meaning, land labor and capital from the non boom sector to the booming sector. There is fear of this happening, which was highlighted in todays commentaries by the editor. He mentioned teachers and nurses leaving their government paid jobs and seeking jobs with the LNG project, which is a trend he expects to continue.

Will the LNG project affect the service industry? Of course, the LNG project will affect the service sector. If you read my previous page on the impact the LNG project will have on the service sector you would understand my view on this matter. I think, the service industry would benefit from the spin off benefits from the LNG project. All thoughout PNG, hotels have upgraded their service, knowing that they will benefit from the LNG project. With the influx of foreign force, tourism activities should increase and it would tend to be one of the major sectors that would benefit from the LNG project.

The recent trend is that, there is an increase in residential properties being turned into guest houses and lodges, etc. The increasing trend in new resorts and guesthouses every where in PNG is driven by the expectations of the flow through effect of the LNG project. I believe tourism and the services sector would be the main beneficiary of the spin off benefits of the LNG project.

The "Dutch Disease" expereinces have thought a lot of lessons to many countries. Likewise PNG has set up a Sovereign Fund to reduce the impact of foreign currency inflows on the domestic currency.

Cool_Guy1 10-01-2012 01:45 PM

2012 Update on the PNG Economy
The 2012 outlook for the PNG economy looks bright with growth rate projected at 5.1 percent and inflation to be around 8.0 percent. After a projected growth of 11.3 percent and inflation of around 9.0 percent in 2011, economic growth is projected to subside, however, the growth is still strong.

This growth was driven by the construction of the LNG project. Economies like the US has not recovered fully from the financial turmoil. Recent indicators show a slow upward push, as European economies expereince debt crisis'. In 2012, the debt crisis is expected to widen in the European markets, which might see a large outflow of capital from Europe to the US for safe haven investments. Latest projections are that, US is expected to pick up from its recessionary trend and experience growth.

Though the financial crisis in the US and the debt crisis in Europe had minimal impact on the PNG economy, the benefits of an improvement in economic performance by the US improves US dollar denominated assets for PNG, and its a welcome news for financial market investors.

Recently, inflationary pressures expereinced in the country were domestic driven, as opposed to historical exchange rate pass through inflation. This is welcome news for PNG because, external shocks will have minimal impact on the PNG economy. Expectations of the spill over effects of the LNG project has kept every aspiring business houses and persons, equip themselves to tap into the spill over benefits, and this has resulted in the growth that has been experienced in the economy.

The expansion of the economy should encourage financial innovation by the banks, meaning, there should be more products offered to individual and business so that, investment horizons can be widened and enhance financial intermediation. Expansion of financial intermediation encourages more businesses which would create employment for the people and ultimately lead to economic growth. China and India were successful in expanding their domestic market and making it more viable for business expansion, rather than depending on external financing to try to deepen the domestic market.

The latest development trends in the country looks set to be following the same mode of development as that of China and India. If funds are not squandered and if things are managed properly, i might not be surprised with PNG hitting double digit growth figures....


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