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Old 29-03-2012, 09:19 AM
Cool_Guy1 Cool_Guy1 is offline
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Economic overview of Papua New Guinea

This is in response to Mon's enquiries on the impact of the LNG project on Agriculture, Trade, Employment, Tourism, Mineral, GDP and Hospitality industry. I will respond to your query based on anacdotal evidence rather than empirical findings. Empirical work has been done by ACIL by modelling the economy. BPNG and Treasury did some empirical work on the impact of LNG project using CGE model, which is more technical to discuss here. Large models cannot quantify the real impact LNG project have on each sector but, gives a basic outline of the effect it would have and how it would impact the various sectors. Therefore, i will try to answer your queries using anecdotal evidences and a bit of expereince.

LNG project impact on Agriculture can be twofold. On the one hand, as a result of wage disparities created by the booming sector it is expected that technical people employed in the agricuture sector such as engineers, mechanics, truck drivers, welders, machinist, managers etc, will shift to the booming LNG project. The agriculture sector can not match the sort of wage that is paid by the LNG project, if they want to match the wage disparities, the agriculture sector will have cost over-runs and it would have to close shop. Noone can operate a business with cost over-runs and no profit. This is not happening in PNG, because PNG has already had mineral booms and had the capacity to meet the labor demands. The gas industry is a new industry and most of the technical people are brought in from offshore, therefore not having much impact on the agriculture sector. The second thing that could happen in PNG is that, due to large inflows of Foreign Direct Investment (FDI), this would lead to appreciation of the real exchange rate, and this would make PNG's manufacturing and agriculture sectors non-competitive with the rest of the world. This hasnt happened in PNG, because the Government of PNG has allowed LNG project operators to operate foreign currency accounts so that all FDI inflows that are targeted toward purchasing capital equipment are kept offshore used to buy them offshore. Only operational funds have been brought onshore which the Foreign currency market is able to absorb. Over the past two years, the real exchange rate has remained stable and it the FDI flows have not had major impact. The real exchange rate appreciation in recent years has been the result of high commodity prices.

LNG projects impact on the GDP is one interesting enquiry. In one of its working paper series, the BPNG published a paper titled, "FDI and Economic growth in PNG". In this paper, they found that, after the 4th year of initial FDI flow, it would have an impact on GDP. This is because, the mineral sector is an enclave sector and spill over benefits can cause growth in the country. However, this findings can be quiried as the LNG project financing arrangements are quite unique to any other mineral projects in PNG. Its unique in a way that, the Government of PNG has dished out a low of money to the LNG project landowners to engage in businesses to benefit from the LNG project from its development phase. This has never happened to any other mineral projects and we have seen a surge in business activities in and around the LNG project site with the set up of major trasport companies, to building accomodations, providing securities, providing transportation, etc. The spill over effect has seen a surge in domestic demand and it can be reflected on GDP growth and pass through to inflation. Expectations are that, as a result of the large LNG project, we would expect PNG economy to still grow and my guesstimate is that the lagged impact of the FDI flow to GDP growth has been shortened. If somebody does a research following from that of BPNG, they would find that the lagged effect of FDI flow on GDP would be shortened.

For both the hospitality and tourism industry, as a result of the LNG project nothing has changed. There are lots of hotels, lodges and motels being build in recent times but not geared towards tourist. Those were geared towards the influx of foreign labourers for the LNG project, and are driving the prices of house up. As for the tourism industry, PNG remains one of the most volatile regions. Most foreigner come into the country risking their lives because they find that they can be compensated well with the large mineral, gas and oil deposits. Tourist for leisure tend to end up in Fiji, Bali, Samoa, etc. Unless the peoples attitude and behaviours change leisure tourists would find it risky to come to PNG. Though we have all the natural beauty, tourist inflow would still remain stagnant as a result of peoples attitude towards the industry.

cherio
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