Papua New Guinea has suffered major budget deficits since 2012, partly resulting from unrealistic expectations of resource revenue and deficient public expenditure planning and control.

Papua New Guinea Deficit Budget Continues: Barker

The National | January 11, 2021.

PAPUA New Guinea has suffered major budget deficits since 2012, partly resulting from unrealistic expectations of resource revenue and deficient public expenditure planning and control, says an economist.

PNG Institute of National Affairs Director Paul Barker in his 2020 economic recap said a further deficit of K4.6 billion was also budgeted for 2020.

“But with the severe drop in business activity, employment, and profitability, revenue was slashed, and, combined with the Covid-19 related measures, drove the deficit forecast up by a further K2 billion, despite major expenditure cuts to projects and public sector operations,” he said.

“Providing interim fiscal stimulus from deficit financing could be justified, but, with debt and debt servicing costs steadily rising, major annual deficits could not be sustained, especially considering the deficient standards of public goods and services.”

Barker said the Government, in 2019, made progress on taking back the economy, including enhancing benefits from resource projects, which gained wide popular appeal.

“During 2016 to 2017, particularly, tax revenue from the extractive resource projects was remarkably low, and just a fraction of rates prior to 2012, this could partly be explained by low commodity prices (notably for hydrocarbons since 2014) and the early phase in the life-cycle of some major resource projects,” he said.

“However, gold prices had held firm and most projects were long-established and tax revenues in other resource-rich countries generally seemed greater than PNG’s.

“As commodity prices improved in 2018 and 2019 tax revenue from the resource sector was picking up, but still appeared comparatively low in PNG, by international standards.

“It was clear that a few projects had secured exceptionally concessional fiscal arrangements, including the Ramu nickel and cobalt project, with its major tax holiday and exemptions for foreign employees.

“It was also clear that some projects were making extensive, if permissible, use of provisions for depreciation and shifting expenditure and losses between years, it was also apparent that more recent projects had secured more concessional arrangements than earlier projects and that, while this might have been necessary to attract investment in 2002, or into new industries or greenfield sites in the 2010s, some review was overdue.

“On the other hand, it was also clear that the Government’s focus on acquiring equity in resource projects, and often borrowing heavily for the purpose, even on experimental projects, such as Solawara1 project, raised exposure to risk and weakened net revenue in some years, while deficient transparency and parallel budget processes with some state-owned enterprises operating as rent-takers from resource projects, was clouding details of revenue received by the State from some resource projects.

“So, the picture was mixed and complex.”

– The National

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