What Every Papua New Guinean Needs to Know – Citizens to Suffer the Consequences of Financing PNG’s Budget Deficit.

Hon.Ian Ling Stuckey
Financing PNG’s Budget Deficit


“In recent days, I have set out the budget challenges facing this nation. O’Neill’s budget deficit legacy of K4,636 million in 2019 alone. O’Neill’s illegal public debt level of over K33 billion or 41.3% of GDP.

The need for massive cuts of K1,482 million to start climbing out of the very deep economic hole left by the O’Neill regime for the people of PNG. Climbing out of this economic hole will take years.

There will be further cuts in spending in the 2020 Budget and 2021 Budgets. There will be further actions in raising revenues by getting rid of tax evasion and getting a proper return from our resources. There will be further actions to lift growth.

However, even with cost cuts and revenue raising and growth increasing measures, the O’Neill legacy has left us with budget deficits which will need to be financed for years through deficit financing.

“The financing challenge for 2019 is an extremely challenging one. At the time of the original 2019 Budget, the K1,867 million deficit was going to be financed in three main ways.

First, the former Prime Minister had rushed through a loan agreement from the China Development Bank worth K960 million (MYEFO estimate). This was one of his grand announcements at the grand APEC meeting.

However, former Prime Minister O’Neill was very confused. He thought the loan could be used to fund his budget deficit. But the Chinese loan was only for project financing – it couldn’t be used to fund the deficit.

I explain the difference between grant, project and deficit financing below, and how project financing can’t be used for PNG’s current need for deficit financing. So this source of budget deficit funding collapsed.

Second, the Maseratis were going to be sold like hotcakes. Well we know that O’Neill’s second source of financing has collapsed! Third, he was going to use some of the proceeds of the Sovereign Bond – some K640 million – with the remainder being available for 2020.

But because the first two sources of financing had been mismanaged, he ended up calling in all the remaining Sovereign Bond borrowings of K1,276 million. Even then, at the time of MYEFO, there was a financing hole of over K426 million.

And following on from the due diligence check of the budget, the actual O’Neill deficit legacy was found to be K2,263 million higher again even after assuming the K350 million in cuts from MYEFO.

“So how should this huge financing gap of K2,689 million be covered? As a first decisive step in starting to live within our means, the Marape-Steven government is recommending to Parliament in the Supplementary Budget that there be cuts of K1,132 million on top of the K350 million built into MYEFO.

But this still leaves a financing gap of K1,557 million. It is just not possible to make cuts big enough to get rid of all of this gap before the end of 2019. The O’Neill legacy means that there will remain the need for K1,557 million more deficit financing this year.

“PNG needs to finance its budget deficit. Project financing, as suggested by the Opposition, cannot fund the K1,557 million extra deficit financing left by the former government.

For the benefit of the Opposition who should know better, I outline the basics of budget financing below. O’Neill’s plans for selling the Maseratis will not help. O’Neill’s China Development Bank loan, although very welcome if on the right terms for the right projects, also won’t fund the budget deficit.

We will continue to use the ADB and World Bank budget support loans started by the former government – I repeat, these budget support loans with conditions attached were started by the previous government.

We will seek out other budget support assistance from other countries if on the right terms – and we are encouraged by current negotiations with Australia. We will use the domestic market to fund the remainder of this year’s deficit. All of this is just part of dealing with the O’Neill legacy. If you spend more than you earn, you have to borrow.

“Let me assure the people of PNG that the Marape-Steven government is a responsible one, one that is willing to make the hard decisions to cut costs, and also one willing to accept the reality of the O’Neill legacy of massive budget deficits. This means we still need to find K1,557 million in deficit financing in 2019. We are working to get the best and cheapest deficit financing packages possible.

“Going forward, this government is in favour of good, cheap project financing for economic activities with rates of return higher than costs. However, we look forward to the day when PNG is living within its means and no longer needs deficit financing”

“O’Neill has left the Marape-Steven Government, and the people of PNG, with a debt crippled budget. He should spend less time in his K30 million mansion in Sydney, stop boasting about his fake economic achievements, which ordinary citizens will tell you simply didn’t happen, return forthwith to PNG and help Prime Minister Marape find out where O’Neill’s record K26 billion in borrowings (from K7 million in 2011 to K33 billion in 2019) were mis-used, corrupted and wasted” stated Treasurer Ling-Stuckey.

Hon.Ian Ling-Stuckey,CMG.MP
Minister for Treasury
7 October 2019

A. Details on Budget Financing Mechanisms

“The former Prime Minister has attacked my discussions with national and international partners to finance this deficit. He does so in complete ignorance of the most basic elements of budget financing. This is the sort of ignorance which has put PNG into such a deep economic hole in the first place. So a quick lesson in budget financing for our former Prime Minister. There are three types of budget financing.

First, there is grant financing. This is when countries, especially Australia in PNG’s case, give grant aid financing. This grant aid financing directly funds forms of government expenditure (such as health centres, roads, electricity, technical assistance). The grant financing is recorded as revenue. Expenditure is higher by exactly the same amount as higher revenue. There is no impact on the budget deficit. Grant financing in 2019 is estimated at K943.1 million.

Second, there is project financing. This is when PNG borrows to pay for specific projects or programs. For example, the ADB Highland Highways project or the EXIM loan for the Enga hospital. The loan is directed to financing a specific project or specific expenditure.

The project expenditure counts as expenditure in the budget, and as loan financing is not counted as revenue, such projects add to the budget deficit (higher expenditure without revenue).

Project financing pays for a project which adds to expenditure which adds to the deficit which is paid for by the project financing. Project financing increases expenditure and increases the deficit by exactly the same amount as the loan.

One cannot use project financing to pay for the K1,557 million deficit inherited from O’Neill. Any new project financing by definition adds the same amount to the budget deficit – there is no deficit reduction.

Let’s put this into the perspective of a family. Let’s assume that the family is spending more than it is earning – it is in a deficit position. A TV sales person may come to the house and offer to sell a new TV paid for by a loan.

The family gets the TV and it is financed by the loan. But this doesn’t help with the family’s earlier deficit position. By buying the TV, it has added to its spending, it hasn’t added to its income, it has financed the TV, but it hasn’t financed the original family deficit. Project financing in 2019 is estimated at K465 million.

Third, there is general deficit financing. This is when PNG borrows to cover the gap between domestic revenue and domestic spending. This is the type of financing needed when a country is living beyond its means.

PNG needs K1,557 million in extra deficit financing in 2019 because of the huge budget hole left by O’Neill. The opposition and the former Prime Minister just don’t understand the basics of managing the budget when they claim we can pay for the budget deficit by project financing.

B. 2019 Budget Deficit Financing Options

So what are the options for deficit financing of K1,557 million?

• Project financing won’t help for the basic budget financing reasons set out above.

• More expenditure cuts would be just too painful – there already has been a tough leadership decision to cut K1,482 million this year.

• All of the deficit financing from the Sovereign Bond has been exhausted. Extraordinarily, the due diligence exercise has highlighted that the O’Neill regime ignored an offer from the ADB to provide a AAA guarantee over part of the Sovereign Bond which would have reduced costs by some K40 to K50 million per year. How irresponsible not to take up this offer! This option is being actively looked at but the paperwork means it would not be an option until 2020.

• O’Neill’s China Development Bank option doesn’t actually pay for the deficit.

• More commercial financing needs to go through a due diligence check on the fees and charges paid for such financing.

• We have been talking to the ADB and World Bank about the budget support loans organised by the former government. Let’s be clear, these budget support loans were entered into and agreed by the former government – so it is hypocritical of the opposition and social media to criticise the current government for talking to these agencies simply to continue the agreements set up by the former government. We are in the second year of a three year program. Given the size of the budget deficit, these are important and welcome programs.

• In a similar fashion to the World Bank and ADB budget support – initiated by the former government – we are also exploring support options from other friendly foreign countries.

At this stage, following consultations between the Prime Ministers of Australia and PNG, there are very promising signs that budget support could be available from Australia with a major payment in 2019. We will explore other budget support options from other countries, but at this stage, Australia is the only country that has offered to step forward and help out. They should be thanked for this flexibility, not attacked.

• Finally, this government will explore greater domestic deficit financing through Treasury Bills and Inscribed Stock. We are planning initiatives in this area over coming months including action to help securitise this market.



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