2017 PNG Economic Survey - Devpolicy Blog from the ...devpolicy.org/Events/2017/PNG after the...
Transcript of 2017 PNG Economic Survey - Devpolicy Blog from the ...devpolicy.org/Events/2017/PNG after the...
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2017 PNG Economic Survey
Rohan Fox (ANU), Stephen Howes (ANU), Nelson Atip Nema (UPNG), Marcel Schröder (UPNG and ANU)
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Introduction
• Survey is written at the time of a new government and new 100-day plan
• Short-term challenges: recession, falling government revenue, foreign exchange shortages
• Long term challenges: low growth of economy and of government revenue
• How can PNG respond to current economic difficulties AND get on a higher growth path?
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The long-term view of the economyIntroduction – Growth – Fiscal – Macro – Conclusion
Non-resource GDP per capita (adjusted for inflation; 1980=1)
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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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The long-term view of government
Revenue and expenditure per person (adjusted for inflation)
Introduction – Growth – Fiscal – Macro – Conclusion
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Real revenue per capita Real expenditure per capita
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Structure
• Introduction
• Section 2 – Growth
• Section 3 – Fiscal
• Section 4 – Macro (exchange rate and inflation)
• Conclusion
Introduction – Growth – Fiscal – Macro – Conclusion
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Economic growth
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The official growth slowdown
Introduction – Growth – Fiscal – Macro – Conclusion
Real GDP and non-resource GDP growth (%)
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%
GDP Non-resource GDP
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Has there actually been a recession?
• Official government data shows growth slowdown, but has there actually been a recession?
• Evidence of recession• Views of business: Drop in output and sales of 20-35% from the peak.
• Negative growth in economy-wide tax revenue every year since 2014 (25% after inflation for GST, income tax and non-resource corporate tax).
• Sharp contraction in imports since 2014.
• Small fall in number of formal workers, and of foreign workers, both since 2013.
• Graphs following provide the data
Introduction – Growth – Fiscal – Macro – Conclusion
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Falling revenue from non-resource sector
Introduction – Growth – Fiscal – Macro – Conclusion
Revenue from economy-wide taxes, 2014-2017 (adjusted for inflation)
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Historic contraction in imports
Introduction – Growth – Fiscal – Macro – Conclusion
Imports of goods and services
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Moderate fall in formal sector employment
Introduction – Growth – Fiscal – Macro – Conclusion
Formal sector employment (March 2007=1)
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Sharp fall in foreign employment
Introduction – Growth – Fiscal – Macro – Conclusion
Foreign workers arriving in PNG
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Reasons for the recession?
• 1. End of stimulus caused by PNG LNG project
• 2. Sharp and sustained fall in commodity prices
• 3. Foreign exchange rationing and overvalued exchange rate have discouraged economic activity
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Growth outlook
• Feedback from business that the recession is now bottoming out.
• Confidence going forward from future resource projects, but nothing in the next year (or two?), and mistake to wait for the next project.
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Fiscal
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Falling revenue; back to 2006 levels
Introduction – Growth – Fiscal – Macro – Conclusion
Government revenue, adjusted for inflation
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Since 2014, falls in economy-wide taxesTax revenue by source (adjusted for inflation)
Introduction – Growth – Fiscal – Macro – Conclusion
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Personal Income Tax Company Tax GST Mining & Petroleum Taxes
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Compliance likely correlated to IRC budget
Internal Revenue Commission budget allocations 2012-2017
Introduction – Growth – Fiscal – Macro – Conclusion
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Sharp falls in expenditure, but after a steep increaseGovernment expenditure, adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
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Rising salary and interest bill
Salaries and interest bill, adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
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Real salaries Real interest
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Discretionary spending back at 2006 levelsDiscretionary expenditure (total minus salaries and interest), adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
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Growth in provincial spending (DSIP etc) has also crowded out other sectors
Budget expenditure by sector, adjusted for inflation
Introduction – Growth – Fiscal – Macro – Conclusion
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ECONOMIC UTILITIES TRANSPORT COMMUNITY &CULTURE
EDUCATION HEALTH LAW & JUSTICE ADMINISTRATION MISCELLANEOUS SUB-NATIONAL
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Decline in spending on hospitals and policePer capita spending on hospitals and police
Introduction – Growth – Fiscal – Macro – Conclusion
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Hospitals Police
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Big increase in deficits (borrowing) in recent years
Government expenditure minus revenue (borrowing)
Introduction – Growth – Fiscal – Macro – Conclusion
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Leading to rapid growth in debt
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Foreign Domestic
Government debt (not adjusted for inflation)
Introduction – Growth – Fiscal – Macro – Conclusion
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Debt-to-revenue back at pre-boom levels
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Debt to revenue ratio
Introduction – Growth – Fiscal – Macro – Conclusion
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Macro and the Real Exchange Rate (RER)
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Background - RER and TOT (terms of trade), 2000-16
Source: BPNG and WDI
Introduction – Growth – Fiscal – Macro – Conclusion
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PGK/USD Exchange Rate, 08/2012-08/2017
Introduction – Growth – Fiscal – Macro – Conclusion
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• Theory: Sharp RER appreciation during resource boom and decline of tradable sector ("Dutch Disease").
• After the boom, RER depreciation needed to restore internal and external balance
• In PNG, RER continued to appreciate even after the boom (see previous Figure)
• Reserves declined from US$ 4B in 6/2012 to US$ 1.7B in 12/2016.
• FX restrictions since 2014: US$ 300M-1B excess demand.
• Fox & Schröder (2017): kina overvaluation = 22% in 2015.
• We update their estimate to 2016: kina still 20% overvalued.
• 2017: RER appreciation projected overvaluation likely to increase
Introduction – Growth – Fiscal – Macro – Conclusion
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Macro-level consequences of FX restrictions
• Macroeconomic adjustment to end of resource boom postponed for years.
• RER overvaluation leads to resource misallocation lower output and productivity growth, and investment.
• Businesses have great difficulty to source intermediate and capital goods from the rest of the world.
Imports have collapsed to historically low levels.
Introduction – Growth – Fiscal – Macro – Conclusion
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PNG Imports – 1980-2016
Soruce: BPNG and WDI
Introduction – Growth – Fiscal – Macro – Conclusion
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Imports/GDP Imports/Non-resource GDP
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Micro-level consequences
• FX has become number 1 issue for PNG businesses.
• Processing time of FX-orders: Currently 8-16 weeks.
• Invoices outstanding now 60-180 days vs. 14-30d credit lines.
• "Dollarized" debt piles up while kina is pressured to depreciate.
• Overseas suppliers may lose have lost their patience.
• MNEs cannot repatriate profits.
• Administrative burden of FX-crisis increases costs Inflation.
Introduction – Growth – Fiscal – Macro – Conclusion
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Inflation
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Introduction – Growth – Fiscal – Macro – Conclusion
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Why is inflation high and accelerating?
• Inflationary expectations?
• Optimism about the future?
• Excess liquidity?
• FX rationing• Reduces competition
• Excess demand
• Increases supply costs
Introduction – Growth – Fiscal – Macro – Conclusion
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Policy options
• Why does BPNG not devalue?• ”Fear of depreciation” (Inflation, loss in urban real income).• “Elasticity pessimism”.• ”Sit out the crisis: Next resource project just around the corner?
• Current situation has very limited benefits, only significant costs.
• Our policy recommendation: Depreciate the exchange rate. One option is to introduce a dual exchange rate for a limited time (up to 24 months)• Apply current appreciated rate for essential imports (rice, pharmaceuticals)• Depreciate kina by 20% and apply that rate to all other transactions.
Introduction – Growth – Fiscal – Macro – Conclusion
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Conclusion
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Reform challenges
• Twin reform goals:• Stimulating economic growth
• Restoring fiscal sustainability while protecting basic services
Introduction – Growth – Fiscal – Macro – Conclusion
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Reforms to stimulate economic growth
• Interest rate: BPNG has limited influence on market interest rates
• Exchange rate: Case for depreciation already discussed
• Structural policy: Need to rebuild business confidence
• 100-day plan: Had some positive statements re business confidence and structural reform but nothing on exchange rate flexibility
Introduction – Growth – Fiscal – Macro – Conclusion
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Reforms for fiscal sustainability
• Borrowing: Government already borrowing as much as it can; deficits need to fall as the economy recovers.
• Taxation: Focus on compliance – IRC funding and performance
• Expenditure: Protection of key services (health, education) will require salary restraint and cuts to MP funds (DSIP etc).
• Supplementary budget: Step in the right direction (cuts to DSIP, focus on tax compliance), but real test will be 2018 budget in November
Introduction – Growth – Fiscal – Macro – Conclusion