Aussie warns PNG on economic ‘slippery slope’ By Joy Kisselpar, Oct 28, 2014. PNG Loop A former Australian and PNG Treasury adviser says Papua New Guinea’s latest monetary policy statement contains some worrying signs the country could be heading down “a slippery slope’’. Paul Flanagan, a former PNG Treasury adviser and now a visiting fellow at the Australian National University, says a bond agreement to fund a large government deficit effectively amounts to printing money which could lead to hyper-inflation. He also says the government is pegging its fortunes too much on the LNG gas project. Mr Flanagan has also advised the Australian Treasury. He told Jamie Tahana next month’s budget will be critical. The following is a transcript of Radio New Zealand’s interview with Flanagan: PAUL FLANAGAN: The devil really seems to be in the detail and even in some things that seem to be a good news story are actually starting down potentially a very slippery slope that may damage PNG’s long-term development. JAMIE TAHANA: What kind of things in particular? PF: The announcement was that the Treasury, the PNG Treasury, and the Bank of Papua New Guinea would cooperate in a way that sounded very positive. And this was that if the PNG Treasury was having difficulty in raising the finance from the private sector to fund the very significant budget deficit in PNG at the moment, then the Bank of PNG would buy up those Treasury bonds and would then sell them on to the PNG public. And while this sounds like a good idea for cooperation in reality it is essentially printing money and this is because it seems as if the Bank of PNG is having to purchase, then it is hard to get detailed information, but it could be up to on occasions in some weeks 100 million kina, these bonds. But they’re only able to sell 1 million kina of these bonds to the PNG public and that means the other 99 million kina has to be printed. JT: So nobody is buying them, basically? PF: That’s right. Rather than dealing and trying to reduce the deficit, or going and looking for raising those funds in international markets, the step seems to have been going down this very worrying path of printing money. It’s a worrying path because printing money leads to inflation and if it continues there is a risk of hyperinflation. And hyperinflation can be devastating for development and the economy and especially damaging for the poor. JT: How at risk is PNG of hyperinflation? PF: These are just very, very early days. And it’s only a couple of recent developments that have started raising some very early warning bells. So one of those is indications that essentially money will start being printed to fund the deficit, the second one was an intervention in the exchange rate where it looks as if the kina has moved away from a market-related exchange rate system and certainly local businesses are talking about growing amounts of exchange rate rationing so local businesses can’t get the funds to be able to pay for the imports they need for their businesses. But it’s only a few months on – a critical thing is the budget that will be handed down in November and if that keeps to the medium-term fiscal strategy of reducing the budget deficit from around 7 percent back down to 2.5 percent then hopefully the private markets will be able to fund that and this current risk that I am talking about will hopefully be a very very short-lived experiment. JT: The LNG project that has been touted many times as a great hope – as a way to address the deficit – to increase spending on things like healthcare, education and staff. But we have seen recently it has been very slow to get off the ground. Do you think hopes are being pegged too much on the LNG project being the great bringer of success for PNG? PF: This is something that confuses me in part because the PNG treasury has over the last two years been producing graphs that indicate that PNG LNG revenue is vital but it is vital because it distinctly replaces declining revenues from the OK Tedi mine and the Kutubu oilfield. So PNG needs this money but it is only in line with the revenues and the share of the GDP that they have been getting previously. So this is important money but it is not a huge goldmine that allows the government to do everything that it would like to do. There will still be some tough choices in this budget and there’s a tough road of development for a long time still. - See more at: pngloop/2014/10/28/aussie-warns-png-economic-slippery-slope/#sthash.ioXe1xti.dpuf
Posted on: Tue, 28 Oct 2014 13:35:33 +0000
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