New Analysis: Papua New Guinea facing targeted austerity as election looms

Once the world's fastest growing economy on percentage terms just two years ago, Papua New Guinea (PNG) is now facing an election friendly budget despite needing significant measures to stimulate an economy reeling from the downturn in global economy.

The nation is in the depth of its second worse recession in history with growth being officially revised down to 2.2 percent in August from the 4.3 percent projected in the 2016 budget. Just two years ago, PNG was growing at 13.3 percent, the fastest in the world.

As such, the central government has undertaken an austerity program more aggressive than that of Greece, seeking to adjust government expenditure by 13.5 percent of GDP, including slashing key priorities of health and education by over 40 percent by 2017. Greece and PNG have similar nominal expenditure cuts, however, the Pacific nation's fiscal problems are not as severe.

Papua New Guinea's budget for fiscal 2017 is expected to be handed down in early November to give the ruling government ample time to smooth over further austerity measures before the national election in mid next year.

"It will be a tough budget," former senior PNG and Australian treasury official Paul Flanagan told Xinhua on Tuesday.

"If the government is going to maintain a reasonable track in keeping its fiscal policy in check and not having to go to markets in raising too much debt, it will mean focusing expenditure and probably even furthering expenditure cuts in top of what's been done in recent years."

PNG's ruling government has earmarked it will continue with its universal healthcare and education policies, flagging a reduction in non-core infrastructure and removing overcapacity in the public service sector so as to not "do what the previous governments have done and try to buy re-election".

"We will make sure that districts are properly funded through their (District Service Improvement Programs) and that core services will be delivered," PNG Prime Minister Peter O'Neill said in a statement.

"What we have done is increasing efficiencies in the public service, delaying spending on non-critical infrastructure, and putting a stop to excess such as unwarranted overseas travel by bureaucrats."

Any budget cuts will be politically difficult in an election year, thus it is expected the government will look to smooth out any austerity by targeting expenditure in key electorates and using off-budget funds to "oil the wheels of politics", Flanagan said.

"I think they'll certainly protect those MPs with the 10 million dollar district allowance that's seen as very vital for maintaining the government's hold on power," Flanagan said.

"I think they will try and make it up in ways that will (be) seen as populist policies... but as history indicates, even PNG's own history, they can actually hurt growth and discourage investment."

PNG needs significant structural reform to rebound from the depressed commodities market. However, current policies indicate growth will remain subdued in the two to four percent region until at least 2020, before staging a rebound to its 2014 growth rate.

Government officials failed to recognise the looming commodity downturn before placing in a number of policies that were seen as anti-growth, causing the non-resource part of the economy to contract by approximately 10 percent over the last two years, Flanagan said.

"(Growth) would improve faster if there were better economic policies being put in place," Flanagan said.

"The type of policies coming out in preparation that are seen as popular for the election during mid-2017 will harm those growth prospects, (and) therefore the path of recovery and increasing revenues to fix up the budget."

The economic environment is continuing to place questions over PNG's ability to host APEC in 2018. However, O'Neill said his nation will deliver a "truly Pacific APEC" in a sensible way.

"PNG's APEC will be the most cost effective in the history of the forum, and will be done in a way that does not undermine the policy outcomes of the meetings," O'Neill said.

"With every APEC meeting that has taken place in PNG over the past year, we have been practicing a more efficient model for event delivery, while maintaining the strictest security protocols."

PNG has scope to seek financing to meet critical infrastructure needs from the Asian Development Bank and the World Bank, rather than another expensive sovereign bond following its foray into the debt market in June. However, those organisations would demand policy reform.

But funding infrastructure projects directly through the budget from the sovereign bond issuance would increase PNG's debt to GDP ratio above the legislated 35 percent limit.

The 2016 budget papers showed the growing deficit caused the ratio to hit 35.2 percent. However, earlier this year officials revised the 2006 growth numbers up by 43 percent, reducing the ratio to 28.8 percent, using a very narrow definition of what constitutes official debt.

All eyes will be watching PNG's move in early November as to what measures it intends to take. The importance for a measured approach cannot be understated given the impactions not only on domestic politics and economic recovery, but PNG's looming high profile international obligations. Endit