SEAN JACOBS | Part 1 of 3
The IMF’s return to Papua New Guinea (PNG) offers a symbolic and timely reminder of many overdue changes to the PNG economy, which have the capacity to deliver policy outcomes where they matter most – among everyday Papua New Guineans.
The nation of approximately 11 million – two decades after the IMF’s disruptive 2001 departure in the wake of student led riots – now grapples with fuel shortages driven by a lack of foreign exchange, a poorly run state led electricity sector, and a human capital environment that remains largely challenged by access to foreign skills and know-how, especially in non-resource sectors.
Structural economic reform in PNG exists in a ‘halfway house’ between a more open and closed economy.
While Prime Minister Marape has welcomed the IMF’s return – “come and assist, assess, look and advise us,” Marape noted in a statement – the implementation of a reform framework will take political courage. Marape may not have the political capital amid an eroding parliamentary base. Yet a feasible reform pathway exists in some priority areas, which I highlight in this three-part series.
If implemented in the next six months, these reforms could secure economic wins to both the formal sector and the most desperate within PNG’s economy by year end 2024, lighting a path to increased prosperity and greater political capital and legitimacy for Marape and the PNG Government.
At the top of PNG’s reform priority list is resolving its petroleum crisis. Petroleum use is pervasive in the PNG economy, from outboard motors and generators to personal motor vehicles and shipping. Yet fuel shortages – and skyrocketing prices – jar the nation. Aviation fuel shortages in particular have recently earned ‘national emergency’ status, while long queues at fuel stations and fuel rationing have resulted in obvious and debilitating economic and social consequences.
PNG’s fuel shortages are blamed on foreign exchange (forex). But what is the link exactly? While oft cited, the reasons are not well explained. PNG floated its currency in 1994 and maintained a ‘managed’ floating exchange rate. In 2014, however, in response to a forex shortage and broader market volatility, PNG moved to a ‘crawl-like’ exchange rate arrangement. This essentially means the PNG Government – through the Bank of PNG – rations the amount of available forex within its economy rather than letting the exchange rate depreciate. As a result, fuel retailers like Puma Energy – who supply the lion’s share of PNG’s fuel – claim to not possess enough foreign money to increase their supplies, leading to the outcomes listed above.
Petroleum is the primary public victim of PNG’s forex crisis, mainly because its absence touches all aspects of the economy and society. Yet forex rationing also taints PNG’s wider economy by dampening business investment and diminishing productivity, increasing costs, limiting export opportunities for PNG industries, and reducing “the variety and availability of goods for domestic consumers,” according to economist Martin Davies.
Escalating costs, limited choice and fewer jobs and growth are obviously not a recipe for progression in a nation where 40 percent live below the poverty line. While “a roadmap on exchange-rate reform” is being contemplated by the PNG Government, it is clear that any immediate positive effects on the economy are – at the time of writing – absent. PNG entered 2024 with the effects of fuel rationing in full tilt.
This is where Marape, by edging PNG’s Kina to full convertibility, could catalyse a series of major positive impacts on the economy. A 20 percent fall in PNG’s Real Exchange Rate, for example, is predicted to result in outcomes such as improving the national trade balance, opening up PNG’s bond market (which could be used as a cash source for projects), increasing forex availability (to likely USD 250 million) and boosting PNG’s agricultural exports by an estimated 30 percent. Importantly, it would also mean a less constrained business environment, which means more economic activity and increased jobs. While Kina depreciation is not an easy path to ride, it is a difficult reform that Marape will need to weather to nudge PNG’s economy off its terminal path.
Related here is government expenditure and reducing the size of the PNG Government, which is not simply an ideological commitment but necessary for currency reforms to work. The main reason is that fiscal deficits increase the demand for foreign currency, “given the strong links between the fiscal balance and the current account balance,” according to Davies. Under current arrangements, more government expenditure means more demand for foreign exchange, which only adds to PNG’s billion-dollar-plus forex backlog.
Speaking frankly, this would not be so bad if the PNG Government’s expenditure and activities were efficient and tangibly contributing to positive ‘on the ground’ outcomes. There is, however, very limited evidence of this, from rolling blackouts that leave families stifling in heat, hospitals that have no medicine or equipment, roads that can’t be driven on, and schools that have no basic amenities and whose teachers go unpaid. Despite this, the PNG Government is PNG’s largest employer, employing over 61,000 staff, according to one analysis, which represents nearly 40 percent of the nation’s total (formal) workforce.
This is clearly not a sustainable arrangement, especially if PNG’s economic and social conditions are to improve. Marape will do well to focus on a leaner PNG Government – with a particular focus on essential services – in order to free up foreign exchange shortages, especially if full convertibility is not pursued within this term.
Sean Jacobs is a Papua New Guinean-born Brisbane-based writer, government relations and public policy specialist, and Industry Fellow at the Griffith Asia Institute.