The economy of Papua New Guinea has come under severe strain since mid-1997, owing in large part to a significant worsening of the external environment. A balance of payment crisis, which emerged in 1994, was temporarily redressed during 1995-96, following implementation of an adjustment program. However, the onset of a drought in the second half of 1997 coupled with a slump in regional demand and international prices for Papua New Guinea’s key commodity exports led to a sharp contraction of output and the emergence of a large external current account deficit.

For 1998 it is estimated that total real GDP (in US dollars) will decline by 28.6%. This decline reflects the depreciation of the average annual value of the Kina by 43.7% against the US dollar over 1998 and a deterioration in Papua New Guinea's terms of trade.

The non-mineral and non-oil sector is expected to decline by 32.9% while the mineral and oil sector is anticipated to experience a smaller, but still significant, contraction of 9.6%.

All sectors of the economy experience declines in output except for the mining and quarrying sector which is anticipated to grow by 11.1%.

For 1998 it is projected that the relative importance of each sector will remain broadly the same though the contribution of the important renewable resources sector will decline by 34.8% due to the overhang of the impact of the drought, the fall in export prices and the partial loss of export markets.

As a result of the eroded external value of the Kina the average rate of inflation (all-items CPI) in 1998 rose to 13.6%. Inflationary pressures were also exacerbated by a large fiscal imbalance as expenditures exceeded budgeted levels and lower than projected revenue inflows. In the absence of official foreign borrowing to fund the 1998 budget the government was forced to resort to domestic financing of the budget.

Latest data from the Bank of Papua New Guinea’s employment survey indicates that formal employment in the labour market excluding mining and petroleum and the North Solomons Province declined by 5.1% in 1998. Declines were recorded in all regions, except Lae and Madang/Wewak regions. By industry, there were declines in all sectors, except the retail and finance/business services sector.

By comparison, the building/construction sector contributed significantly to the slump in the level of employment, with a 6.7% decline in the March quarter, 1.2% in the June quarter, a 6.9% decline in the September quarter and 10.7% in the December quarter, resulting in an overall decline of 20.3% in 1998. The negative growth reflected the completion of most civil and building construction projects and lack of new projects, which impacted negatively on the transportation, wholesale, and manufacturing sectors. Lower employment in the agriculture/forestry/fisheries sector reflected the lack of demand for logs in the Asian market, a slow recovery of some cash crops following the drought in 1997 and cyclone in the first quarter of 1998.

The balance of payments moved into a substantial deficit in 1998. The current account recorded a surplus as a result of lower imports and reduced investment. Significant capital outflows, particularly private capital, more than offset the current account surplus.

Papua New Guinea’s total external debt outstanding at the end of 1998 was K5,279 million compared to K4,362 million at end-1997. Official sector external debt totaled K2,705 million at the end of 1998 while the private sector external debt outstanding was K2,574 million. The increase was due to growth in both official and private sector external debt. Growth in official external debt resulted from continued drawdown of existing loans combined with the depreciation of the Kina against the currencies of PNG’s major trading partners while the growth in the private sector external debt was due to loan drawdowns by the mineral sector and the construction of the Hanjung power plant. The mineral sector accounted for 52.7% of total private external debt.

Papua New Guinea’s total external debt service payment was K659 million in 1998. The official sector debt services payments were K314 million and the private sector external debt services payments were K345 million.

The ratio of debt service to current account receipts deteriorated to 16% in 1998 from 15% in 1997, due to the significant increase in stock of debt outstanding, which more than offset a strong growth in the current account receipts. The ratio of Papua New Guinea's external debt outstanding to nominal GDP was higher in 1998 due to substantial growth in the stock of debt, which more than offset a growth in nominal GDP.

Over 1998, the trade weighted nominal exchange rate fell by 17% (and by 11% and 16% against the Australian and US dollar respectively). The depreciation against the US dollar was a reflection of the strength of the US dollar, attributed to a number of factors including economic growth in the US and currency turmoil in Asia.

The level of international reserves also fell as the Bank of PNG intervened to stabilize the Kina and maintain market confidence combined with high overseas public debt service payments.

In 1998, a deterioration in revenue receipts accompanied by an increase in expenditure pressures saw the budget deficit increase by 2.5% of GDP from the 1997 outturn.

The Bank of Papua New Guinea is tasked with the goal of promoting monetary stability and a sound financial environment in support of sustainable medium growth of economic activity in the non-mining and non-petroleum private sector.

Over 1998 monetary and credit conditions were tightened in response to the pressure on the economy's external position. Strong private sector credit growth originated from the large volume of lending by the largest commercial bank the PNG Banking Corporation, whose lending rose by K303.2 million (68.6%) between December 1997 and September 1998.

Domestic interest rates were raised aggressively peaking at 26% in mid-1998. Commercial bank interest rates responded by rising simultaneously. In August 1998 a non-interest cash reserve requirement was imposed on the liquid assets of commercial banks in an attempt to constrain their lending activities and restrain pressures on the exchange rate.

In 1999, the Papua New Guinea’s government projections are as follows:

• Economic growth: -5.6%.
• Annual increase in consumer prices: 8%.
• Export and import of goods and services: -1.0% and -11.8%, respectively.

For the period 2000-2001, they are as follows:

• Economic growth rate of 3.7% and 9.3% respectively
• Average annual increase for consumer prices of 4% in both 2000 and 2001.

The Government is pursuing simultaneously trade and indirect tax reforms. Consistent with APEC and WTO membership movement towards greater trade liberalization is progress under the auspices of reduction in tariffs as well as excises. Revenue neutrality will be ensured by the introduction of a value-added tax. The implementation of these reforms began on 1 July 1999.

Restructuring of the public service has commenced with the intention of reducing the wage bill and increasing productivity. A reduction in the size of the public service by around 10% is envisaged over the medium-term.

Specific objectives of the financial sector reforms include: (i) ensuring improved fiscal and financial programming; (ii) enhancing institutional support in the Bank of Papua New Guinea and the Department of Treasury and in the market for government securities; and (iii) liberalizing foreign exchange controls.

In addition to the foregoing, the government will be embarking on a program to revitalize institutions and facilities that provide credit lines to rural and informal enterprises.

Source: Data are submitted by member economies, unless otherwise stated. Figures for nominal and real GDP are from Asia Development Outlook1999 (ADB 1999).

Note: (1) Treasury Bill rate