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Papua New Guinea : Private sector credit growth and bank lending margin
In response to lower inflation, the central bank lowered its target interest rate from 7.75% to 6.75% in September 2012, signaling easing monetary policy intentions. However, with the central bank una... ble to fully absorb the high liquidity in the commercial banking system, the impact of target interest rate movements on market interest rates and inflation continued to be limited. Private sector credit growth remained near 10% per annum during 2012, well off its peak of 40% in 2007 (Figure 3.33.5). Economic growth is expected to slow to 5.5% in 2013 before picking up again to 6.0% in 2014. The non-mineral economy is expected to slow most sharply as the winding down of LNG project construction will dramatically curtail construction and transport activity, eventually spilling over into lower domestic consumption and retail and wholesale trade. Moderating international agricultural prices are expected to depress rural incomes derived from the sale of crops for export. A significantly increased national budget, which plans for large budget deficits of 7.2% of GDP in 2013 and 5.9% in 2014, will counter some of the effects of falling domestic demand on the non-mineral economy. The mineral sector is expected to lead growth, expanding by 13.0% in 2013 as production bottlenecks clear at a number of gold and copper mines and production at the new Ramu nickel and cobalt mine ramps up. Continued declines in petroleum production, as reserves in major oil fields become depleted, will offset some of this growth in 2013, but the onset of LNG exports will greatly boost mineral output late in 2014, with overall growth in the sector expected to surpass 60% in that year. In 2013, an expected easing of the kina exchange rate could fuel resurgence in imported inflation, while high government spending is likely to stoke domestic inflation. The winding down of LNG plant construction will be a counterinfluence subduing price growth later in 2013 and throughout 2014. This period will see up to 8,000 workers demobilized, easing a shortage of skilled labor and other private sector capacity constraints, particularly in construction and transport. Declining capital imports associated with the LNG project will relieve port congestion. On balance, inflation is projected to bounce back to 6.5% in 2013 and 7.5% in 2014. The 2013 current account deficit is expected to narrow to 15.1% of GDP as reduced LNG capital imports reduce the trade deficit. A rebound in production at existing mines and the ramping up of production at the Ramu facility will help boost export earnings. A further narrowing of the current account deficit to 8.4% of GDP is expected in 2014 as LNG exports beginSource: Bank of Papua New Guinea. http://www.bankpng.gov.pg (accessed 20 February 2013)
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