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 producti...
on 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 begin.
Although large budget deficits are planned for 2013 and 2014, public
debt is expected to remain low by historical standards, peaking at 35% of
GDP in 2014. While such public indebtedness is moderate, PNG will need
to ensure that higher spending does not undermine the fiscal buffers that
have allowed it to withstand recent shocks (Figure 3.33.6).
Foremost is the need for spending to remain in line with the
government’s own deficit-reduction plan. To keep public debt below 35%
of GDP, the 2013 budget plans for zero nominal growth in government
wages and salaries and just 2.5% annual growth in spending on goods
and services up to 2017. Such recurrent expenditure restraint will be
difficult to achieve and risks starving service delivery by, for example,
undercutting salaries for teachers and health workers. The government
may therefore need to reprioritize spending away from capital investment
and toward recurrent goods and services to ensure service delivery within
designated spending limits.
The government faces growing challenges in financing its deficit
spending. While domestic bank liquidity remains high, local commercial
banks are approaching regulatory limits on their lending to the
government. A result will likely be deficit financing sourced from
international markets in 2013 and 2014, significantly increasing the
government’s cost of borrowing and exposure to exchange rate risk.
Fiscal risks arising from the budget must be better coordinated
with those generated separately. The reduction in public debt over the
past decade has been offset by a rise in off-budget liabilities, which now
equal between 15%–20% of GDP. Major components include borrowing
to finance the state’s equity in the LNG project, large unfunded
superannuation liabilities, and contingent liabilities surrounding the
successful completion of the LNG project. Progressively reducing these
state liabilities will be important to taming fiscal risks.
In the medium-term, the outlook for growth remains strong and
for public debt to remain low. While government plans to increase
investment in critical national infrastructure and social services are
commendable, this priority must be balanced against its need to maintain
fiscal buffers against future shocks. Building up the country’s economic
resilience will be vital to avoiding reprising past boom–bust cycles.
Sources: PNG Department of Treasury. 2012. 2013 National Budget. December; ADB estimates
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