Loi M Bakani: Economic overview and future developments in Papua
New Guinea
Statement by Mr Loi M Bakani, Governor of the Bank of Papua New Guinea, at the
2010 Annual Meetings of the International Monetary Fund and the World Bank Group,
Washington DC, 8 October 2010.
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Mr. Chairman, Colleague Governors, President of the World Bank Group, Managing Director
of the International Monetary Fund, Ladies and Gentlemen, it is my pleasure to address this
2010 Annual Board of Governors Meeting. On behalf of the Government of Papua New
Guinea I would like to extend our appreciation to the Bank and the Fund for the ongoing
effort and initiatives to improve our living standards and global financial systems. We look
forward to a fruitful round of discussions here in Washington DC.
Governors and colleagues, the prospects for global growth continue to be impacted by the
aftermath of the financial crisis. I reiterate the International Monetary Fund's (IMF) outlook on
the world economy with an anticipated growth of 41⁄2 per cent in 2010. Whilst the growth is
heading in the right direction we must acknowledge that growth remains sluggish by past
standards. At the same time downside risks remain, due to rising concern over sovereign
debt and fiscal imbalances that could trigger a repeat of the financial and economic crisis.
The downside risks underscore the need for ongoing cooperation and commitments from
mutual partners to develop policies and governance mechanisms to address the challenges
and secure global prosperity. At the global level, we should support policies that address
structural imbalances over the medium term including supportive monetary conditions,
accelerating financial sector reform, and rebalancing global demand.
Papua New Guinea, as a small open economy, was able to navigate the negative impact of
the global financial crisis and grew by 51⁄2 percent in 2009. In 2010, growth prospects remain
positive as the economy enters its fourth year of economic expansion. The combination of a
stable exchange rate and moderate interest rates is encouraging businesses expansion.
Employment is strong, foreign exchange reserve level is high and Government debt is at a
sustainable level.
The solid performance of the Papua New Guinea economy reflects increased investor and
consumer confidence following a period of macroeconomic and political stability. The country
has also benefited from a number of important economic and structural reforms the
Government has undertaken in recent years to complement its macroeconomic policies and
management.
At the same time, competition has improved the delivery of telecommunication services
throughout the country. This is one of our success stories of the past few years. Services
such as electronic banking and payment of some utility charges have taken advantage of the
impressive take-up by the population of the mobile telephone services.
Papua New Guinea is benefiting from high commodity prices for its major exports and from
inflows of capital investments related to the PNG LNG project. As a result, the country's
balance of payments has shown an overall surplus of K526 million up to June 2010, and the
level of gross foreign exchange reserves at the end of June 2010 was US$2,580.5 million,
sufficient for 10.9 months of total import cover.
Inflation however remains a concern due to increased domestic demand. The annual
headline inflation was 6.2 percent in June 2010 and is expected to be around 7.0 percent by
end of 2010. Price pressures are expected to come from domestic demand related to the
PNG LNG project and Government spending. In coherence, the Central Bank continued to
take a cautious approach to Monetary Policy. The country's stable macro economic
conditions coupled with the slow pace of economic recovery in the global economy has
enabled the Central Bank to maintain its Kina Facility Rate at 7.0 percent for the last nine (9)
months of 2010.
Our financial system remains resilient, well capitalized with adequate levels of liquidity, low
level of non-performing loans and are highly profitable. In 2009, the Central Bank
commenced work on the National Payments project to promote a cost effective and an
efficient national and international payment system. In 2010, the Central Bank commenced
work in partnership with the World Bank and UNDP to undertake a Financial Literacy Survey
during 2011, which will lead to specific intervention programs aimed at extending financial
services to the unbanked and underserved segment of the population. This will compliment
the growth of microfinance services in making a positive contribution to providing banking
services to our rural population.
On the fiscal front, the Government recorded a small deficit of K36.3 million (0.2 per cent of
GDP) in 2009 compared to the fiscal deficit of K478.5 million, (2.2 per cent of GDP) in 2008.
In its Mid Year Economic and Fiscal Outlook (MYEFO) Report released on 31 July 2010, the
Government projects a revenue surplus of K533.3 million for 2010. This surplus is expected
to be spent through a Supplementary Budget later on in the year to meet financial
commitments to the development partners and landowners of the PNG LNG project.
The Government remains committed to growing and building our economy, and the private
sector investment is an integral part of our economic development plans. The country will
continue to pursue structural reforms to encourage investments and remove impediments to
doing business and investment, thereby promoting a competitive and dynamic private sector.
These are fundamental to reducing poverty, generating income and employment to improve
our living standards. The Government will also continue to invest in priority infrastructure
projects, improve services to districts, priority areas of education, health and justice, and
ensure its debt level is sustained.
Development prospects however continue to remain a challenge for Papua New Guinea.
Significant improvements are still required in the provision of education, health, justice
services and transport infrastructure. There is a great need to raise the efficiency of service
delivery and implementation capacity of Government institutions throughout the country. The
Government acknowledges these limitations and has formulated a 20-year long term
development blueprint for the country, the Papua New Guinea Development Strategic Plan,
2010-2030 which underpins the new Medium Term Development Strategy and complements
the existing Medium-Term Fiscal Strategy and the Medium-Term Debt Strategy. These
initiatives provide a coherent medium term policy framework that sets out our goals and
future plans, to achieve the aspirations of our people reflected in the Government's Vision
2050.
Looking ahead, the country still faces potential risks to its growth outlook. The risks include
down-turn in the global economy that could hurt our exports, increase inflation pressure
arising from domestic demand pressure related to the PNG LNG project and managing the
impact of this project on the economy.
The significant foreign exchange inflows expected from the PNG LNG project will add to the
already high liquidity levels in our banking system. This is one of our greatest challenges in
the pursuit and maintenance of price and macroeconomic stability. Thus there is a need for
adherence to the Government's Medium Term Fiscal Strategy framework to ensure that
Government expenditure is kept under control and does not fuel instability.
As a way forward, the Government has decided on the establishment of a Sovereign Wealth
Fund (SWF) which will manage revenues flowing from the PNG LNG project. The goal is to
find a balance between macroeconomic development and stability, improvement in the
welfare of the broader population and the need for effective transparency and accountability
in utilizing the revenues from the PNG LNG project.
We acknowledge the involvement of the World Bank and the International Monetary Fund in
Papua New Guinea. We are grateful for the continued assistance provided by the Bank, the
Fund and our development partners in terms of technical assistance, funding and advice.
Working together, we can ensure our efforts complement each other and are directed in the
most effective way for the benefit of our people.
To end, I would like to express my country's sincere gratitude to the management and staff of
the World Bank and the Fund for their continuous support in Papua New Guinea.