Loi Martin Bakani: Economic prospects and outlook for 2011 to 2015
Address by Mr Loi Martin Bakani, Governor of the Bank of Papua New Guinea, to the
Consultative Implementation and Monitoring Council (CIMC) National Development Forum,
Port Moresby, 24 August 2011.
* * *
Acknowledge dignitaries and organizers (CIMC) of the forum.
Although the period for the topic is 2011 to 2015, allow me to confine my presentation to the
period 2011 to 2014, which is largely the period for the construction phase of the PNG LNG
project.
I. Economic prospects: 2011 to 2014
Papua New Guinea is currently enjoying the longest streak of economic growth in its history
as an independent nation. 2011 will be the 10th year of economic growth as measured by the
increase in real Gross Domestic Product (GDP). The average increase in real GDP for the
period from 2002 to 2010 was 5.4%. The driving force behind the growth for most of the
period was the non-mineral sector.
Projections by the Bank of Papua New Guinea indicate that economic growth in 2011 will be
around 9.5%. The growth in economic activity shall continue all through the 2011 to 2014
period. The high economic growth in 2011 is driven by the construction of the LNG project,
and the global demand for the country's primary exports. Even if there will be a slowdown in
the economic activity in the developed economies, high growth in the major emerging
markets of Brazil, Russia, India, China and South Africa (BRICS) should ensure that the
slowdown in global activity will not be severe. Hence, the international commodity prices
might decline, but will still be historically high, which should benefit our agriculture, forestry
and fisheries industries. The construction of the LNG project will benefit the sectors of the
economy that supply inputs and services to the developer, mainly manufacturing, earth
works, infrastructure, building and construction, transport, communication, commerce
(wholesale and retail especially equipment and vehicles), personal services, accommodation
and hotels, and local food production for the workforce.
In addition the high international metal prices of copper and gold will result in high mineral
export receipts and taxes to the Government, which will allow for continued high public
expenditure and the public sector contribution to aggregate demand, and GDP.
Based on the above outlook it is assumed that economic growth as measured by real GDP
will continue to be high at the 8% to 10% range, all through the period of the construction of
the LNG project, that is, up to the end of 2014. I will refrain from projecting developments
beyond the LNG construction stage, given the need to fully assess what the impact of the
production and export of the gas will have on the economy.
As can be expected, over the last five years the increase in economic growth resulted in an
increase in formal employment averaging 6.0% per annum. In the June quarter of 2011
employment increased by 7.1%. It can be expected that this trend will continue during the
period 2011 to 2014.
The increase in aggregate demand associated with the increase in economic growth,
combined with higher public sector spending as a result of the increase in tax revenue,
combined with higher prices of fuel and imported food items, led to an increase in the prices
of goods and services. Annual inflation increased to 9.6% in the June quarter of 2011, up
from 7.2% in the December quarter of 2010. There is some tradeoff between economic
growth and inflation. I want to repeat what I said in my previous presentations. In this period
of high economic growth, there will be increased inflationary pressures. The Bank of Papua
New Guinea will do all it can in using all the available instruments available to it - interest
rates, exchange rate, and trade in Central Bank Bills - to contain inflation within the
singledigit to low-two-digit range. To ensure that this objective is achieved, it will require very close
cooperation and coordination with the Government in the management of fiscal and
monetary policies, to ensure that inflation does not spiral out of control. At the same time, it
will ensure that its policies do not counteract the objective of economic growth, development
and the increase in the standard of living of the majority of the population.
II. Good economic management
Let me now turn to the issue of how to secure a balanced growth at acceptable inflationary
levels, at these very challenging times in the history of our economic development.
I am confident that with close coordination and cooperation between the Government and the
Central Bank the macro economy can be prudently and responsibly managed. I will touch
upon the issue of the "Dutch Disease" phenomena and how to deal with it, later in my
presentation.
The microeconomic aspects are as important as the macroeconomic ones, to achieve a
balanced non-inflationary growth. The first and most important one is, to ensure that the
Government is not competing with the Private Sector for limited productive resources and
capacities. Such competition will only result in price increases, increase in imported inputs,
including materials, equipment and labour, and misallocation of the limited resources
resulting in losses to the nation. Therefore, my recommendation is that during the LNG
construction period the Government should refrain from undertaking major infrastructure
projects. Undertaking major infrastructure projects by the Government will only compete with
the limited resources in equipment and manpower in the areas of earth moving, building and
construction, as well as other industries that are and will be fully utilized for the LNG project
construction. The Government should instead do work in the areas of, maintenance,
upgrading and some instances complement work done by the developer of the LNG project.
The Government should commence planning its infrastructure implementation and be ready
to implement them, as and when the LNG project scales down its construction operations
and the highly skilled labour trained by the developer, equipment and materials, become
available and can be utilized, for other infrastructure developments.
During the construction phase of the LNG project, the Government should concentrate its
efforts on areas that do not compete with the LNG developer on resources, which are the
social sectors of education, including the up-skilling of the workforce through vocational and
on the job training, health and law and order. It is clear that the expansion of the services in
these areas will require investment in classrooms, aid posts, police stations and housing for
teachers, health workers and police personnel. The recommendation is not to refrain from all
work in the area of building and construction, but to limit them to the bare minimum
necessary to maintain the existing infrastructure and complement it with the most needed
additions. Once the LNG project construction winds down, the opportunity to move the skilled
labour trained by it, and the resources becoming available, to major infrastructure and
building and construction projects should be planned. This means that the Government must
have a clearly designed plan, including detailed implementation plans and programs for it.
III. Combating "Dutch Disease"
The second important micro level proposed initiative is to invest in the agriculture sector and
social infrastructure. In many presentations of the problems that the development of the LNG
project might create, the subject of the "Dutch Disease" which involves the pricing out of the
traditional export sectors is raised. One of the most efficient ways to counteract it is, by
investing and developing a competitive traditional export industry. Papua New Guinea is
blessed with very fertile land, abundant water resources, and available labour force, and has
the potential to develop a competitive, advanced agricultural sector. Given the world wide
food shortage and the steady increase in food prices, the Government should develop a plan
of investment in the agricultural sector that will place Papua New Guinea as a food supplying
country, not only for its own use, but for exports. This is the most efficient and effective way
to counteract the "Dutch Disease" risks emanating from the LNG development where we
have alternate sources of income generation with a wider base of exports.
Given the projections of revenue and tax flows during the next four years 2011-2014, the
Government should have the resources to invest in the social sectors and the development
of the agriculture sector. I recommend to the Government to set up a Special Purpose
Account (that is budgeted for) with the Bank of Papua New Guinea in which all the excess
revenue will be deposited, to be used for these purposes.
IV. Initiatives by the central bank
Allow me to end my presentation with two subjects at the top of my agenda as the Governor
of the Bank of Papua New Guinea.
The first is Financial Inclusion: We are in the process of planning and implementing a
program of enabling every Papua New Guineans wherever they live to have access to
banking and financial services. This will include the advancement of the microfinance service
and mobile phone banking. It will be complemented by financial awareness, literacy training
and education. I plan that during my term as the Governor the program will, as much as
possible; reach every citizen of this country wherever they live.
The second is the Payment Systems: We are planning to enhance and improve the National
and International Payment Systems, and turn them into a modern, low cost and efficient one.
We also aim to upgrade our payment laws in the process. We are in the process of selecting
a vendor to assist us in the development of the system.
Conclusion
To conclude, let me reiterate three important points.
1. The Government, through its fiscal policy, can redistribute effectively the windfall
revenue gain (through increased taxes from high commodities prices and spin-off
business activities) by investing in the social sector and agriculture for wealth
creation, to combat Dutch Disease, and to achieve a balanced growth in the PNG
economy;
2. Government should not compete with the private sector for limited resources during
the construction phase of the LNG project by engaging in large infrastructure
projects, but maintain and improve existing infrastructures, and plan to use the
resources when they are released after the construction phase;
3. There has to be a more close and coordinated management of fiscal policy and
monetary policy to fight inflation so that it does not spiral out of control in this period
of high economic growth.
Thank you for having invited me to make this presentation at this important forum.
I wish you all success in this forum.
Thank you and God bless.
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