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Papua New Guinea - Economy

Papua New Guinea is facing headwinds stemming from low commodity prices and is recovering from a major drought, which have weighed on economic growth, weakened the external position, and created fiscal challenges. Foreign exchange (FX) remains in short supply but inflows have recently picked up somewhat, and the gross foreign reserve position is expected to remain broadly stable. Revenues fell short of the budget in response to recent commodity price declines, prompting the Parliament to pass a supplementary budget 2016 that entails expenditure cuts. Inflation has increased somewhat, partly reflecting the exchange rate depreciation.

After strong economic growth driven by the new liquefied natural gas (LNG) project coming on stream in 2014-15, the underlying growth is expected to slow down reflecting base effects following the commencement of LNG production, as well as modest growth in the non-resource sector. The large LNG exports and import compression caused by the shortage of FX led to a strong current account surplus, largely offset by financial account outflows consistent with project development agreements. Inflation is expected to continue edging upwards in the near term due to the gradual exchange rate depreciation and prices of seasonal agricultural items.

The country has a dual economy and 80% of the population live in rural areas and are engaged in subsistence agriculture, cultivating crops such as sweet potatoes, taro, yam, bananas, and sago palm. A small number of farmers produce coffee, copra, cocoa, tea, rubber, and oil palm for export while other activities include hunting and fishing. The countrys natural resources include oil, natural gas, gold, copper, silver, nickel, fisheries and timber. Minerals including gold, oil and copper account for nearly two thirds of export revenue. Further diversification of the economy and the $19 billion liquefied natural gas (LNG) project that is planned by commercialising the Hides, Angore and Julla oil fields, and expanding operating fields of Kutubu, Agogo, Gobe and Moran in the Southern Highlands and Western Province has potential to further increase the countrys foreign earning.

PNG has experienced over a decade of comparatively robust economic growth, with expanding formal employment opportunities and strong growth in government expenditure and revenues. This economic performance has been driven by high international prices for PNGs exports (including agricultural products), conservative fiscal policies and, more recently, construction activity related to the Liquefied Natural Gas (LNG) project.

Notwithstanding this favorable environment, PNG continues to confront considerable development challenges. PNG remains off track against all the Millennium Development Goals. Over 2 million Papua New Guineans (an estimated 40 percent of the population) are poor and/ or face hardship, according to the 2013 Pacific Regional Millennium Development Goal (MDG) Tracking Report. With around 80 to 85 percent of Papua New Guineans residing in traditional rural communities, the majority secure their livelihoods from subsistence gardens and smallscale cash cropping.

While exports of LNG will boost PNGs Gross Domestic Product (GDP) considerably in the near future, the PNG Government will need to practice fiscal discipline in order to maintain macroeconomic stability and increase broad-based economic growth. Australia is working with the PNG Government to support the establishment of a sovereign wealth fund to assist with sharing the economic gains of PNGs resource sector with the people of PNG.

The deficit is largely the result of disappointing revenues, particularly from mining and petroleum taxes, and consequently the government faced short-term cash flow constraints. It has little recourse to domestic financing as PNG-based purchasers of Treasury bills have already invested heavily in short-term government debt. New sources of finance such as asset sales or sovereign bond issuance, are being considered but will take time to materialize and could be expensive.

Clans or kinship groups own 97 per cent of the land in PNG. They control its division, use, and transfer. This common ownership binds them together and is the basis of their identity in the community. Usually, they use the land collectively for hunting, fishing, gathering plants for food or other needs, or collecting firewood. Rights to use certain areas for gardens or houses are divided among individuals and can be transferred to their descendants. Boundaries are marked by natural features such as trees, rocks, ridges, and rivers. Knowledge of these rights is passed by word of mouth from one generation to another.

The peoples of New Guinea are mainly settled villagers living in a subsistence economy. Their productive activities vary according to the zone they inhabit on the island's extraordinary vertical ecology. The extreme highlands have an alpine climate, with widespread frost. There, an intensive agriculture based on the sweet potato has developed over the last few hundred years. This highly productive system has given rise to a local population boom, and the highlands support large, dense groups with large languages, as we have seen. Highland groups are constrained from spreading downward, however. The competitive advantages of the sweet potato over other plants decline with decreasing altitude, and lower down, endemic malaria, which is absent from the relatively cool highlands, is a powerful check on population growth and aggregation.

The coastal lowlands and the intermediate areas known as the highland fringe consist of pockets of rainforest, swamps, and grassland. The population is low and thinly spread, making a living from mixed farming, fishing, or from gathering forest sago palm, depending on the local conditions. It is in these areas that the really extraordinary diversity of languages is to be found. The basic unit of social organization is a local group-a village or hamlet-which occupies and works a common territory. Local groups number from 50 to a few hundred people, and there are many cases of local groups with a unique language.

As most of New Guinea is warm and wet at all seasons, food production is continuous throughout the year. Gardens growing a wide variety of crops are planted every year, and after a few months, begin to yield a small food harvest every day. A garden will produce for several years, by which time the next one has been cleared and planted and is productive. Local groups are therefore very self-sufficient.

Though self-sufficient in staples, local groups engaged in extensive and enthusiastic trade with other goods. Shells moved up from the coast, and feathers down from the interior. Stone tools, pottery, and salt moved from their centres of origin through long chains of supply and were made available throughout the country. These types of trade were often accompanied by festivals and other ceremonial occasions, in which huge quantities of prestige goods were exchanged, often across language boundaries.

The local gardens reliably provided for most basic needs. Specialist goods such as stone tools and pots were obtained through intergroup trade, but there is a limit to how many of these one wants. In general, the range of goods and services available outside the local groups was not sufficient to entice people to enlarge the scale of marketing and economic specialization.

Almost all of PNGs total land mass is regarded as customary land where rights and interests are regulated by clan customs. The remainder is alienated land or state owned land that was acquired from customary land owners to be administered through leasehold and freehold interest for future development. Large swathes of customary land have been opened up to logging to the extent that deforestation in PNG is extensive. Deforestation is largely a result of illegal logging representing between 70-90 percent of all logging. Given the large scale of logging, the improper use of customary land affects a great number of tribes and people. The land has been cleared exposing it to soil erosion and loss of productive capacity.

The logging industry has become synonymous with political corruption, extensive violations of landowners rights, extreme environmental destruction, police racketeering and the brutal repression of workers, women and those who question its ways. This has become such a large issue that the government of PNG issued a moratorium on the issue of logging licences in August 2012.

Few citizens have anything good to say about the way the country is currently managing its natural resources. They have a litany of concerns starting with adverse impact on the environment. They talk about pollution of rivers/coastal waters, destruction of rainforests, soil erosion and bad air quality. Environmental destruction, participants note, is not just bad in and of itself but also makes life hard for local communities who depend on the environment for their livelihoods. Comments on damage to the environment sometimes include references to the government prioritizing money above the environment or to the government allowing foreigners to harm the environment. Sustainability is another concern. There is a keen sense that the natural resources are not unlimited and that there will be little left for future generations.

What makes all the environmental degradation worse is that the extraction of natural resources has not led to benefits for Papua New Guineas people or even the owners of the land where the resources are extracted. This sentiment is reflected in the comment There are only 7 million Papua New Guineans. If there was efficient management [of natural resources extraction], then all Papua New Guineans should be wealthy.

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Page last modified: 30-06-2017 19:32:55 ZULU