Can PNG afford extra debt?

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Betting on the potential of future useful resource wealth has proved
a dangerous technique. Historical past holds invaluable financial classes.

Papua New Guinea has huge improvement wants. Paying to satisfy these is the problem. So the Worldwide Financial Fund not too long ago agreed to supply PNG a US$918 million mortgage.

It’s a unprecedented amount of cash for a rustic already combating years of persistent price range deficits. The implications of a default on a mortgage this huge can be dire – notably at a time when a rising quantity of growing nations face debt misery.

At current, there aren’t any indicators that PNG is struggling to service debt. However the nationwide steadiness sheet is weak to market shifts. Some 49 per cent of PNG’s debt is topic to variable rates of interest which might be revised yearly. And, as rates of interest climb globally, PNG is already taking a success.

Nationwide debt stands at US$15.3 billion, amounting to 50 per cent of GDP. The common rate of interest on home debt is 7.2 per cent, a lot greater than the two.8 per cent common rate of interest on overseas debt (PNG’s inventory of debt is nearly evenly break up between home and overseas debt).

So, PNG wants a method to scale back its debt burden. Financing its deficits primarily by way of overseas debt with decrease rates of interest is sweet. The cheaper charges of the IMF mortgage liberate extra funds to be spent on improvement.

Spending financed by extreme borrowing is weak to market shifts that may result in a collapse in income and huge fiscal deficits.

However the IMF has itself listed PNG as a rustic at excessive danger of debt misery, citing as causes low ranges of foreign-exchange reserves, liabilities for state-owned entities, and the economic system’s vulnerability to fluctuations in commodity costs.

Which begs the query: can borrowing extra scale back the danger of debt misery?

The IMF mortgage phrases are beneficial. The rate of interest is decrease than the PNG common at simply 2.4 per cent. The ten-year reimbursement interval on the mortgage, with a five-and-a-half-year grace interval, can also be beneficiant. A optimistic outlook for brand new useful resource initiatives additionally factors to future public income flows.

All of which sounds good, however dangers stay. Earlier governments haven’t all the time been fiscally accountable, and this expertise holds classes.

Previous to 2002, PNG was characterised as a rustic trapped by excessive debt with an upward deficit spiral. Debt as a share of GDP rose from 17 per cent on the time of independence in 1975 to 47 per cent, a pattern that had persevered by way of 9 completely different governments spanning 26 years. However as illustrated within the chart under, PNG has loved relative political stability within the years since 2002. The last decade-long authorities of Sir Michael Somare noticed the best fall in nationwide debt. However the rollercoaster turned. With Peter O’Neill as PM (2012–19), debt shot again up, a pattern that has largely continued since James Marape got here to energy.

Some commentators characterised the Somare years as a time of booming assets. Excessive commodity costs yielded robust authorities revenues from firm taxes after which got here a spike in earnings tax receipts from the development section of the PNG Liquefied Pure Fuel Mission in 2009. Income doubled throughout the interval whereas authorities spending elevated by solely 58 per cent, so PNG moved forward with fiscal surpluses and debt fell. The result lowered PNG’s debt servicing burden from a historic excessive of 25 per cent to a low of 5 per cent.

However the positive aspects had been frittered away by O’Neill’s fiscal mismanagement. The 2013 price range declared: “we’re borrowing sure within the information that income inflows from mining and LNG initiatives will make reimbursement manageable”. Debt elevated and so did authorities expenditure. However the “sure information” didn’t maintain. A hunch in commodity costs in 2015 and a dispute over the LNG undertaking meant that income didn’t meet expectations. The collapse in income prolonged to different areas equivalent to private earnings tax, which fell in keeping with the decline in formal sector employment, and falls in firm tax and GST collections.

This historical past stands as a warning. PNG as a useful resource wealthy, “value taking” economic system must be prudent. Spending financed by extreme borrowing is weak to market shifts that may result in a collapse in income and huge fiscal deficits. Underneath O’Neill, debt shot as much as 40 per cent of GDP. Even after the pandemic years, turning this round is crucial.

For PNG, taking over extra debt is manageable, offered the cash is invested in constructing productive capability and brings returns. Borrowing in opposition to future useful resource income is unwise. The human toll of a miscalculation might be excessive if the nation turns into shackled to debt serving quite than servicing its folks.

Contributor: Maholopa (Maho) Laveil.

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