Two new reports have outlined the revenue challenges being faced by Papua New Guinea’s government in the face of the COVID-19 pandemic. Without progress on resources projects, they suggest PNG can expect spending cuts and more foreign exchange shortages.
A report by Fitch Solutions says that because of ‘lost tax revenues and higher extraordinary spending due to the latest COVID-19 outbreak,’ it has revised its forecast for PNG’s Budget deficit in 2020 to 7.3 per cent of GDP, ‘from a previous forecast of 6.5 per cent.’ The 2019 estimated Budget deficit was 4.9 per cent.
‘The wide fiscal imbalance will force the government to implement spending cuts – potentially delaying important public infrastructure projects – or add to a growing debt burden,’ the report says.
Fitch has lowered its forecast for GDP growth in 2020 from minus 1.1 per cent to minus 1.6 per cent.
The ANZ Bank’s latest Pacific Insight report, authored by International Economist Kishti Sen and Senior International Economist Tom Kenny, says the PNG government will have a shortfall of K1 billion in petroleum taxes and dividends.
‘We believe another K1.5 billion of projected overall tax revenue won’t be realised due to a lacklustre economy. The shutdown of the Porgera gold mine, while Barrick Niugini pursues a legal challenge to the government’s decision not to extend its Special Mining Lease, will also impact revenue.’
ANZ’s economists estimate that PNG’s budget deficit will blow out to K7.1 billion in 2020, raising questions about where the funding will come from.
‘So far, the government has raised a total of K2.4 billion (K1.1 billion through domestic bond issuance and K1.3 billion from an IMF loan), leaving a deficit financing gap of K4.7 billion.
‘A recovery of PNG’s economy and government revenue heavily depends on getting ‘the next wave of resource projects over the line.’
‘The Treasurer has also said he is confident of raising another K500 million from the domestic market, and that he will actively seek additional multilateral and bi-lateral development partner support to bridge the gap.
‘We think the latter will be a tough ask. The lending pipeline of multilaterals is under pressure from a large volume of requests from member countries for emergency financing. The Asian Development Bank has already cut $US110 (K388 million) from a $US300 million (K1.0 billion) Partial Credit Guarantee Bond for the PNG government.’
The Fitch report says mine closures are also adversely affecting the availability of foreign exchange in PNG.
‘With gold representing around a quarter of PNG’s total exports, prolonged mine closures have a clear negative impact on the country’s trade balance and exacerbate existing problems with foreign exchange shortages.’
‘The government needs to strike the right balance between national interests and investor interests in negotiating distribution of project benefits’
Fitch says Ok Tedi Mining has estimated that the 14-day suspension of operations at the mine is likely to reduce US foreign exchange inflows by around US40 million (K140 million). The report says the Porgera mine shutdown will also cause a significant loss of revenues, noting that the mine accounts about a tenth of PNG’s annual exports.
The ANZ report argues the government will need to reduce spending on wages and salaries ‘to rein in operating or recurrent expenditure’.
It also says a recovery of PNG’s economy and government revenue heavily depends on getting ‘the next wave of resource projects over the line.’
The P’nyang gas agreement is identified as particularly important, with ‘timely completion of this agreement’ being needed to prevent the Papua LNG project and the PNG LNG expansion being indefinitely on hold.
‘That could do irreversible damage to the economy. We understand that the government is taking a tough negotiating position with potential investors seeking to achieve a larger equity, greater landowner involvement and more opportunities for SMEs and local communities.
‘However, mining capital is not a limitless pool, and PNG – notwithstanding its unique value proposition including rich gas – is competing against discoveries in Mozambique, Guyana, Brazil and the United States. The government needs to strike the right balance between national interests and investor interests in negotiating distribution of project benefits.’
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