Economic Analysis of Papua New Guinea

Economic Analysis of Papua New Guinea

by David Osborne, Robert Harden and Christopher Hoy
6 December 2017


This paper analyses the PNG economy by considering (1) macroeconomic stability; and (2) fiscal policy and debt.

From 2003 to 2015, Papua New Guinea experienced comparatively robust economic growth which underpinned increased formal sector employment and strong growth in government revenue. This performance was aided by high prices for PNG's commodity exports, supportive macroeconomic policy settings, and developments in the resources sector, the most notable being the construction of the PNG LNG Project and the first gas exports in 2014. [1]

Natural gas plant | Papua New Guinea highlands. Photo: (Angela N Perryman/Shutterstock)

This prolonged period of robust economic growth has not, however, translated into improved social indicators or improved standards of living, particularly for PNG's rural majority (around 80 to 85 per cent of the population). Papua New Guinea failed to achieve any of the Millennium Development Goals and it is currently ranked a lowly 154 out of 188 countries on the UN Human Development Index, compared with Fiji's ranking of 91, Vanuatu's of 134 and Solomon Islands' of 156.

The robust economic performance fuelled rapid growth in government expenditure, which increased from K3 681 million in 2003 to K13 789 million in 2015 (nominal terms). However, the effectiveness of the greatly expanded government expenditure program is questionable, with concerns that too much has been spent on 'prestige' projects rather than on projects which will expand the productive capacity of the economy. Even the PNG Treasury has raised concerns over the effectiveness of funds transferred to the Provinces and Districts. [2]

Following years of relatively strong economic growth, Papua New Guinea is now confronting a period of significantly weaker growth. This reflects a number of factors: weaker international commodity prices, declining oil production due to maturing oil fields, and the one-off boost in GDP growth due to gas exports which has passed. Over the medium term, the PNG Treasury is projecting modest economic growth of around 2.7 per cent, which is significantly below the estimated population growth rate of 3.1 per cent. [3]


key findings


key findings


Resource economies such as Papua New Guinea need to manage revenue and expenditure volatility to maintain debt sustainability. There are a number of possible approaches, such as strong macroeconomic frameworks with fiscal rules and special purpose funds (natural resource funds or sovereign wealth funds) to smooth and/or constrain government expenditure and maintain sustainable levels of debt. Papua New Guinea has a history of applying such mechanisms: the Mineral Resources Stabilisation Fund, the PNG Sustainable Development Program with its development and long-term funds, and now the PNG SWF. It has also used trust accounts to smooth expenditure, and medium-term fiscal strategies with fiscal rules to constrain expenditure growth and minimise debt.

The effect of fiscal rules and tools on revenue and expenditure volatility can be seen in revenue and expenditure growth rates. Figure 3 compares fiscal management in Norway and Venezuela. Norway has a fiscal rule and Natural Resource Fund that stabilises the revenue available for budget expenditure. The fiscal tools stabilise (or smooth) expenditure despite volatility in revenue growth rates. By contrast, Venezuela has no effective fiscal rule to manage volatility, and expenditure mirrors revenue volatility. This makes budgeting very difficult.

Figure 3: Using fiscal tools to reduce volatility: Norway vs Venezuela (government revenue and expenditure growth rates)



Source: IMF, World Economic Outlook 2017

Papua New Guinea appears to manage volatility in revenue and expenditure like Venezuela, rather than Norway (Figure 4). It has made attempts to improve the management of volatility but they have been neither long-lasting nor very effective. In consequence, government expenditure is unpredictable from one year to the next, reducing the ability for government to undertake medium to longer term planning for service delivery and infrastructure development.

Figure 4: PNG Revenue and expenditure growth rates

Source: DevPolicy PNG Budget Database (accessed 17 July 2017)

From 2003 to 2013, PNG's share of revenue to GDP remained steady at approximately 28 per cent, while the share of expenditure to GDP increased from 28 per cent to 38 per cent, indicating a worsening fiscal position, with the majority of the change occurring in 2012 and 2013. Since 2013 both revenue and expenditure have been falling in both kina terms and as a share of GDP (Figure 5). The recent and projected fall in revenue and expenditure to GDP reduces the government's ability to provide basic services and to invest in reforms and infrastructure to stimulate future growth. The projected fall in expenditure as a share of GDP to below 20 per cent is the lowest level in over 30 years (Figure 5), and well below the long-term average of approximately 32 per cent.

Figure 5: Revenue and expenditure (share of GDP)

Source: DevPolicy PNG Budget Database (accessed 17 July 2017)


Papua New Guinea needs appropriate fiscal tools to manage revenue and expenditure volatility. It is a resource-dependent developing country that faces a resource curse. Fiscal tools must not only be capable of implementation but also take into account political realities.

They must also be coordinated. An effective SWF must be integrated within a country's broader fiscal policy and coordinated with all related fiscal policy tools. [16] For example, a savings fund would only be effective if there was a genuine increase in government saving, not offset by increased borrowing). PNG's SWF will need to be closely integrated with the policies established under Kumul Consolidated Holdings and related entities, controlling resource equity and related dividends for the state. Logically, the SWF should align with the objectives of PNG's current and future Medium Term Fiscal Strategy, Medium Term Debt Strategy and annual National Budget, and vice versa.

In the past, growth in PNG's revenue and corresponding rise in expenditure was largely absorbed through the use of trust accounts, as the economy was unable to expand in line with growing expenditure. The government allocated funds through the annual budget cycle and supplementary budgets, and held the funds in trust accounts. The trust accounts had a 'smoothing' effect, holding funds until the economy had sufficient capacity to implement the designated project or program. However, there have been questions over missing funds from many trust accounts, and allegations that funds were not used effectively or for their intended purposes.

Papua New Guinea's fiscal framework now needs to be positioned to respond to economic events. Trust accounts should not be the default mechanism, and their use should be minimised. Keeping funds 'on-budget' and clearly within formal public financial management systems would enhance international and public confidence. Global commodity prices may have stabilised for now, but history indicates that increased prices or expanded output will return.

The new government will be required to formulate and approve a new Medium Term Fiscal Strategy for 2018-2022. The government therefore has the opportunity to consider options for an accelerated fiscal consolidation program, and better integrate fiscal policy with exchange rate policy and foreign exchange management.


Papua New Guinea's current stock of debt is approximately 33 per cent of GDP (see Figure 6), which is above the guideline of 30 per cent in the Papua New Guinea Fiscal Responsibility Act 2006. This debt is within historical levels and remains low compared to 'peer' countries.


Figure 6: Resource exporters, debt to GDP

Source: IMF, World Economic Outlook 2017

In its 2016 Debt Sustainability Analysis of Papua New Guinea, the IMF concluded that "PNG's risk of external debt distress remains low but the overall risk of public debt distress is heightened". [17] A rising share of short-term Treasury bills, combined with less concessionary external debt since 2014 (increasing exposure to US interest rates) have contributed to this heightened risk.


Figure 7: Total public debt as a share of GDP

Source: DevPolicy, PNG Budget Database (accessed 17 July 2017); Papua New Guinea, Mid-year Economic and Fiscal Outlook Report 2017

If PNG's projections are realistic and recent downward revisions to both revenue and expenditure are realised, then debt as a share of GDP will remain at historically low levels. However, sudden and large reductions in government expenditure will have a significant impact on service delivery, activity in the broader economy, and livelihoods. Papua New Guinea is confronted with a prolonged period of low revenue growth as it faces some of its greatest development challenges. The process of expenditure prioritisation and the return it achieves from social and economic investments will determine the sustainability of its current fiscal deficits and related debt. If money is wasted on low priority and low return initiatives then it will be hard to see how human development indicators can improve over the next decade. There is a strong case for PNG to establish a fiscal management regime that manages its budget volatility so that expenditure is more stable and predictable, allowing both the public and private sectors to undertake longer term investment and planning.


[1] The ramp up in the construction phase of the project contributed to overall real economic growth of over 10 per cent in 2010, while the first full year of gas exports contributed to overall economic growth of over 12 per cent in 2014.

[2] The Treasury noted in the 2013 National Budget that: "The quality of expenditure must also be increased. This means some lower priority or wasteful expenditure will need to be cut, while high priority expenditure, such as on health, education, law and order, and infrastructure, [will need to be] increased and made more effective": PNG, 2013 National Budget: Volume 1 - Economic and Development Policies, 41.

[3] The 2011 Census estimated PNG's population at 7,275 million. With a growth rate of 3.1 per cent, PNG's population will double in 23 years. .

[4] Foreign currency holdings by the Bank of Papua New Guinea (the Central Bank).

[5] Meaning PNG residents and resident companies can readily purchase foreign currency with kina.

[6] Bilateral partners, including Australia, also provided financial assistance under these programs.

[7] A fundamental policy condition of IMF Standby programs is a requirement to address the original and primary source of the external account pressures; that is, by returning the fiscal account to balance. World Bank Structural Adjustment programs directly fund reforms aimed at improving the efficiency of government and the business operating environment.

[8] From 2008 to 2011 PNG's external position was greatly assisted by foreign exchange inflows associated with the construction of the PNG Gas pipeline, as reflected by an appreciating exchange rate and increasing external reserves.

[9] Also associated with the winding down of the construction phase of the PNG LNG project.

[10] Meaning that resident exporters can hold foreign currency proceeds offshore for a period of three months and can use those proceeds to meet their foreign liabilities. However, after three months, any surplus of foreign currency proceeds must be repatriated to PNG.

[11] While 2014 heralded the first full year of gas exports, the resulting inflow of foreign currency into Papua New Guinea was not substantial. The foreign currency earnings from the project are, in the first instance, predominately used to service the project's offshore loan commitments.

[12] World Trade Organization, Trade Statistics database, accessed 14 June 2017.

[13] In April 2016, the credit rating agency Moody's downgraded the PNG government's foreign currency and local currency issuer ratings. This decision was made in large part by "Strains on foreign currency reserve adequacy due to heightened balance of payments pressures that will continue over the next two years": Moody's Investor Service, "Moody's downgrades Papua New Guinea's Rating to B2 with Stable Outlook", Global Credit Research, 25 Apr 2016.

[14] International Monetary Fund, 2016 Article IV Consultation, Papua New Guinea, IMF Country Reports 17/22.

[15] International Monetary Fund, 2016 Article IV Consultation, Papua New Guinea, IMF Country Reports 17/22.

[16] Phil Garton and David Gruen (2012), "The Role of Sovereign Wealth Funds in Managing Resource Booms: A Comparison of Australia and Norway", Address to the Third Annual Asia Central Bank and Sovereign Wealth Fund Conference, 23 February.

[17] International Monetary Fund, 2016 Article IV Consultation, Papua New Guinea, IMF Country Reports 17/22.

Top image: Flick user ILO in Asia and the Pacific


David Osborne is Adam Smith International's in-house Principal Economist (Asia Pacific) with over 15 years' experience working within the Australian Government, regional governments, the private sector, and think tanks. He is an economics professional with a focus on policy and strategy development, economic growth, macroeconomic policy, revenue management, economic governance, and public financial management, including in the extractives sector. David has spent much of the past 10 years implementing and advising on economic policy issues in Papua New Guinea, with a focus on the management and impact of the extractives sector.

These papers presenting a country snapshot of Papua New Guinea in 2017 were produced with the support of ExxonMobil. More