COUNTRY REPORT€¦ · COUNTRY REPORT Papua New Guinea 1st quarter 1997 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom. The Economist Intelligence

COUNTRY REPORT

Papua New Guinea

1st quarter 1997

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

The Economist Intelligence Unit

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ISSN 1366-4085

Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1997-98

10 Review10 The political scene14 Economic policy and the economy18 Agriculture, forestry and fishing19 Energy and mining20 Transport and communications21 Employment, wages and prices23 Money and finance24 Foreign trade and payments28 Aid and development

29 Quarterly indicators and trade data

List of tables8 Forecast summary9 World commodity price forecasts

16 Central government budget18 Export prices21 Consumer price index22 Employment by industry22 Exchange rates23 Money supply23 Commercial banks’ liquid asset holdings24 Commercial bank interest rates24 Agricultural exports by volume25 Agricultural exports by value25 Non-agricultural exports26 Main exports27 Balance of payments28 Public debt outstanding29 Quarterly indicators of economic activity29 Direction of trade30 Main commodities exported

Papua New Guinea 1

EIU Country Report 1st quarter 1997 © The Economist Intelligence Unit Limited 1997

List of figures9 Gross domestic product 9 Kina real exchange rate

26 Trade balance27 Total reserves minus gold

2 Papua New Guinea


February 28, 1997 Summary

1st quarter 1997

Outlook for 1997-98: The approach of mid-year national elections is spurringthe Chan government into action but there is disillusionment with it. Post-election changes in policy are unlikely. The Bougainville crisis is spirallingdangerously out of control and heavy casualties are likely. The economy isin better shape and the recovery will continue into 1998. The outlook forcommodities is mixed.

The political scene: Sir Julius Chan has made a last-ditch attempt to resolvethe Bougainville crisis by employing mercenaries. The decision has been con-demned by Australia, neighbouring countries and the Bougainville TransitionalGovernment (BTG). The failings of the PNG army have been highlighted by thefinding that PNG soldiers were involved in the October 1996 assassination ofthe BTG premier. Political parties are preparing for the June elections. Thegovernment has attempted to tackle rising crime.

Economic policy and the economy: The World Bank has approved thesecond tranche of the SAP loan only after a government U-turn. The 1997budget has been announced in two stages. The government has undertaken toreform the public and private sectors. Government spending indicates a fiscalrelaxation, while the drawdown of aid remains low. The economic recovery hasgathered pace, but the mining sector has failed to shine. Construction andinvestment have sucked in imports.

Sectoral trends: Coffee exports have continued to rise. The government hassuccessfully floated off part of Orogen Minerals. Fears that PNG’s oil reserves arefast depleting may prove unfounded as Moran drills show promise. Placer Domehas launched a bid for Highlands Gold and has gained control of the Porgeragold mine. PNG and Australia have agreed to open up air routes.

Employment, wages and prices: Inflation in the third quarter moved intosingle digits. Employment rose in the first half of 1996. The currency has begunto stabilise.

Money and finance, foreign trade and payments: Money supply hasgrown by 20% as liquidity has continued to rise and interest rates have fallen.Total agricultural export earnings have risen but mineral receipts have fallen.The trade surplus has fallen by 26% in the first nine months of 1996, but thecurrent account has remained in surplus. The capital account has moved intosurplus, keeping the overall balance in the black. Public-sector debt has risen.

Editor:All queries:

Sophie LewisohnTel: (44.171) 308 1007 Fax: (44.171) 830 1023

Papua New Guinea 3


Political structure

Official name Independent State of Papua New Guinea

Form of state Constitutional monarchy

Head of state Queen Elizabeth II, represented by the governor-general, who is nominated by theNational Parliament

The executive The National Executive Council, presided over by the prime minister, has executivepowers; the prime minister is appointed by the head of state on the proposal ofparliament

National legislature Unicameral National Parliament; its 109 members are elected for a period of five years,89 representing “open” constituencies and the rest representing 19 provincialconstituencies and the capital district

Provincial government Each of the 19 provinces has its own government which may levy taxes to supplementgrants received from the national government

Legal system Series of regional and magistrates’ courts leading to a Supreme Court at the apex

National elections June 1992; next elections due by June 1997

National government Sir Julius Chan, leader of the People’s Progress Party, heads a coalition government,since his defeat of Paias Wingti of the People’s Democratic Movement in aparliamentary ballot in August 1994

Main political organisations People’s Progress Party; Pangu Pati; People’s Democratic Movement; National Party;Melanesian Alliance; People’s Action Party; League for National Advancement,National Alliance

Main members of theNational Executive Council

Prime minister Sir Julius ChanDeputy prime minister & minister of finance & planning Chris Haiveta

Key ministers Agriculture & livestock David MaiDefence Mathias IjapeEducation John WaikoEnvironment Paul MambeiFisheries & marine resources Titus PhilomenForeign affairs Kilroy GeniaForestry Andrew BaingHealth Philemon EmbelHome affairs David UnagiHousing Robert NagleIndustrial relations Samson NapoMining & petroleum John GihenoNational planning Moi AveiProvincial & local governments Paul BarterPublic services Joseph OngugloTransport & works Peter Yama

Central bank governor Koiara Tarata

4 Papua New Guinea


Economic structure

Latest available figures

Economic indicators 1992 1993 1994 1995 1996a

GDP at current prices Kina m 4,140 4,979 5,297 6,060a 6,939

Real GDP growth % 11.8 16.6 3.5 –2.9 2.5

Consumer price inflation % 4.3 4.9 2.9 17.3 12.0

Population m 3.85 3.92 4.00 4.07 4.10

Exports fob US$ m 1,948 2,604 2,651 2,670 2,337

Imports fob US$ m 1,323 1,135 1,325 1,262 1,521

Current account US$ m 95 646 569 674 82

Reserves excl gold US$ m 239 141 96 261 434b

Total external debt US$ m 3,740 3,224 2,879 2,719a 2,457

Debt-service ratio % 29.3 29.0 29.0 25.1a n/a

Exchange rate (av) Kina:US$ 0.965 0.978 1.005 1.276 1.341

February 21, 1997 Kina1.383:US$1

Origins of gross domestic product 1993 % of total Components of gross domestic product 1992 % of total

Agriculture 26.0 Private consumption 57.9

Mining & quarrying 28.9 Government consumption 22.4

Manufacturing 8.8 Investment 23.8

Construction 3.6 Exports of goods & services 45.2

Services 32.7 Imports of goods & services –49.3

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports fob 1995 US$ m Principal imports cif 1994 US$ m

Gold 626.9 Machinery & transport equipment 442.9

Crude oil 617.7 Manufactured goods 334.0

Copper 563.1 Food & live animals 204.2

Logs 325.9 Chemicals 85.9

Coffee 160.1 Mineral fuels & lubricants 40.8

Palm oil 106.1 Total incl others 1,526.5

Total incl others 2,670.0

Main destinations of exports 1995 % of total Main origins of imports 1995 % of total

Australia 33.4 Australia 51.2

Japan 23.3 Singapore 13.1

Germany 11.5 Japan 9.2

South Korea 7.8 USA 3.9

China 2.7 New Zealand 3.8

USA 1.9 Malaysia 2.8

a EIU estimate. b November actual.

Papua New Guinea 5


Outlook for 1997-98

Mid-year elections providea springboard for change—

The approach of national elections in June has forced the government to try toget its house in order. The government is making an attempt to combat risingcrime, which could threaten the free and fair conduct of the elections. Thebudget statement in November indicated a greater commitment to economicreform and development. And although the government may be tempted tostray from this path as the demands of the elections raise recurrent expenditureat the expense of capital expenditure, the conditionalities attached to theWorld Bank’s Structural Adjustment Programme (SAP) and the government’sneed for cash should deter any excesses.

—but there isdisillusionment with the

current government

However, there appears to be widespread disillusionment with the currentgovernment, led by the prime minister, Sir Julius Chan. Law and order havedeteriorated, the Bougainville crisis has escalated and, embarrassingly, thegovernment has been forced to back down from unpopular revenue-boostingmeasures introduced in September 1996.

The first post-independence prime minister, Sir Michael Somare, is attemptingto tap into some of this feeling. He recently formed a crossparty alliance of11 MPs, known as the National Alliance, which is campaigning on an anti-corruption platform. He has also promised the people of Bougainville self-determination if he becomes prime minister again. Although the NationalAlliance currently only numbers a few MPs out of the total of 109, Sir Michaelhopes to attract enough new MPs to his alliance after the elections to be able toform a government.

PNG election forecasts arenotoriously difficult—

However, predictions about the outcome of elections in PNG are notoriouslydifficult to make. Political allegiances tend to be very fluid, as they stem morefrom personal ties and offers of ministerial portfolios than ideology and partyloyalty. This is clearly illustrated by the formation of the current government:of the 32 MPs representing the ruling People’s Progress Party (PPP), only eightwere originally elected for the party in 1992—the remaining 24 switched fromother parties, often more than once, before joining the government benches.The instability of coalitions is compounded by the large number of candidatesstanding in elections, an average of 15 for each of the 109 seats. A highturnover of MPs is thus common in PNG elections—usually as many as 60% ofMPs fail to be returned. A first-past-the-post system means that the successfulwinners are usually elected by only a small, often clan-based, proportion of thepopular vote.

We do not expect that any one party will be able to consolidate its positionsignificantly ahead of the June elections. Instead, a victorious party or coalitionled by one of PNG’s elder statesmen, such as Sir Julius, Paias Wingti of thePeople’s Democratic Movement, or Sir Michael, is likely to emerge only as theresult of horse-trading in the weeks after the election.

6 Papua New Guinea


—but post-electionchanges in policy are

unlikely

The incoming government will have little room for manoeuvre in the conductof economic policy. The World Bank’s SAP is designed to raise governmentspending on the delivery of essential services, such as health and education,and shift more expenditure towards development of infrastructure. Althoughthe World Bank has praised the reforms that have been implemented so far, ithas also emphasised that initiatives designed to further structural reform andencourage private-sector investment are still inadequate.

The Bougainville crisis isspiralling dangerously out

of control—

The decision of Sir Julius to employ foreign mercenaries in Bougainville is aworrying new development in the nine-year-old crisis. The Chan governmentappeared to have exhausted all its options. A peace conference, the BougainvilleTransitional Government (BTG) and the increased military offensive have allfailed; the level of trust between the two sides has reached a low-point followingthe finding that members of the PNG Defence Force (PNGDF) were involved inthe assassination in October 1996 of the BTG premier, Theodore Miriung; andthe low morale and ill-discipline within the PNGDF have rendered the soldiersalmost useless in fighting the rebels and protecting the civilian population. Theuse of mercenaries to solve the crisis was one option that few had thought of.

—and heavy casualtiesare likely

All along the government has remained wary of giving away too much toBougainville, as this would involve either handing power over to theBougainville Revolutionary Army (BRA)—which is widely unpopular on theisland—or having a referendum once order is restored. A referendum could setoff secessionist movements in other parts of the country, such as East NewBritain. In recent months the government’s tactic appears to have been to talkabout further negotiations while upping the military offensive. The use ofmercenaries by the government at this stage suggests an end-game—the elimin-ation of the rebel leaders followed by the imposition of a compromise solutionon the remaining BRA fighters.

Although Sir Julius has claimed that the role of the mercenaries is limited totraining rather than fighting, this remains a grey area. The new head of theBTG, Gerard Sinato, voiced the concerns of many, including internationalobservers, when he feared “grave consequences”. The outlook is not for a shortsharp solution to the crisis, but for a messy fracas involving high levels ofcivilian as well as rebel casualties.

The question of paymentremains clouded

It remains unclear exactly how the cost of the mercenaries will be funded,although speculation is rife. It was suggested that the money to cover the costwould be diverted from another province’s development fund. If this is true,however, once these funds run out, other sources will have to be found—andthe funds do not exist to pay for mercenaries indefinitely. The World Bank,Australia and other donors will be scrutinising the disbursement of their aidfunds to check for any unauthorised diversion. Of particular concern are reportsin the PNG press that some of the funds raised in the partial flotation of thegovernment-owned Orogen Minerals have been allocated for the Bougainvillemercenary operation.

Papua New Guinea 7


The economy is in muchbetter shape—

Six months ago the government accused the World Bank of infringing onPNG’s sovereignty after the Bank threatened to abandon its SAP in the country(4th quarter 1996, page 19). Now that the government has repealed forestrylegislation and scrapped unpopular revenue-raising measures, the World Bankhas congratulated it on the depth of the country’s economic reforms. Thegovernment’s U-turn came with the realisation that it could not afford the lossof financial assistance from the international community. No longer could itresort to domestic financing for its budget deficits, as this had triggered manyof the country’s economic problems in the first place: foreign exchange dep-letion, currency devaluation and loss of business confidence.

This was the situation when the Chan government took over in August 1994,which necessitated the involvement of the World Bank in early 1995. Sincethen, a tight fiscal policy, in particular tighter controls on public expenditure,has brought budget deficits down as a share of GDP, the currency has stabilised,and annual average inflation is expected to be in single digits by the end of1997. Consequently the Bank of Papua New Guinea (the central bank) hasbeen able to relax its monetary policy and lower interest rates. The release ofthe US$30m second tranche of World Bank funding, coupled with US$320mfrom other foreign donors, should bolster the macroeconomic and structuralreforms that have already been introduced.

—and the recovery willcontinue into 1998

The EIU expects the economic recovery to gather pace over the next two years.In 1996 construction work on the Lihir gold mine buoyed economic growth.These factors will diminish in importance during 1997—investment growth islikely to fall back once Lihir is completed, probably in mid-1997, and growth inimports will also fall as a result. In 1997-98 growth will come from expandingagricultural production, investment in new infrastructure projects and, in 1998,in new extractive projects. The main impetus for economic growth, though, isexpected to come from exports of agricultural products and minerals, partic-ularly gold from the Lihir mine. Domestic consumption growth is likely to fallslightly owing to the extension of the curfew in major urban areas and theclampdown on government spending under the SAP. Overall, the EIU forecaststhat the economy will grow by 3% in 1997 and 3.9% in 1998.

Forecast summary(% change year on year unless otherwise indicated)

1995 1996 1997 1998

Real GDP –2.9 2.5 3.0 3.9 of which: private consumption 1.0 2.4 2.3 1.9 government consumption –5.2 3.8 3.2 2.0 gross fixed investment 9.0 21.0 –11.3 4.3 exports of goods & services –5.5 –2.3 7.8 8.4 imports of goods & services –1.5 6.5 1.1 5.4

Consumer prices 17.3 12.0 9.0 8.5

Merchandise exports (US$ m) 2,670 2,337 2,422 2,592

Merchandise imports (US$ m) –1,262 –1,521 –1,604 –1,728

Current account (US$ m) 674 82 110 216

Exchange rate (Kina:US$) 1.276 1.341 1.360 1.389

8 Papua New Guinea


The outlook forcommodities is mixed

The contribution of agriculture to economic growth over 1997-98 will be con-strained by the mixed outlook for commodity prices. Although the price ofcocoa on world markets is now expected to rise more steeply than previouslyforecast—owing to larger than expected world production shortfalls—thecoffee market is looking oversupplied, which will have a depressing effect onprices for at least the next 12-18 months. Higher Philippine output of lauric oilswill lower the prices of coconut and palm kernel oil by about US$100/ton andUS$60/ton, respectively, by the end of 1997.

The EIU now expects global demand for crude oil to grow more slowly in1997-98 than in 1996, but supply will pick up (assuming the resumption ofIraqi oil exports and higher non-OPEC production). Oil prices are thereforeforecast to weaken from the second half of 1997. The forecast price of copperhas been revised upwards in light of higher than expected growth in demand.

World commodity price forecasts(US$/ton unless otherwise indicated)

% % % %1995 change 1996 change 1997 change 1998 change

Copper, refined 133.2 27.2 104.0 –21.9 102.5 –1.4 95.0 –7.3

Cocoa (US cents/lb) 65.1 2.7 65.9 1.2 75.3 14.3 88.0 16.9

Coffee (US cents/lb) 138.4 3.0 101.9 –26.4 84.4 –17.2 78.3 –7.2

Sugar (US cents/lb) 13.28 10.3 12.07 –9.1 10.18 –15.7 10.25 0.7

Crude palm oil 628 18.9 530 –15.6 472 –10.9 416 –11.9

Palm kernel oil 677 7.6 727 7.4 688 –5.4 681 –1.0

Copra 439 5.1 488 11.2 435 –10.9 424 –2.5

Coconut oil 670 10.2 751 12.1 676 –10.0 661 –2.2

Crude oil (US$/barrel) 17.2 10.0 20.6 20.0 18.5 –10.4 18.3 –1.1

Rubber 1,058 32.7 962 –9.1 1,040 8.1 1,210 16.3Source: EIU.

-4

-2

0

2

4

6

8

1994 95 96(a) 97(b) 98(b)

Papua New GuineaAsia excl Japan

Gross domestic product % change, year on year

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange ratesadjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

70

80

90

100

110

1990 91 92 93 94 95 96(a) 97(b) 98(b)

Kina real exchange rate (c)1990=100

Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$Kina:US$

Kina:¥

Kina:US$

Kina:¥Kina:¥

Kina:DMKina:DMKina:DM

Kina:US$

Kina:¥

Kina:US$

Kina:¥Kina:¥

Kina:DMKina:DMKina:DM

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:US$

Kina:¥

Kina:DM

Papua New Guinea 9


Review

The political scene

The Bougainville crisismoves to centre-stage—

The ramifications of the secessionist war on Bougainville Island are growinggreater and more worrying by the day. The war has been rumbling on for somenine years now, since disgruntled local landowners attacked the Pangunacopper mine, owned by the company now known as RTZ-CRA, in 1988. Thelandowners’ grievances were then directed at the environmental damagecaused by the mine and the financial royalties earned by the company. Thedemands of the activists, namely the Bougainville Revolutionary Army (BRA),have shifted over time and now focus on obtaining autonomy from the PNGgovernment in Port Moresby.

—as Sir Julius makes alast-ditch attempt to

resolve it—

The prime minister, Sir Julius Chan, came to power in August 1994 witha pledge to bring peace to Bougainville. However, the situation has onlydeteriorated over the past two years and the violence has escalated, mostdramatically with the initiation of Operation High Speed by the Papua NewGuinea Defence Force (PNGDF) in July 1996. With an election looming,Sir Julius appears to be making a last-ditch attempt to resolve the crisis. How-ever, the means employed have angered PNG’s largest bilateral trading partnerand most important donor, Australia, and provoked consternation within theBougainville Transitional Government (BTG).

—by employingmercenaries

In its attempts to overcome the secessionist rebels on Bougainville, the govern-ment appeared to have exhausted most of its options, apart from handing overpower to the BRA or holding a referendum. The government has been reluctantto countenance these options, fearing that any concession to the BRA wouldprecipitate similar demands in other provinces and lead to the break-up of thecountry. Hence the government has pursued a strategy of talking of negoti-ating a peaceful settlement of the crisis, while at the same time pursuingmilitary means to end it. The government’s response has also been dictated bythe level of violence inflicted by the rebels. However, one option for thegovernment that had not been foreseen was the use of mercenaries.

The admission by Sir Julius at the end of February that 40 foreign militaryadvisers were now training PNG troops and would be part of a mission toBougainville that would target rebel leaders has received widespread condemn-ation. Sir Julius claims that the involvement of the mercenaries will be limitedto training, but the operation is still expected to cost A$36m (US$26m) and,according to Sir Julius, is aimed at ending the rebellion within the year. He hasalso said that the decision to use mercenaries was taken some 18 months ago; itmay well have been for cash-flow reasons that the mercenaries have not beenemployed until now.

The decision iscondemned by Australia—

The mercenary issue has strained relations with Australia, whose prime minister,John Howard, saw the use of mercenaries as an extremely unwelcome develop-ment in the South Pacific. The Australian government, which has over the yearsprovided military training and support to PNG worth some A$1bn, was not

10 Papua New Guinea


consulted by the PNG government on its decision. Moreover, the Australiangovernment is angered by the possibility that the mercenaries will be paid out ofthe A$320m in aid that Australia will hand over to PNG this year. According toAustralia’s foreign minister, Alexander Downer, it would not be possible tosuspend the aid programme, as this would breach a legally binding treaty, whichobliges Australia to send A$320m per year to PNG until 2000. There is, however,pressure, particularly from the opposition in Australia, to suspend the country’sA$11m annual defence cooperation programme with PNG.

Mr Howard wants to see a negotiated settlement as a long-term solution to thesituation on Bougainville and has offered to facilitate and broker talks with therebels in order to find a solution. Positive signals that the peace process wasworking were noted by Mr Downer on his trip to PNG shortly before the newsof the use of mercenaries broke. He pointed in particular to the recent estab-lishment of 20 councils or regional peace committees made up of traditionalchiefs on Bougainville, which already appear to be effective in resolving localconflicts.

—and by the BTG— Relations between the government in Port Moresby and the BTG, which wasoriginally appointed by the Chan government, have not been helped by thedecision. The new premier of the BTG, Gerard Sinato, expects graveconsequences from the use of mercenaries. Whereas locally based soldiers mighthold back from firing on their countrymen, mercenaries would have less com-punction about doing so. Moreover, private armies tend to be less interested inpeace and reconciliation than in quickly eliminating the opposition. Mr Sinatohas accused Sir Julius of failing to honour the Miringini Charter—signed inMarch 1995 and authorising the establishment of the BTG—which calls for con-sultation with the transitional government on any changes in policy regardingBougainville. The government’s decision nullifies further attempts to find apeaceful solution to the crisis and it will be difficult to restore the necessary levelof trust between the two governments—central and transitional—alreadydiminished by the October 1996 assassination of the BTG premier, TheodoreMiriung.

—and highlights thefailings of the PNGDF

The government’s resort to mercenaries, whether as trainers and advisers or ascombatants, is an expression of no confidence in the PNGDF garrisoned onBougainville Island. A number of incidents have severely dented the reputationof the PNGDF. Most recently, two companies, consisting of some 200 soldiers,failed to return to active service following Christmas leave. In addition, theUK-based human rights group Amnesty International reports that PNG soldiershave murdered, raped and tortured civilians on the island; reports of ill-discipline, drunkenness and violence among the soldiers are legion.

In response to claims by Amnesty International, the government has also beenforced to admit that anti-secessionists on Bougainville, who fight alongside thePNGDF, were responsible for the massacre at Kangu beach on September 8 inwhich at least ten PNGDF soldiers died. An internal investigation found thatthe killings were in retaliation for the PNGDF’s ill-treatment of resistance forcesand local civilians. On the day of the massacre several of the soldiers were

Papua New Guinea 11


reported to have been drunk and many of their weapons had been taken by theresistance fighters.

The PNGDF is implicatedin the murder of the BTG

premier—

The most damning indictment of the PNGDF’s activities on Bougainville hasemerged from the inquest into the assassination of the premier of the BTG,Mr Miriung (4th quarter 1996, page 22). The inquest was headed by a retiredSri Lankan judge, Thirunavukkarasu Suntheralingam, who was appointed afterSir Julius appealed to the Commonwealth Secretariat for assistance with animpartial inquiry. Members of the PNGDF together with anti-secessionist fight-ers were provisionally found to be responsible for the murder. Although somewitnesses had been too intimidated to come forward, Mr Suntheralingam saidthat there was sufficient evidence to implicate up to seven soldiers and oneresistance fighter. There was nothing to indicate the involvement of the BRA.Whether the murder was ordered by military superiors or was an impulsivedecision by the PNGDF/resistance fighters on the ground is as yet unclear.

—who had offered agenuine prospect of peace

The appointment of Mr Miriung as premier of the BTG in early 1995 had raisedhopes that it would now be possible to broker both peace with the BRA andrapprochement with Port Moresby over autonomy for the province. Initially,the aim of the BTG was first to obtain a ceasefire together with the resumptionof essential services to the province, and thereafter to form a consensus withthe BRA and Bougainville’s MPs on the future political status of the island.Once this had been agreed, it could then be negotiated with the PNG govern-ment in Port Moresby.

However, Mr Miriung’s attempts at a peaceful solution were stymied whenSir Julius decided to launch a new offensive against the BRA in March 1996.Since then, the views of the BTG and Port Moresby over the best way of solvingthe Bougainville crisis have increasingly diverged—the PNG governmentrefused to allow the BRA to participate in discussions, while the scale of theatrocities committed by both PNGDF and BRA soldiers increased. Mr Miriungbegan to lead calls for a referendum on Bougainville’s future political status.As tension mounted between Port Moresby and the BTG, the PNGDF be-came increasingly distrustful of Mr Miriung. The PNG defence minister,Mathias Ijape, even accused Mr Miriung of involvement in the BRA ambush atKangu beach.

The BTG elects a newpremier

Gerard Sinato, the MP for Kunua/Keriaka and a village chief in his own right,was voted in to succeed Mr Miriung as premier of the BTG. During his firstpress conference Mr Sinato called for the Port Moresby government to allowthe return of the International Red Cross to the troubled island and provideassistance to both government- and rebel-controlled areas.

Port Moresby and Honiaraagree on joint patrols

The rebel insurgency on Bougainville has also strained relations between PNGand the neighbouring Solomon Islands. In a positive development, however,Sir Julius and the premier of the Solomon Islands, Solomon Mamaloni, tookadvantage of an impromptu meeting at the funeral of the president of theMarshall Islands, Amata Kabua, on January 6, 1997, to agree on joint bordersurveillance. The agreement should help to ease tensions between the twocountries—PNG has alleged that the BRA uses the Solomon Islands as a base,

12 Papua New Guinea


while the Solomon Islands government has claimed that PNG security forceshave crossed into its territory in pursuit of rebel forces. The border agreement,which allows for the involvement in the surveillance of a third party, such asAustralia, is expected to be implemented within the next two months.

Political parties preparefor elections

Part of the reason for the government’s decision to employ mercenaries at thisstage probably lies in the imminence of national elections in PNG. Sir Juliuscame to power in 1994 determined to resolve the costly crisis on Bougainville.He must now feel the need to prove to the electorate that some progress hasbeen made, either by crushing the rebels or by forcing them to accept acompromise.

Sir Michael Somare, the country’s first prime minister, has promised thatBougainville will have self-determination, should he be elected prime ministeragain. He recently formed the National Alliance, a crossparty alliance of 11 MPs(out of 109), to contest the June elections. Although the group’s manifesto is stillunclear, it is likely to focus on combating corruption. Sir Michael hopes toattract enough MPs after the elections to enable the National Alliance to be amajor player in the formation of the new government. This is not so unlikely:party allegiances in PNG are very weak—of the 32 MPs of the ruling People’sProgress Party (PPP), only eight were elected as PPP candidates in the 1992elections.

Corruption continues inhigh places

The view that corruption permeates political life in PNG has been underscoredby recent findings. The Ombudsman Commission has referred two MPs, JosephOnguglo (who sits for the Kindiawa-Gembogl constituency and is the leader ofthe Black Action Party) and Joshua Avini (who represents the Finschafen seatand is a member of the PPP), to the public prosecutor on multiple counts ofmisconduct under the leadership code, including misuse of electoral develop-ment funds (EDFs). A report prepared by the auditor-general in 1994 observedthat over half of the 109 MPs failed to account for how they disbursed theirEDFs during that year as required under the Public Finances (Management) Act.

At the beginning of October the Ombudsman Commission published a reportinto the award to a Malaysian consortium of a Kina160m (US$116m) contractto upgrade Port Moresby’s water supply. The report concluded that there wasevidence of corrupt practice in the way the contract was awarded. It furtherrecommended that the contract be cancelled immediately and the project beput out for proper tender. The government has steadfastly refused to acceptthese findings, insisting that the contract was legitimately won. The Ombuds-man Commission is currently discussing plans to take court action in order toget its recommendations implemented.

The government attemptsto tackle rising crime

In an attempt to curb the rising level of crime in the country, the governmentimplemented stiff measures in November. The government is particularly con-cerned about the level of crime as the national elections approach; the use ofguns and intimidation was reportedly widespread during the 1992 elections. Atwo-month nationwide curfew (between 9 pm and 5 am) came into force onNovember 8, although it was likely to be strictly enforced only in identifiedtrouble-spots. The curfew lapsed in most parts of the country at the end of the

Papua New Guinea 13


two months. However, in Port Moresby, Lae, Mount Hagen and the surround-ing areas, where crime rates are highest, a six-hour curfew will continue in forceuntil March.

In a further move aimed at reducing violence, parliament passed the Firearms(Amendment) Bill in December. The Bill effectively bans the private ownershipof all pistols and high-powered guns. There is to be a three-year amnesty duringwhich firearm owners can hand over illegally held guns to the police. Legalowners of handguns are expected to receive some compensation. However, thecompetence of the police to handle guns has been thrown into doubt by areport in the Port Moresby daily newspaper, the Post Courier, that 85 policeweapons, including high-powered M16s and AR15s, have disappeared over thelast six years, largely as a result of police negligence.

In late December an explosive device was detonated in the Central GovernmentBuilding in the Waigani district of Port Moresby. No one was hurt in the blastand damage was minimal. Security at all the government buildings in Waiganihas now been tightened. Numerous bomb threats against government officeswere made during 1996, but as yet no one has claimed responsibility for thishighly unusual incident.

Sir Julius attends theAPEC summit meeting

The prime minister was one of 18 leaders of the Asia-Pacific EconomicCooperation (APEC) forum to attend a one-day summit held at Subic Bay in thePhilippines in November. Sir Julius was a signatory to the final communiqué,which called for a reduction in barriers to trade and investment in advancedcountries by 2010 and in developing countries, such as PNG, by 2020. Sir Juliusalso succeeded in obtaining APEC approval for the establishment of a regionalAPEC office in Port Moresby which would serve the smaller Pacific countries.

Economic policy and the economy

The World Bank approvesthe second tranche of the

SAP loan—

In January the World Bank approved the release of the second tranche of theloan linked to PNG’s Structural Adjustment Programme (SAP). The US$30m offunds had been held back for almost 12 months because the Bank doubted thecommitment of the PNG government to the SAP, which had originally beenagreed in early 1995. As the government’s cash-flow problems became increas-ingly acute, the delay in the release of the funds was useful in putting pressureon the government to comply with the loan’s conditionality. First, the WorldBank insisted that the government establish a sustainable forestry industryin the country and thus demanded the restoration of the National ForestryAssociation’s (NFA) independence—the NFA is responsible for approving thelucrative logging licences in the country. Second, the Bank balked at the intro-duction of a revenue-raising budget in September 1996, the burden of which, itclaimed, would fall on the poorest 40% of the population.

—only after thegovernment makes a

U-turn

The government had claimed that the country could survive without the Bank’sassistance. However, the government’s pressing need for funds was highlightedby the introduction of new revenue-raising measures by the deputy prime min-ister and minister for finance, Chris Haiveta. These were abandoned in less thana week in response to widespread criticism. The government then had no option

14 Papua New Guinea


but to court the World Bank in order to secure the second tranche of funds. ByOctober 8 the necessary amendments to the Forestry Act had been passed,restoring the NFA’s independence, which effectively cleared away the secondobstacle to the release of funds. This means that US$320m in funding fromother donors—including the Australian and Japanese governments, the IMF,and the Asian Development Bank (ADB)—which would not provide funds with-out World Bank endorsement, will now also be forthcoming.

The managing director of the IMF, Michael Camdessus, made an official visit toPNG in November 1996. He reassured the PNG government that the IMFwould continue to support the economic recovery programme during 1997,providing that the government continued to implement certain reforms, suchas increasing funding for the delivery of basic health and educational services.

The 1997 budget isannounced in two stages—

The annual PNG budget will now be announced in a two-stage cycle, hence theannouncement of the 1997 revenue budget in September and a detailed ex-penditure budget on November 12. At the World Bank’s insistence, the formatof the budget presentation was also revised to promote transparency—allgrants and transfers to provincial government have been reclassified moreaccurately as recurrent rather than development expenditure.

—expenditure— The 1997 national expenditure budget provides for a massive increase in totalgovernment expenditure to Kina2.05bn (US$1.48bn), well above the revisedtotal for 1996. The increase in expenditure is largely because of drawdowns onconcessional loans for public investment projects in the national developmentbudget. The budget allocates Kina421.2m to national development, Kina568.3mto the provinces, and Kina863.1m to government departments and statutoryagencies. A further provision of Kina554.6m was made for debt servicing.

Although this is a record for budgeted expenditure, the increases in spendingare mainly in areas approved by the World Bank. The Bank has sought im-provements in infrastructure development and in the delivery of services. Inhis speech, Mr Haiveta emphasised that projected expenditure had beendirected towards the priority areas of health, education, transport, agriculture,law and order, and private-sector development. Combined expenditure inthese areas is budgeted to rise by 25.5% to Kina697.3m in 1997. The govern-ment has also allocated Kina5m for a rural housing scheme and Kina15m forthe least-developed areas of the country. A further Kina32m has been set asideto pay for the general elections and Kina7m to cover the cost of maintaininglaw and order over the period. The slush funds known as MPs’ constituencydevelopment funds have been abolished, although a Kina5m MPs’ retirementfund has been established for outgoing MPs—as usual, a high turnover of MPsis expected in the forthcoming elections. Given the approach of national elec-tions, the government may well be tempted to stray from its expenditurebudget in 1997. However, the World Bank’s continued presence in the countrythrough the SAP may help to limit the government’s room for manoeuvre.

—and revenue The revenue budgeted for 1997 will be met by raising Kina1.68bn in tax andnon-tax revenue, Kina300.5m in grants, including World Bank and Australianaid, and Kina425.2m in loans. The funds raised from the flotation of

Papua New Guinea 15


Orogen Minerals, formerly part of the government-owned Mineral ResourcesDevelopment Corporation (MRDC), were not included in the budget. Thegovernment intends to use the proceeds to assist rural development, for whichplans are being drawn up. Press reports have also suggested that part of theOrogen funds may be used to pay for the mercenaries on Bougainville.

A 20% tax on the gross profits of operators of poker gambling machines(“pokies”) was introduced at the time of the November budget—this replacedthe controversial 7% turnover tax introduced in the September revenuebudget. The change was made largely in response to pressure from the gamingindustry, which had claimed that the turnover tax was too high and could welldestroy the industry.

The government pledgesto reform the public

sector—

An important element of the World Bank-sponsored SAP has been a reductionin the size of PNG’s large and costly public service. Mr Haiveta announced thatthe freeze on new recruitment and departmental structures would continue. Healso intends to improve the accountability of public service departments bymaking the heads of department personally responsible for all hiring and firing,as well as meeting strict spending targets; if they fail to do so, they will facesuspension without pay. The government has also pledged to increase the num-ber of school places, improve access to health services, and provide electricityand water to rural areas.

—and the private sector As part of its agreement with the World Bank, the government has undertakento bolster private-sector development. This is in line with the aim of shiftingthe economy away from its excessive dependence on the minerals sector. Thereare plans to reform the financial sector, which will help to foster greater privateinvestment by improving access to funds. The government intends to continueits privatisation programme with plans to dispose of state-owned companiessuch as the Post and Telecommunications Corporation (PTC) and Air Niugini.

The government is also reforming the tax system in order to promote private-sector investment in the economy. Reforms announced so far include a reduc-tion in the import duty on capital equipment and machinery from 11% to 8%,the lifting of the import ban on sugar and its replacement by a highly protective85% tariff (and a minimum anti-dumping duty floor value of Kina552.5 per ton)and the removal of a 5% export tax on all marine export products.

Central government budget(Kina m)

Revised Jan-Sep 1995 1996 1995 1996

Revenue & grants 1,723.5 1,786.2 1,205.2 1,306.9 Tax revenue 1,208.0 1,423.5 882.8 1,094.7 Personal tax 257.8 297.0 187.6 225.9 Company tax 355.8 457.0 255.5 361.4 Other direct tax 63.7 69.5 48.8 52.5 Indirect tax 530.8 600.0 390.9 454.9 Non-tax revenue 278.8 197.3 167.8 79.6 Foreign grants 236.7 165.4 154.7 132.6

continued

16 Papua New Guinea


Revised Jan-Sep 1995 1996 1995 1996

Expenditure 1,755.3 1,855.9 1,054.1 1,333.3 Recurrent expenditure 1,577.7 1,656.8 987.0 1,178.3 National Departmental 705.1 722.0 448.3 500.6 Provincial governments 352.5 521.6 223.5 380.1 Interest payments 273.6 304.0 186.4 204.8 Foreign 93.8 96.3 74.4 81.5 Domestic 179.8 207.7 112.0 123.3 Other grants & expenditure 245.3 111.2 130.9 95.3 Net lending & investments 1.2 –2.0 –2.1 –2.5 Development expenditure 177.6 199.1 67.1 155.0 Capital works 135.6 0.0 49.7 0.0 Maintenance works 42.0 0.0 17.4 0.0 National projects 0.0 199.1 0.0 155.0 Provincial projects 0.0 0.0 0.0 0.0

Overall balance –31.8 –69.7 151.1 –26.4

FinancingExternal financing –43.2 –61.7 –27.3 –23.3Domestic financing 75.1 131.4 –123.8 49.7Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Government spendingindicates fiscal

relaxation—

During the first nine months of 1996 government finances went into the red.The deficit of Kina26.4m indicated a noticeable relaxation in fiscal policy andcompares with a surplus of Kina151.1m in the same period of 1995, when thegovernment made greater efforts to restrict spending. Total expenditure overthe period was Kina1.33bn—the largest portion, Kina1.18bn, going towardsrecurrent expenditure. Development expenditure over the period, althoughhigher than in 1995, remained inadequate at Kina155m.

—while the drawdown ofaid remains low

Total tax revenue receipts amounted to Kina1.09bn over the first nine monthsof 1996. The government made net overseas loan repayments of Kina23.3mover the period, consisting of Kina20m in net concessionary loan repaymentsand Kina20.6m of net commercial loan repayments, which more than offset adrawdown of only Kina17.3m in extra-budgetary financing associated with theSAP; the low drawdown of aid during the period, which compares with adrawdown of Kina120.9m over the same period of 1995, reflected the govern-ment’s tussles with the World Bank during the year. In order to cover theKina49.7m net domestic financing requirement, the government increased itsborrowing from the commercial banks.

Economic recovery hasgathered pace—

According to the Bank of Papua New Guinea (the central bank), the economicrecovery which began towards the end of 1995 is gathering pace. Growth hasbeen buoyed by the implementation of several government and donor-fundedinfrastructure projects, private-sector construction projects such as the Lihirgold mine, and the recovery of agricultural areas in East New Britain provincewhich had been damaged by volcanic eruptions in 1994. Production volumesof major natural resource exports such as coffee, palm oil, cocoa, copra and logshave expanded and higher producer prices for such commodities as cocoa andcopra also will have helped. The improvement in the agricultural sectorhas raised rural incomes which, in turn, has spurred slightly higher levels ofconsumption.

Papua New Guinea 17


—but the mining sectorfails to shine

The economic recovery has extended to other sectors. The central bank’s busi-ness liaison survey for the first half of 1996 reported that in the private sector(excluding mining and petroleum) the value of sales increased by 5%, com-pared with a 6% decline in the corresponding period of 1995. The constructionsector has also picked up, mainly as a result of strong activity in both the civiland building construction subsectors. The performance of the mining sector in1996 was, however, subdued, as a result of lower production, lower-qualitymining and lower prices.

Construction andinvestment suck in

imports

In the first nine months of 1996 merchandise exports in kina terms fell by3.3%. Although the value of agricultural, forestry and crude oil exports was up,this was more than offset by declines in the value of gold and copper exports.Construction at the Lihir gold mine and higher levels of capital expenditure atother mines sucked in large imports of equipment and machinery contributingto a 24.8% rise in the kina value of imports.

Agriculture, forestry and fishing

Commodity prices weremixed in 1996

The export prices of some of the country’s main commodity exports are esti-mated to have fallen during the third quarter of 1996: the price of coffee fell by21.3% compared with the year-earlier period, owing to higher than expectedproduction in Brazil, the world’s largest producer; palm oil prices fell by 22.9%;rubber prices by 34.1%; and log prices by 2.2% over the same period. However,export prices for cocoa, copra, copra oil and tea all rose. Despite falls in theprices of coffee and palm oil, these remained higher than the government’sminimum guaranteed prices for these commodities, and hence no advancesfrom agricultural export commodity price support schemes were necessaryduring the third quarter of 1996.

Export prices(Kina/ton unless otherwise indicated; fob)

Year Sep 1994 1995 % change 1995 1996 % change

Cocoa 1,115 1,559 39.8 1,470 1,614 9.8

Coffee (all grades) 3,165 3,893 23.0 3,940 3,102 –21.3

Tea 1,235 1,286 4.1 1,238 1,503 21.4

Copra 292 427 46.2 469 523 11.5

Copra oil 579 897 54.9 717 1,026 43.1

Palm oil 336 762 126.8 864 666 –22.9

Rubber 853 1,481 73.6 1,923 1,268 –34.1

Logs (Kina/cu metre) 164 174 6.1 184 180 –2.2Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Coffee exports continueto rise

The PNG Coffee Industry Corporation (CIC) has reported a coffee harvest inexcess of one million bags for the fourth year in a row. PNG’s coffee exportsrose to 1.13m 60-kg bags in the 1995/96 season, which ended on September 30,compared with 1.03m bags in 1994/95. There has been no significant increasein new plantings of coffee, so the CIC has estimated that the existing tree stockhas the potential to produce 1.2m bags only with improved tree management.

18 Papua New Guinea


The EU funds cocoaresearch

The EU has agreed to pay Kina3.86m (US$2.8m) to the PNG Cocoa and CoconutResearch Institute over the next three years. The funds will be used to researchimproved varieties of cocoa and black pod disease, which can cause yield lossesof up to 40%.

Energy and mining

The governmentsuccessfully floats Orogen

The Mineral Resources Development Corporation (MRDC) was partly floatedon the Australian Stock Exchange at the beginning of September under thename Orogen Minerals. The MRDC, as it was formerly known, was the holdingcompany for all the state’s assets in oil and mining projects, such as Porgeraand Lihir, and the government will retain a 51% stake in Orogen Minerals. Theshare issue was very successful, being some ten times oversubscribed. OrogenMinerals was formally listed on the Australian Stock Exchange on November 1at A$2.05 (US$1.48) per share. The flotation raised Kina300m (US$217m),Kina30m more than originally projected. The funds are expected to be used topay for stakes in mining projects for which the government has not yet paid,and the remainder will be used in rural development schemes.

Fears that PNG’s oilreserves are fast being

depleted—

Senior officers at the natural resource company Chevron Niugini have warnedthe government that the country’s oil reserves are fast being depleted. Exportsof petroleum from the Kutubu oilfield began in June 1992 and peaked in 1993at 45.8m barrels. By 1995 exports had fallen to 36.9m barrels. In an attempt tocompensate for declining oil reserves, the government has been examining theplan to pipe some of PNG’s vast reserves of liquefied petroleum gas (LPG) toQueensland, northern Australia. Chevron is now involved in developing thePNG/Queensland gas project at an expected cost of A$2bn (US$1.6bn) andOrogen Minerals may well take a stake in the project. Chevron aims to begincommercial delivery of gas to locations in Queensland by about July 2000.The PNG government also introduced a number of tax measures and policyprovisions in the 1997 budget which are specifically aimed at encouraging thedevelopment of gas projects.

—may prove unfounded asMoran drills show promise

Oil Search’s discovery of a new oilfield, Moran 1X, about 11 km from theKutubu oilfield in the Southern Highlands continues to cause excitement.Speculation is rising that the oilfield could exceed the Kutubu project in size. Intest drillings the oilfield produced oil at a rate of 1,500 barrels/day (b/d) and gasat a rate of 2.5m cubic feet of gas/day, levels which are believed to indicate thepresence of oil in commercial quantities. The Moran 1X discovery has led to adoubling of Oil Search’s share price in the last six months and created anupsurge in exploration in the area, especially in the Fold Belt section of theHighlands. Orogen Minerals, Chevron Niugini, BP, Ampolex and BHP are alsoinvolved in the project.

Mineral licences aregranted

Chevron, as the operator of the country’s second oil project, at Gobe, has beengranted a petroleum development licence (PDL). The Gobe project includes thedevelopment of two distinct oilfields about 85 km south-east of the Kutubuoilfields in the Southern Highlands. Together the two fields are expected toproduce about 50,000 b/d over the next five years. Also, in December the

Papua New Guinea 19


government issued the latest mining lease to Nord Pacific Resources for theSimberi gold prospect, a medium-sized development in New Ireland.

Placer launches a bid forHighlands Gold—

Towards the end of November Placer Dome, the Canadian mining group whichowns 75% of Placer Pacific, launched a US$330m cash offer for the PNG-basedmining group Highlands Gold. The offer valued shares in Highlands Gold atA$0.75 each, whereas before the offer they had been trading at A$0.58 on theAustralian Stock Exchange. However, the offer was initially rejected byHighlands Gold, and the company’s principal PNG-based shareholders, theNational Provident Fund and Motor Vehicle Insurance Trust—both of which aresemi-autonomous, parastatal bodies—provided support by buying more shares.

—and gains control of thePorgera gold mine

In late January Highlands Gold recommended that its shareholders accept theoffer after Placer Dome agreed to a restructuring proposal. Under the terms ofthe proposal, Highlands Gold would float off a separate company, HighlandsPacific, which would hold the company’s assets in PNG and Indonesia, exclud-ing the company’s 25% stake in the Porgera gold mine which would go toPlacer Dome. Control of the Porgera gold mine appears to have been the aim ofPlacer Dome’s bid. A report by an investment bank, Baring Brothers Burrows,valued the Highlands Gold stake in the Porgera mine at A$258.7m-294.8m.The Canadian company also moved to buy the 24.6% of outstanding publiclyheld shares in its locally listed subsidiary, Placer Pacific, which also owns 25%of the Porgera project.

By mid-February Placer Dome had achieved control of 91.6% of the shares inHighlands Gold and effectively of the company—a holding of 90% of shares ormore triggers a compulsory acquisition of the remaining shares. The offer topurchase shares at A$0.75 per share closed on February 15, after which Placerintended to request a compulsory acquisition of Highlands Gold and a delist-ing from the Australian Stock Exchange.

Failings in the securitieslaws have been

highlighted

The deputy prime minister and finance minister, Chris Haiveta, initially sup-ported Placer Dome’s bid, claiming that it illustrated the confidence of inter-national investors in PNG. However, now that control of half of one of thecountry’s most important mines has fallen into foreign hands, the governmenthas decided to introduce a securities bill, which will regulate such takeoversand protect the interests of investors in PNG. The official government line nowis that the Placer Dome takeover bid has highlighted a number of failings in thecurrent regulation of takeovers which the securities bill will aim to rectify. Thegovernment proposes to establish a Securities Commission, within the Invest-ment Promotion Authority, responsible for developing a takeover code whichwill then become law.

Transport and communications

PNG and Australia agreeto open up air routes

In a new bilateral agreement, the governments of PNG and Australia haveagreed to allow new entrants on air routes traditionally controlled by theirrespective national carriers, Air Niugini and Qantas. The agreement allows newoperators to offer direct flights between cities such as Cairns, Darwin, Townsville

20 Papua New Guinea


and Port Moresby, and possibly other PNG destinations. PNG-based airlinessuch as Milne Bay Airways and Island Airways have expressed interest in biddingfor some of the new routes.

PNG acquires threesatellites

The PNG government has signed an agreement with a Honolulu-based satellitecompany, Loral Space and Communications, to build and launch three satel-lites into three of the six orbital slots that PNG owns. The satellites are expectedto have channels specifically for PNG’s own needs.

NBC is forced to gocommercial—

In response to further reductions in government funding, the state-ownedbroadcaster, the National Broadcasting Commission (NBC), has decided to startselling its air time. Even government broadcasts, such as school programmes orhealth warnings, which were previously free, are to be charged for. In announc-ing the decision, the minister for communications, Joseph Egilio, concededthat he had been unable to persuade the prime minister, Sir Julius Chan, of theneed to fund NBC in full.

—while Sir Julius suggestsa cut in aid to save Radio

Australia

The suggestion by the prime minister that PNG would take a Kina1m(US$700,000) cut in aid from Australia in order to help save Radio Australia, theinternational radio service of the Australian Broadcasting Corporation (ABC),appeared surprising and inconsistent. A recent review of ABC recommendedthe closure of Radio Australia as one way to reduce costs. Radio Australiawas launched in 1939 and has an estimated audience in Asia and the Pacific offive million.

Employment, wages and prices

Inflation moves intosingle digits

The price level as measured by the urban-based consumer price index duringthe third quarter of 1996 was 9% higher than in the same quarter of 1995.Inflation in the previous quarters of 1996 was still in double digits: 15.9% inthe second quarter and 17.4% in the first quarter; annual average inflation for1996 is therefore likely to have remained in double digits. (The inflation raterose dramatically in 1995 following the devaluation of the kina.) Lower levelsof inflation are possible now that the kina has stabilised, allowing the importedgoods bill to stop rising so rapidly. An expansion in agricultural production hasalso helped to reduce domestic inflationary pressures.

Consumer price index

Year 3 Qtr 1993 1994 1995 1995 1996a

Index: 1977=100 258.5 265.9 311.9 322.3 351.4

% change, year on year 4.9 2.9 17.3 23.2 9.0

a Official estimates.

Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Employment rises in thefirst half of 1996

The latest data from the employment survey of the private sector carried out bythe Bank of Papua New Guinea (the central bank), which excludes the miningand petroleum sectors, indicated that employment increased by 10.9% over the

Papua New Guinea 21


12 months to June 1996. The largest increases were recorded in the agriculture,forestry and fisheries sector, partly as a result of the start of the coffee season,and in the building and construction sector, which has experienced a signif-icant increase in residential and civil building activity, for example the con-struction of the Poreporena freeway in Port Moresby. With the inclusion of themining sector, overall employment in the private sector fell slightly, by 0.4%.This is probably related to the fall in production volumes at the Ok Tedi,Porgera and Misima mines.

Employment by industry(Jun 1989=100)

Year Jun 1994 1995 % change 1995 1996 % change

Retail 88.4 90.7 2.6 93.2 90.8 –2.6

Wholesale 90.6 81.9 –9.6 80.7 81.7 1.2

Manufacturing 120.1 109.3 –9.0 105.0 114.7 9.2

Building & construction 77.8 67.8 –12.9 63.2 86.0 36.1

Transport 95.2 89.1 –6.4 86.0 95.8 11.4

Agriculture, forestry & fisheries 101.1 90.4 –10.6 85.5 96.8 13.2

Financial & business 102.3 111.0 8.5 107.6 111.7 3.8

Total excl mining 98.1 92.5 –5.7 91.7 101.7 10.9

Total incl mining 104.9 112.3 7.1 113.4 112.9 –0.4Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The kina begins to holdits value

Data for the first nine months of 1996 indicate that the kina is beginning tostabilise at a market value of about Kina1.37:US$1. In the year to January 1997the kina depreciated in nominal terms by 3.7% against the Australian dollar,2.5% against the US dollar and 7.8% against sterling. The sharp depreciation ofthe kina since 1995 has had a positive impact on growth by boosting exportcompetitiveness. However, the high level of inflation in PNG relative to itstrading partners means that the kina will appreciate in real terms now thatnominal depreciation has started to tail off (see figure: Kina real exchange rate,page 9). As the bulk of PNG’s exports are commodities rather than manufac-tured goods, this does not present a problem to the country’s exporters.

Exchange rates(foreign currency units per kina; end-period)

Year Jan 1993 1994 1995 1996 1997 % change

A$ 1.5077 1.0927 1.0176 0.9925 0.9561 –3.7

US$ 1.0190 0.8454 0.7545 0.7465 0.7280 –2.5

¥ 113.93 84.71 76.79 79.74 88.84 11.4

DM 1.7675 1.3178 1.0866 1.1095 1.1918 7.4

£ 0.6896 0.5442 0.4899 0.4909 0.4524 –7.8Source: Bank of Papua New Guinea, Statistics Update.

22 Papua New Guinea


Money and finance

The money supply growsby 20%—

At the end of the third quarter of 1996 the level of broad money (M3) hadincreased by 19.5% year on year. The rise was largely the result of an increasein net credit to the government and an upsurge of net foreign assets from aidflows associated with the Structural Adjustment Programme (SAP). Over thesame period private-sector credit declined by 6.2%, reflecting the lack of invest-ment opportunities in the country. During the third quarter the value of theMineral Resources Stabilisation Fund (MRSF) increased by Kina102.8m(US$74m), resulting in a balance of Kina410.2m at the end of September.

Money supply(Kina m; end-period)

Year Sep 1994 1995 1995 1996 % change

Domestic credit 1,750.7 1,776.5 1,773.0 1,898.6 7.1

Non-government 1,262.6 1,201.9 1,263.1 1,173.6 –7.1 Private sector 855.2 846.8 876.4 822.0 –6.2 Official entities 380.6 330.8 363.6 324.4 –10.8 Non-monetary financial institutions 26.8 24.3 23.1 27.2 17.7

Central government 488.1 574.6 509.9 725.1 42.2 MRSF –190.4 –302.0 –250.1 –410.2 64.0 Others 678.5 876.6 760.0 1,135.3 49.4

Net foreign assets 109.4 291.5 248.8 517.0 107.8

Total money supply (M3) 1,860.1 2,068.0 2,021.8 2,415.6 19.5

a Mineral Resources Stabilisation Fund.


—as liquidity continuesto rise—

Increases in net credit to the government continue to be responsible for thegrowth in liquidity within the financial system. By the end of the third quarterof 1996 the level of liquidity had increased by 47.1% since the end of 1995 andtotal liquid assets held by the banking system passed the Kina1bn mark for thefirst time. As few other investment opportunities are open to them, thecommercial banks continue to hold the bulk of their loanable funds in Treasurybills.

Commercial banks’ liquid asset holdings(Kina m; end-period)

% changeYear Jun 1995/

1994 1995 1995 1996 % change Jun 1996

Notes and coins 43.2 41.2 31.0 40.3 30.0 –2.2

Deposits with central bank 10.2 27.4 95.9 93.5 –2.5 241.2

Government securities Treasury bills 355.8 659.5 464.3 967.5 108.4 46.7 Short-term stocks 51.9 55.7 61.0 52.0 –14.8 –6.6

Total liquid assets 461.1 783.8 652.2 1,153.3 76.8 47.1

Liquid asset ratio 31.7 44.0 37.1 54.8 47.7 24.5

Liquid asset requirement 26 32 32 27 – –Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Papua New Guinea 23


Monetary policy continues to be dictated by high levels of government spend-ing. The Bank of Papua New Guinea (the central bank) has tried to manipulatethe level of liquidity through changes in the Minimum Liquid Asset Ratio(MLAR). However, as the commercial banks voluntarily hold twice the level ofliquid assets set by the MLAR, its effectiveness as an instrument of monetarypolicy is negligible.

—and interest rates fall As liquidity has soared, the weighted average interest rate on total deposits hasdeclined from 8% at the end of the second quarter of 1996 to 5.2% at the endof the third. The weighted average rate on total lending also fell over the sameperiod from 14.4% to 11.7%. The weighted average yield on 182-day Treasurybills declined between the second and third quarter from 13% to 11.7%.

Commercial bank interest rates(% per year)

Year Sep 1994 1995 1995 1996 % change

Weighted average deposit rate 4.5 9.4 8.3 5.2 –37.3

Weighted average loan advance rate 10.0 15.4 14.6 11.7 –19.9

US prime lending rate 8.5 8.65 8.75 8.25 –5.7Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Foreign trade and payments

Coffee production is upbut receipts are down

The coffee harvest began promptly in the second quarter of 1996. Althoughcoffee exports fell 7% year on year in the third quarter to 25,900 tons, in thefirst three quarters of the year coffee exports in volume terms increased byalmost 27% over the same period of 1995. However, weak coffee prices duringthe period led to a 4% fall in coffee export receipts.

Agricultural exports by volume(’000 tons unless otherwise indicated)

Year Jan-Sep 1993 1994 1995 1995 1996 % change

Cocoa 37.8 26.0 30.6 22.1 29.0 31.2

Coffee 62.8 64.7 55.1 40.9 51.9 26.9

Tea 6.4 3.4 4.2 2.7 3.9 44.4

Copra 59 50.3 64.2 44.8 58.5 30.6

Copra oil 45.5 34.7 33.1 24.5 34.7 41.6

Palm oil 245.7 230.8 186.6 139.0 202.6 45.8

Rubber 3.6 3.4 2.7 1.8 2.0 11.1

Logs (’000 cu m) 2,374.9 2,943.9 2,512.5 1,958.0 2,026.1 3.5Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Total agricultural exportearnings are up—

In the first nine months of 1996 the cocoa sector benefited both from higherprices, as world supply fell, and higher export volumes, as production from EastNew Britain expanded. By the end of the third quarter of 1996 cocoa receiptswere 37% higher than in the same period of 1995 at Kina46.7m (US$34m).Copra and copra oil earnings also picked up during the first nine months of

24 Papua New Guinea


1996, rising 53% and 70% respectively over the same period of 1995. Weakerworld prices for palm oil—the result of expanded production in Indonesia andMalaysia—were more than offset by increased output, leading to a 31.8% year-on-year increase in export earnings over 1995. Similarly, but less spectacularly,an increased volume of log exports—due to favourable weather conditions—made up for declining world prices and export receipts rose 8.1%.

Overall, the value of agricultural exports (excluding timber) increased by 16.7%year on year in the first nine months of 1996, and accounted for 20.2% of totalmerchandise exports.

Agricultural exports by value(Kina m)


Cocoa 33.1 29.0 47.7 34.1 46.7 37.0

Coffee 100.5 204.8 214.5 164.4 158.5 –3.6

Tea 7.2 4.2 5.4 3.4 5.6 64.7

Copra 14.2 14.7 27.4 18.3 28.0 53.0

Copra oil 19.6 20.1 29.7 21.0 35.7 70.0

Palm oil 79.2 77.5 142.2 107.3 141.4 31.8

Rubber 2.6 2.9 4.0 2.9 3.1 6.9

Total incl others 270.1 374.6 498.0 373.2 435.7 16.7

Logs 400.2 483.1 436.7 335.1 362.3 8.1Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

—but mineral receipts aredown

Although the value of crude oil exports was up during the first nine months ofthe year, lower receipts from gold and copper exports contributed to a 9.5%decline in the value of overall mineral exports compared with the same periodof 1995.

Non-agricultural exports


Marine products (’000 tons) 2.8 4.7 10.9 9.8 2.6 –73.5

Crude oil (’000 barrels) 45,842.6 43,456.3 36,990.2 27,844.2 29,722.4 6.7

Copper (’000 tons) 192.2 207.2 215.7 155.8 90.0 –42.2

Gold (tons) 59.3 55.8 55.2 42.2 32.4 –23.2Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Crude oil receipts rose as higher demand from the North American marketpushed up prices. The attraction of gold as an investment asset led to a rise inthe world price of gold, but this was more than offset by a decline in thevolume of gold exported by PNG owing to the combination of lower prod-uction and the mining of lower grades at the Ok Tedi, Porgera and Misimamines. The copper sector recorded declines in both price, owing to worldoversupply, and output, as shipments from the Ok Tedi mine were delayed.

Papua New Guinea 25


Main exports(Kina m)


Agricultural 270.1 374.6 498.0 373.2 435.7 16.7

Forest products 410.4 494.4 449.7 347.7 375.8 8.1 of which: logs 400.2 483.1 436.7 335.1 362.3 8.1

Marine products 7.8 10.3 16.7 13.8 8.8 –36.2

Minerals 1,767.8 1,782.7 2,435.4 1,811.4 1,640.1 –9.5 of which: gold 681.6 702.3 840.1 636.6 574.3 –9.8 copper 256.3 367.4 754.5 542.9 283.6 –47.8 crude oil 817.8 702.7 827.7 621.8 774.6 24.6

Total 2,456.1 2,662.0 3,399.8 2,546.1 2,460.3 –3.4Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The trade surplus fell by26% in the first nine

months of 1996—

The value of merchandise exports fell by 3.3% year on year in the first ninemonths of 1996, as the fall in gold and copper export earnings exceeded therise in earnings from agricultural and forestry products and crude oil. Merchan-dise imports, however, rose by almost 25% as the high import demand fromthe construction phase of the Lihir gold mine and the general improvement ineconomic activity sucked in imports. As a result the trade surplus was 25.8%lower at the end of the third quarter compared with the same period of 1995,at almost Kina1.06bn.

—but the current accountremains in surplus—

The deficit on the invisibles account increased slightly over the same period, ashigher dividend payments by mining and petroleum companies more thanoffset increased business receipts. The surplus on the transfers account at theend of the third quarter rose to Kina71m, up from Kina54m a year earlier—adecrease in net outward private transfers compensated for a decline in netinward official transfers. Overall, the current account was in surplus byKina334m at the end of the third quarter of 1996, although this was well downon the Kina704m surplus recorded in the corresponding period of 1995.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1989 90 91 92 93 94 95 96

Exports, fob

Imports, fob

Balance

Trade balance$ bn

Source: IMF, International Financial Statistics.

26 Papua New Guinea


Balance of payments(Kina m)


Merchandise exportsa 2,547 2,682 3,420 2,561 2,476 –3.3

Merchandise imports –1,110 –1,336 –1,620 –1,138 –1,420 24.8

Trade balance 1,437 1,346 1,800 1,423 1,056 –25.8

Invisible credits 330 262 443 298 400 34.2

Invisible debits –1,177 –1,043 –1,477 –1,071 –1,193 11.4

Net transfers 42 11 93 54 71 31.5

Current-account balance 632 576 859 704 334 –52.5

Official capital flows 65 –107 –46 –9 –10 –

Private capital flows –675 –557 –193 –403 –123 –

Non-official monetary-sector transactions –108 –11 –5 –10 –7 –

Change in offshore account balances 17 70 –373 –3 160 –

Capital-account balance –701 –605 –617 –425 20 –

Net errors & omissions –27 5b 2 –97 –126 –

Overall balance –96 –26 244 182 228 25.3

International reserves 137.9 112.2 357.4 295.4 585.0 98.0

a Merchandise exports have been reconciled with the National Statistical Office up to 1993 only.b Negative in source.


—and the capital accountmoves into surplus—

There was a surplus of Kina20m on the capital account at the end of the thirdquarter of 1996, compared with a deficit of Kina425m at the same point in 1995.A decline in private capital outflows and a reduction in funds held in offshoreaccounts by the mining and petroleum companies more than offset an increasein official capital flows as the government increased its loan repayments.

—keeping the overallbalance in the black

After allowing for errors and omissions, the overall balance of payments was insurplus by Kina228m at the end of the third quarter, compared with aKina182m surplus at the same point of 1995. By the end of September officialreserves had risen to a healthy Kina585m, almost double the level recorded12 months earlier, and sufficient for 3.7 months of total import cover andfive months of non-mining import cover.

Public debt continuesto rise

Total public debt outstanding at the end of September 1996 stood atKina3.69bn, an increase of almost 17% on the year-earlier level. The growth indebt was primarily in the domestic sector, as there was a rise in special loansfrom the Bank of Papua New Guinea (the central bank) and in the issuance ofshort-term Treasury bills.

0

100

200

300

400

500

1989 90 91 92 93 94 95 96(a)

Total reserves minus gold$ m

(a) November.Source: IMF, International Financial Statistics.

Papua New Guinea 27


Public debt outstanding(Kina m)

Year Sep 1993 1994 1995 1995 1996 % change

Domestic 1,036.6 1,424.3 1,605.7 1,416.8 1,912.9 35.0 Treasury bills 591.8 1,008.1 1,217.5 1,018.1 1,217.5 19.6 Inscribed stock 444.8 416.2 388.2 398.7 354.1 –11.2 Special loans from central bank 0.0 0.0 0.0 0.0 341.3 –

External 1,283.3 1,536.9 1,718.4 1,742.4 1,773.6 1.8 International agencies 1,011.0 1,278.6 1,475.8 1,484.0 1,532.6 3.3 Commercial loans 259.8 242.8 227.9 243.1 227.5 –6.4 Other loans 12.5 15.5 14.7 15.2 13.6 –10.5

Total public debt 2,319.9 2,961.2 3,324.1 3,159.2 3,686.5 16.7Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Aid and development

Australia donates funds tothe Red Cross—

On his February trip to PNG, the Australian foreign minister, AlexanderDowner, announced that the government intended to donate A$4m (US$3m)to the Red Cross. The money would be used to provide humanitarian relief forabout 30,000 families on Bougainville in the form of medicines, cooking uten-sils, gardening tools and seeds.

—as the latter plans towithdraw from

Bougainville

Following the seizure of a marked Red Cross vehicle on Bougainville Island, thePNG Red Cross Society has decided to halt all operations on the island. Thesecretary-general of the Red Cross in PNG, Janet Sulemon, announced thatfull-scale distribution of medicines and essential supplies would resume onlyafter Red Cross workers had been guaranteed safety.

28 Papua New Guinea


Quarterly indicators and trade data

Quarterly indicators of economic activity

1994 1995 1996

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Exports Qtrly totals

Copra ’000 tons 10.6 10.1 16.3 17.2 11.8 15.8 19.4 15.6 11.0 31.9

Copra oil “ 9.7 7.4 2.1 5.9 7.7 10.9 8.6 12.5 5.7 16.5

Cocoa ” 9.8 8.9 0.5 7.7 3.3 11.1 8.5 10.1 8.9 10.0

Coffee “ 15.6 25.6 16.0 6.4 6.7 27.8 14.2 6.9 19.5 25.5

Logs ’000 cu metres 909 468 762 919 587 453 555 692 622 712

Gold tons 14.2 13.2 14.0 13.6 13.8 14.8 13.0 11.1 12.2 9.1

Fish ’000 tons 0.4 2.8 1.3 2.2 1.1 6.5 1.1 2.4 2.7 n/a

Copper “ 55.0 57.6 44.9 42.2 73.1 60.0 59.9 21.5 41.2 27.3

Petroleum, crude ’000 barrels 11,229 10,840 10,642 9,933 9,501 8,411 9,146 9,706 9,052 10,964

Prices Monthly av

Consumer prices: 1990=100 117.7 118.6 127.2 132.9 135.2 146.0 151.0 156.0 156.7 159.2

change year on year % 1.6 0.6 6.5 12.2 14.9 23.1 18.7 17.4 15.9 9.0

Money End-Qtr

M1, seasonally adj: Kina m 626.5 609.6 588.6 593.9 616.3 768.0 648.6 689.5 752.7 n/a

change year on year % 28.1 21.7 3.4 3.4 –1.6 26.0 10.2 16.1 22.1 n/a

Foreign trade Qtrly totals

Exports foba Kina m 643.3 692.0 765.0 756.2 864.0 922.0 853.7 761.9 874.5 823.9

Imports fob “ 320.0 359.0 358.0 371.2 316.0 451.0 482.0 460.0 477.0 483.0

Exchange holdings End-Qtr

Foreign exchange US$ m 111.4 61.7 95.9 35.3 87.9 223.0 260.6 215.1 307.1 439.9b

Exchange rate

Official rate Kina:US$ 0.945 1.086 1.179 1.212 1.314 1.325 1.335 1.316 1.285 1.330c

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Includes re-exports. b End-November, 433.5. c End-November, 1.342.

Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; IMF, International Financial Statistics.

Direction of trade(Kina m)

Jan-Dec Jan-Dec Jan-Dec Jan-DecImports cif 1989 1990 Exports fob 1992 1993

West Germany 19.3 15.3 West Germany 158.5 163.2Netherlands 14.7 4.4 Netherlands 27.3 21.6UK 37.7 26.8 Spain 0.0 0.0Singapore 88.0 97.2 UK 72.1 76.6Australia 525.2 534.4 China 97.0 168.7New Zealand 41.6 38.5 Australia 796.6 911.4Japan 200.4 152.4 New Zealand 5.1 18.9USA 145.1 110.4 Japan 374.3 546.2Total incl others 1,152.2 1,057.0 South Korea 166.2 255.9

USA 60.4 100.8Total incl others 1,882.0 2,527.3

Papua New Guinea 29


Main commodities exported(Kina m)

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Sep Jan-Sep1992 1993 1994 1995 1995 1996

Fish 7.8 5.3 10.3 16.7 13.8 8.8Coffee 68.1 88.9 204.8 214.5 164.4 158.5Cocoa 33.9 31.6 29.0 47.7 34.1 46.7Tea 2.6 3.7 4.2 5.4 3.4 5.6Logs 148.2 410.4 494.4 449.7 335.1 362.3Crude petroleum n/a 817.8 702.7 827.7 621.8 774.6Copra & copra oil 31.4 30.2 34.8 57.1 39.3 63.7Palm oil 53.3 76.7 77.5 142.2 107.3 141.4Gold 745.9 681.6 702.3 840.1 636.6 574.3Copper 313.5 256.3 367.4 754.5 542.9 283.6Total incl others 1,882.0 2,527.3 2,662.0 3,399.8 2,546.1 2,160.3Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

30 Papua New Guinea


Documents

COUNTRY REPORT€¦ · COUNTRY REPORT Papua New Guinea 1st quarter 1997 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom. The Economist Intelligence