PNG: Fiscal Policy at a Crossroads KUM HWA OH YONGZHENG YANG A S I A P A C I F I C D E P A R T M E N T I N T E R N A T I O N A L M O N E T A R Y F U N D P N G U P D A T E J U N E 1 2, 2 0 1 4
PNG: Fiscal Policy at a Crossroads 1 I. Fiscal Performance during 2002-11 II. Changing Fiscal Policy: MTFS 2013-17 III. Prospects for 2015-19 and Long-Term Fiscal Sustainability IV. Summary and Policy Implications
Successful fiscal consolidation: 2002-11 2 The government debt fell from 74 percent of GDP in 2002 to 22 percent of GDP in 2011. The achievement was remarkable and compares well with Asian economies. Government Debt (In percent of GDP) 100 90 80 70 60 50 40 30 20 10 PNG Fiji Solomon Indonesia Malaysia Philippines Vietnam 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Successful fiscal consolidation: political commitment Fiscal consolidation was guided by two MTFSs. MTFS 2002-07: Targeting a balanced budget; Achieved in 2004 MTFS 2008-12: Capping non-mineral fiscal deficit at 8% of GDP: Mineral revenue 4% of GDP; Trust accounts 4% of GDP; Additional mineral revenue: 30% for debt reduction; 70% for public investment 3
Successful fiscal consolidation: outcome Strong implementation. 4 Non-Resource Budget Deficit 0 (In percent of GDP) -2-4 -6-8 -10-12 -14 Non-resource budget deficit/gdp 8% ceiling 2000 2002 2004 2006 2008 2010 2012
Successful fiscal consolidation: good luck Upward trends in resource prices. 5 700 600 500 400 300 Resource Prices 1/ Gold price Copper price Crude oil price 200 100 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1/ The prices are indexed by adjusting year 2000 to 100.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Expansionary fiscal stance: 2012-14 Non-resource -2 primary balance -4 (NRPB) in 2012- -6 2014 has been -8 significantly lower (deficit -10 higher) than the -12 average of the -14 past decade. -16 0 6 NRPB/NRGDP NRPB/NRGDP (In percent) NRPB/NRGDP (Average 2002-2012 = 5.4%)
Reduced fiscal space 7 Fiscal deficit: 8.5% of GDP in 2013; 8.3% of GDP (projected) in 2014. Central government debt rebounded to around 34% of GDP in 2013; expected to exceed 35% of GDP in 2014. 70 60 50 40 30 20 10 0 Government debt and other non-contingent liabilities (In percent of GDP) Other liablilities Debt (RHS) 2008 2009 2010 2011 2012 2013 2014 Proj.
Competing fiscal frameworks 8 Incremental Consumption from a Resource Windfall Resource windfall Bird-in-hand rule Permanent Income (PIH) rule Optimal frontloading of domestic investimet 0 T0 T1 Time
Fiscal framework for PNG: considerations Resource horizon is highly uncertain but finite; Social and physical capital is scarce; so some frontloading is desirable, but should not cause instability; In this environment, priority should be given to macroeconomic stability, high-quality development, and inter-generational sharing of wealth; Limited absorption capacity must be a consideration. 9
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 Resource revenue projections 10 (Million kina) 6,000 5,000 4,000 3,000 2,000 1,000 Resource Revenue (Nominal term) PNG LNG Other resource revenue (Million kina) 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Resource Revenue (Real term) PNG LNG Other resource revenue 0 0
Assumptions for PIH exercise: an illustration 11 NRGDP growth rate: 4.5% Inflation: 5.5% Population growth: 2.5% Resource revenue up to 2018: based on WEO price projections and Budget 2014 projections of export volumes. Resource revenue from 2019 onward: LNG revenue from Budget 2013. Other resource revenue fixed at 2018 level in real term.
Sustainable fiscal balance under PIH 12 0.0 Non-Resource Primary Balance (NRPB) (In percent of NRGDP, constant in real term) -2.0-4.0-6.0-8.0-10.0 PIH2013 PIH2014 PIH2015-12.0
Baseline (MTFS) for 2015-19 13 Fiscal deficit declines over time (sharply in 2015; partially due to LNGboosted GDP) Debt-to-GDP ratio remains above 30% of GDP even after 2015. 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0 Overall fiscal balance and debt (In percent of GDP) 2010 2011 2012 2013 2014 Proj. Deficit (LHS) Debt (RHS) 2015 2016 2017 2018 2019 45 40 35 30 25 20 15 10
Three scenarios for 2015-19: Non-resource primary balance 14 0-2 -4-6 -8-10 -12-14 -16 Non-Resource Primary Balance (In percent of non-resource GDP) Baseline (MTFS) Alternative Current fiscal stance Average 2002-12 = -5.4% 2013 2014 2015 2016 2017 2018 2019 Source: IMF staff calculations.
Three scenarios for 2015-19: overall balance 15 0-1 -2-3 -4-5 (In percent of GDP) Overall Balance -6-7 -8-9 Baseline (MTFS) Alternative Current fiscal stance 2013 2014 2015 2016 2017 2018 2019 Source: IMF staff calculations.
Three scenarios for 2015-19: government debt 16 60 50 40 30 (In percent of GDP) Government debt 20 10 0 Baseline (MTFS) Alternative Current fiscal stance 2013 2014 2015 2016 2017 2018 2019 Source: IMF staff calculations.
Summary and policy implications Major achievements in the past underpinned by strong commitment to fiscal and macroeconomic stability, helped by rising commodity prices. MTFS 2012-17 is heading in the right direction, but fiscal consolidation may not be fast enough to meet government debt target given large fiscal expansions in 2013-14 and weaker commodity prices. Critical choices to be made: Current (2013-14) fiscal stance not sustainable. Sustainable policy requires steadfast fiscal consolidation over the medium term. Focus on spending quality within the resource envelope. 17