Papua New Guinea

Country Profile 2005

Papua New Guinea

This Country Profile is a reference work, analysing the country’s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit’s Country Reports analyse current trends and provide a two-year forecast.

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Symbols for tables “n/a” means not available; “–” means not applicable

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r r o o Bagabog I. Unea I. Telefomin L K ag Buka I. aip R. Madang Tolokiwa I. Lake Kopiago Talasea WebagWabag Long I. Mount Hagen Pal Malmal Bougainville I. Siassi Sipul Kimbe Kieta Goroka New Britain Torokina Mendi Kainantu Kandrian INDONESIA ua R. T Mamagota SOLOMON Lake Pro L. Kaim K R. Murray i k Lae ISLANDS W o ri R. a R i . r Bulolo L. Szaga w la a la o i u a i V Kikori Baimuru P L. Daviumba L. Avu R. L. Kwinia L. Ambuve Balino Kerema SOLOMON SEA Tapini Ioma Losuia Morehead Gulf of Papua Bereina Popondetta Woodlark I. Tufi Daru Viviganl Guasopa PORT MORESBY Tutubea Torres Strait Kwikila Bwasiaiai Cape Rodney Alotau

Samarai Bwagaoia Misima Is.I.

Tagula Rossel I. AUSTRALIA Tagula I. CORAL SEA

' The Economist Intelligence Unit Limited 2005 Comparative economic indicators, 2004

Gross domestic product Gross domestic product per head (US$ bn) (US$ ’000)

Australia 617.1 Australia 30.5

New Zealand 97.0 New Zealand 23.8

Papua New Guinea Fiji

Fiji Samoa

Vanuatu Tonga

Samoa Vanuatu

Solomon Islands Papua New Guinea

Tonga Solomon Islands

012345 012345 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices (% change, year on year) (% change, year on year)

Solomon Islands Samoa

New Zealand Tonga

Fiji Solomon Islands

Australia Fiji

Vanuatu Australia

Tonga New Zealand

Samoa Papua New Guinea

Papua New Guinea Vanuatu

012345 05101520 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

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Contents

Papua New Guinea

3 Basic data

4 Politics 4 Political background 7 Recent political developments 9 Constitution, institutions and administration 11 Political forces 12 International relations and defence

14 Resources and infrastructure 14 Population 15 Education 16 Health 16 Natural resources and the environment 17 Transport, communications and the Internet 18 Energy provision

18 The economy 18 Economic structure 19 Economic policy 23 Economic performance 25 Regional trends

26 Economic sectors 26 Agriculture 27 Mining and semi-processing 30 Manufacturing 30 Construction 31 Financial services 32 Other services

35 The external sector 35 Tra d e i n go od s 35 Invisibles and the current account 35 Capital flows and foreign debt 36 Foreign reserves and the exchange rate

38 Regional overview 38 Membership of organisations

41 Appendices 41 Sources of information 42 Reference tables 42 Population 42 Formal employment in the private sector by industry 42 Central government finances 43 Central government revenue

43 Central government expenditure 43 Gross domestic product 44 Gross domestic product by sector 44 Gross domestic product by expenditure 44 Money supply 45 Consumer prices 46 Commercial production and value of forestry, agriculture and marine resources 46 Commercial production and value of major minerals and petroleum 47 Foreign trade 47 Main exports 47 Main trading partners 48 Balance of payments, national series 48 Net official development assistance 49 Public debt outstanding 49 External debt, World Bank series 50 Foreign reserves 50 Exchange rates

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Papua New Guinea

Basic data

Land area 462,840 sq km

Population 5.71m (2003, IMF mid-year estimate)

Major islands New Britain, New Ireland, Manus, Bougainville Population in ‘000 (2000 census) Port Moresby (capital) 254 Lae 79 Madang 29 Wewak 20 Goroka 20 Rabaul 24 Mount Hagen 28

Climate Tropical

Weather in Port Moresby Hottest month, December, 24-32°C (average daily minimum and maximum); (sea level) coldest month, August, 23-28°C; driest month, August, 18 mm average rainfall; wettest month, February, 193 mm average rainfall

Languages Tok Pisin (Pidgin English), English and Hiri Motu; more than 800 other distinct languages also in use

Measures Metric system

Currency 1 kina=100 toea. Average exchange rate in 2004: Kina3.23:US$1; Kina2.37:A$1. Exchange rate on June 15th 2005: Kina3.23:US$1; Kina2.49:A$1

Time 10 hours ahead of GMT

Public holidays January 1st (New Year’s Day); March 25th (Good Friday); March 28th (Easter Monday); April 25th (National Day; previously Remembrance Day, July 23rd); June 13th (Queen’s Official Birthday); September 16th (Independence and Constitution Day); December 25th (Christmas Day); December 26th (Boxing Day)

Politics

Papua New Guinea (PNG) is a pluralist democracy modelled on the UK. However, the party system is weak: traditional society lacks hierarchy, and parties have few ideological precepts or organisational structures. Parliamentary groupings therefore tend to form around dominant personalities or “big men”, and governments tend to be composed of fragile coalitions, which rely on significant numbers of small parties and independent members of parliament (MPs). In 2002 PNG held its sixth general election since independence in 1975. The prime minister, Sir Michael Somare, heads a coalition government.

Political background

Colonisation came late to PNG Settled agriculture has been practised in PNG for 10,000 years. The country only began to engage with the rest of the world about four or five generations ago, about 300 years later than neighbouring Indonesia. The country now known as Papua New Guinea was colonised by several European powers during the 19th century. Australia assumed responsibility for the administration of British New Guinea (the southern part of eastern New Guinea, later renamed Papua) in 1906 and of the German New Guinea territories (the north- eastern part of eastern New Guinea) in 1914, under a League of Nations mandate. In 1942 the Japanese occupied all of New Guinea and parts of eastern Papua. Australia regained control of the New Guinea territory under a UN trusteeship arrangement in 1945, and in 1949 the administration of the Papua and New Guinea territories was unified. However, the western part of the main island (which had been administered by the Netherlands) was forcibly annexed by Indonesia in 1962 and became, in a UN-sponsored plebiscite in 1967, the Indonesian province of Irian Jaya, recently renamed West Papua. Many aspects of colonial development in PNG had barely begun when worldwide decolonisation broke out. Independence came while the building of economic and social infrastructure was still in its infancy and before modern economic, social and political institutions had taken root. PNG’s history of long isolation and short international engagement made inevitable the institutional inadequacies that have frustrated much conventional policy development since independence.

Post-independence governments The indigenous movement for independence was driven largely by a tiny band are short-lived of civil servants, intellectuals and a few local leaders, and was led by the more economically advanced island regions, particularly Bougainville and the Gazelle peninsula. PNG became internally self-governing in December 1973 and fully independent on September 16th 1975. Sir Michael Somare, who headed the last pre-independence government, remained prime minister following the 1977 general election. He lost a no-confidence vote in March 1980 to a New Ireland- based MP, Sir Julius Chan, the leader of the People’s Progress Party (PPP), the junior coalition partner. Sir Michael regained the premiership at the 1982 general election when his party, Pangu Pati (PP), won 41 seats in parliament (which had 102 members at the time). PP’s strong performance in the 1982

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election may have marked the high point of party-political achievement, but the party’s time in office was brief.

No-confidence votes add to The no-confidence vote has become a standard feature of PNG politics and political instability has spawned innovative political manoeuvres. Designed as a means of escape between elections from extraordinarily bad government, no-confidence motions have been abused by opportunists who face no risk in their destabilising quests for power. After three successful no-confidence motions had brought to an end Sir Michael’s terms in office in 1980 and 1985 and Paias Wingti’s term in 1998, in November 1990, fearing another no-confidence motion, the prime minister, Rabbie Namaliu, rushed the budget through, gagged all debate and adjourned parliament until July 16th 1991. When parliament reconvened, the government managed to push through a bill extending from six to 18 months the grace period after a general election before a no-confidence motion could be brought. However, Mr Namaliu failed to retain his position in the 1992 general election, and Mr Wingti returned to office. In an attempt to prevent a vote of no confidence after his statutory 18-month grace period had elapsed, Mr Wingti resigned 15 months into his term of office and called a snap parliamentary ballot. Parliament, which was not in full attendance at the time, re-elected him minutes later, but following a successful legal challenge, Mr Wingti was forced to step down.

Corruption and economic Corruption scandals and economic crises have also taken their toll on the crises have taken their toll longevity of governments. A coalition government headed by Sir Julius Chan succeeded the Wingti administration in 1994, but it faced a worsening financial situation. This was blamed largely on fiscal mismanagement by the previous administration, in which Sir Julius had been finance minister for much of the time. There were also allegations of high-level corruption and political scandals, the most damaging being the Sandline affair, when Sir Julius employed a private military company, Sandline International, to quell the Bougainville rebellion. This scandal eventually forced Sir Julius to step down in March 1997. Plagued by allegations of sleaze and corruption after forming a government at the 1997 election, the leader of the People’s National Congress, Bill Skate, proposed changes to the constitution that would make MPs less willing to remove a government between elections, but failed to get them through parliament. In December 1998, prior to the expiry of his 18-month grace period, Mr Skate adjourned the legislature for seven months in order to extend his term in office. However, the country’s deteriorating economic performance in 1998-99 eroded most of Mr Skate’s remaining support, and on July 7th 1999, one week before his government was due to face a no-confidence vote, Mr Skate resigned as prime minister. Bougainville

Background to the insurgency The island of Bougainville, which constitutes the North Solomons Province (NSP), lies to the south-east of the New Guinea Islands, near the Solomon Islands. The Bougainvilleans, who regard themselves as different from mainlanders, were instrumental in the adoption of provincial governments at independence. The

agreement that resulted in the establishment of the giant Panguna copper mine in the centre of the island was renegotiated in 1974 just two years after the mine came on stream. The new agreement allowed for seven-yearly renegotiations, but these never eventuated owing to a failure by the national and provincial governments to agree on an agenda for them. From late 1988 onwards dissident landowners, who demanded a greater share of the mine’s earnings, carried out attacks on staff, and the mine was forced to close in May 1989. The national government despatched security forces to the troubled island. However, this merely hardened the attitude of the rebel Bougainville Revolutionary Army (BRA), led by Francis Ona and Samuel Kauona, which began to demand independence for NSP. The Papua New Guinea Defence Force (PNGDF, the national army) regained control of much of the island, but a military solution always seemed unlikely given the harsh tropical terrain, which is well suited to guerrilla warfare. In March 1995 a breakaway BRA faction led by Theodore Miriung, who claimed to represent one-half of the estimated 5,000 active BRA members, established the Bougainville Transitional Government (BTG) for NSP, with the national government’s agreement. Relations between the BTG and the BRA worsened with the assassination of Mr Miriung on October 12th 1996 in Buka. Ceasefire and peace agreements are reached In July 1997, backed by the New Zealand and Australian governments and helped by a change of government in PNG, representatives of the BTG, the pro-BRA Bougainville Interim Government (BIG) and the BRA met in New Zealand for peace discussions. These led in October 1997 to the “Burnham Truce”, which entailed a temporary ceasefire and an invitation for a neutral peacekeeping group to be stationed on Bougainville. On April 30th 1998 a “permanent and irrevocable” ceasefire was signed by all parties in Arawa, the provincial capital. The government of Sir Mekere Morauta helped to maintain the momentum for change with the signing of the Loloata Understanding between the national government and Bougainville leaders on March 24th 2000. This paved the way for greater autonomy for the island and possibly even for a vote on independence once the autonomous Bougainville government is established. The three sides—the PNGDF, the BRA and the Bougainville resistance force—met for the first time since the cessation of hostilities in Townsville, Australia, in February 2001. They agreed that disarmament must proceed alongside autonomy, and also agreed to devise a way of achieving it. Following this breakthrough, the Bougainville Peace Agreement was concluded in August 2001 and was given effect by the national parliament in February 2002. The Bougainvilleans elect an autonomous government The national parliament’s approval of the Bougainville constitution paved the way for UN-sponsored elections in May 2005. The constitution required that all political parties contesting the election had a policy platform committed to post-conflict resolution, fiscal self-reliance, economic development and agricultural rehabilitation. In a strong turnout, the 133,000 eligible voters elected 39 members from over 200 candidates and a president. Joseph Kabui, the leader of the Bougainville Peoples’ Congress, won the presidential election from a field of five, which included the former Bougainville governor, John Momis. The inauguration ceremony of the Bougainville Autonomous Government was held on June 15th 2005. A referendum on independence could be held by 2015.

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Recent political developments

Sir Mekere promotes political On July 14th 1999 Sir Mekere Morauta, the newly chosen head of the PDM and stability and economic reform former finance secretary and governor of the Bank of Papua New Guinea (BPNG, the central bank), was elected prime minister by parliament with 99 votes to five. He named economic reform and greater political stability as his main priorities. In his first year of office he introduced a supplementary budget to restore the government’s fiscal balance and re-establish relations with international donors, especially the World Bank and the IMF. These bodies supported successive budgets, but implementation of their loan conditions met widespread opposition at home. However, parliament’s long adjournment from December 7th 2000 to July 23rd 2001 ensured that Sir Mekere was able to see out his term until the general election in June 2002.

Sir Michael returns to power PNG’s seventh parliament elected Sir Michael Somare, widely known as “the for the third time Chief”, as prime minister on August 5th 2002 after a chaotic national election. Sir Michael’s current party, National Alliance (NA), won the most number of seats in the election, 19 of 103 declared (the electoral commissioner declared that the elections had failed in six electorates in Southern Highlands province), and in early August the governor-general, Sir Silas Atopare, invited Sir Michael to form a new government. A supplementary election for the six outstanding seats was held in April-May 2003 under heavy security.

Sir Michael fails to extend the The 2002 election was the first to be held under the Organic Law on the no-confidence grace period Integrity of Political Parties and Candidates, which was introduced by Sir Mekere and enacted in 2001. The main aim of this law is to stabilise government by strengthening the party system and limiting the influence of independent MPs. The conditions imposed on MPs by the law include the restriction that they must vote along party lines on the appointment of a prime minister, the budget, any constitutional change and on no-confidence motions. Late in 2003 Sir Michael tried to push through a bill that would double the grace period relating to no-confidence votes from 18 months to three years (his coalition partners had failed to back a proposal to remove the no-confidence provision from the constitution completely). Although Sir Michael introduced the bill with the intention of further stabilising the political scene, those opposed to the bill were concerned that the extension of the grace period to three years would prevent the country from taking action to oust possible “rogue” leaders in the future. In late 2003 Sir Michael won the first vote to extend the grace period, but failed twice with the required second vote, while questions were asked regarding whether MPs voted according to the require- ments of the new integrity law. In May 2004 Sir Michael shelved the idea of extending the grace period, handing it to the Constitutional Development Committee for examination.

Opposition is thwarted in its The political environment throughout 2004 was fraught, with Sir Michael facing attempts to oust Sir Michael continued agitation from the opposition for a vote of no confidence in his administration. However, Sir Michael was successful in his efforts to avoid facing such a vote. This was largely the result of adept political manoeuvring, primarily through a series of timely parliamentary adjournments. The govern-

ment also successfully thwarted the opposition’s attempts to call for a motion of no confidence by claiming that proper procedures were not followed. Alleviating some of the pressure on Sir Michael’s tenure, changes in political alignments in early 2005 were to his advantage, lessening support for efforts to oust him and improving his chances of remaining in office for a full five-year term. Sir Michael also managed to avoid disrupting the stability of his governing coalition over the appointment of a deputy prime minister, potentially a divisive issue. On June 6th Sir Michael finally named the petroleum and energy minister, Sir Moi Avei, as his deputy. (He had been under intense pressure to name a deputy following proceedings in the National Court.) Over the previous 12 months or so, during which the post of deputy prime minister had been vacant, Sir Michael had managed to maintain the loyalty of key coalition parties, partly by keeping the post vacant and thereby maintaining coalition party leaders’ eagerness to prove their worth. As a result, Sir Michael appeared to show little real determination or willingness to select a candidate. His eventual selection, however, appears to have been welcomed by leaders of other parties in the governing coalition, despite the fact that Sir Moi’s party, Melanesian Alliance, was one of the smallest parties in it. Important recent events

June-July 2002 The sixth general election since independence is marred by an inaccurate common roll, voting irregularities, and violence (including deaths). However, on August 5th parliament votes in Sir Michael Somare as prime minister. April-May 2003 Elections in the five constituencies in the Southern Highlands province and in the provincial seat, which had failed, owing to violence, in the 2002 general election, take place peacefully under tight security. September 2003 On its first reading members of parliament vote by a majority of one in favour of a bill to double the grace period relating to no-confidence motions to three years. Parliament elects Sir Albert Kipalan as governor-general elect out of eight candidates, but the Ombudsman Commission appeals to the courts, alleging defective process. November 2003 Parliament twice fails to deliver the required second vote for the bill to double the no-confidence grace period. The Supreme Court finds the September governor- general election process defective and declares the election null and void. December 2003 Parliament votes again to nominate a governor-general; Sir Pato Kakarya wins the four-man contest, but the runner-up, Sir Albert, who had won the first contest in September, cries foul and appeals to the courts.

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January 2004 The national court stays the swearing-in of the governor-general pending a Supreme Court ruling on the validity of the December nomination. Parliament meets for six days and adjourns until June 29th. April 2004 The December 2003 governor-general nomination is ruled null and void. Parliament reconvenes for a third attempt at electing a governor-general, but all nominations are declared defective. May 2004 Sir Michael drops his proposal to double the no-confidence grace period, and makes major changes to the composition of his ruling coalition and his cabinet by incorporating the opposition PNG party, led by Sir Mekere Morauta, into the government. Parliament elects Sir Paulias Matane as governor-general elect at its fourth attempt. June 2004 Papua New Guinea (PNG) and Australia enter into a controversial four-year Kina2bn (US$625m) Enhanced Co-operation Programme (ECP) involving 300 Australian personnel, including not only police but also treasury, justice, customs and border control specialists. March 2005 A diplomatic incident involving Sir Michael and Australian airport security officers results in PNG’s cancellation of imminent talks between officials of the two countries relating to the ECP and the freezing of further deployment of Australian personnel under the programme. May 2005 The Supreme Court rules that the ECP is unconstitutional owing to its provision offering immunity from prosecution to Australian police and officials operating in PNG under the programme. The programme therefore comes to an abrupt end and Australian officials are withdrawn. Constitution, institutions and administration

PNG is a constitutional The British sovereign is the head of state and is represented by a governor- monarchy general, who is nominated by the PNG parliament and holds office for six years. The 109-member parliament, which is based on the UK system, is elected every five years by universal adult suffrage. Electors have two votes each, one to elect members for the 89 constituencies, and the other to elect the 20 MPs who will act as governors in the 19 provinces and the National Capital District. Following a general election, parliament elects the speaker and the prime minister. The provision that parliament may also change prime ministers, except in the 18 months following an election and the 12 months before a poll is held, has been virtually negated by recent political integrity laws. The prime minister chooses his cabinet.

Disputes arise between central In 1977, prompted by threats from Bougainville to seek independence, PNG and local governments created 19 provincial governments and a National Capital District. In 1984 the administration in the province of Enga became the first to be suspended for financial mismanagement, and was followed by several others. Disputes between the two levels of governments over the distribution of power, responsibilities and funding led to the 1995 Organic Law on Provincial Governments and Local Level Governments. It devolves a wide range of powers such as raising revenue, delivering services and project implementation to provincial and local governments. It also requires four types of financial transfers from the national government. However, the law is proving difficult to implement. East New Britain province is seeking a measure of financial and political autonomy. The Somare administration, along with the recently resigned Bougainville governor, John Momis, who introduced provincial government in 1977, seems set to take the process further. According to Sir Michael, the establishment of autonomous government for Bougainville has widened the opportunities for PNG to mobilise her people in developing the country. Decentralisation, previously the responsibility of the Ministry of Provincial Affairs and Local- Level Governments, has been brought under the Ministry of Inter-Government Relations, headed by the Madang MP and elder statesman, Sir Peter Barter.

Public Service Commission’s In early 2003 parliament unanimously passed the constitutional amendment role is strengthened bills that have resurrected the Public Service Commission’s role in selecting senior bureaucrats (which was taken away from it by parliament in 1986). Introducing the bills, Sir Michael spoke of a more proactive role for the commission in the selection, appointment, suspension and dismissal of departmental heads, provincial administrators and heads of public authorities. They would be appointed on merit, and would only be removed from office because of a failure to discharge their duties adequately. The legislative changes were a requirement under the public-sector reforms agreed with international agencies and donors by the previous government.

The judiciary is fairly The Supreme Court of Papua New Guinea, headed by the chief justice, is the independent highest judicial authority in the country, dealing with appeals from the National Court and adjudicating on all constitutional matters. Below the National Court, which has unlimited jurisdiction in both civil and criminal matters, are district, local and village-level courts, as well as specialised agencies for matters regarding children, customary land disputes and civil cases relating to the mining sector. The legal system is based on that in the UK, but it has also adopted many traditional local values, particularly with respect to communally held land rights, and legal cases can be made on the basis of respect for local custom. The judicial system is comparatively free from political interference, and the courts have shown a willingness to resist political pressure when making decisions. The courts are getting better at dealing with the five-yearly cycle of electoral petitions, a substantial case load in PNG’s extremely pluralistic version of democracy. Responding to strict protocols laid down by the court, 35 of the 85 petitions resulting from the 2002 general election were withdrawn. However,

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the courts still have a heavy workload—only 21 of the 24 judges allowed under the constitution are serving.

Political forces

Local loyalties remain strong Traditional political units were predominantly small, clan-based entities separated by terrain, language and custom. Since independence, local loyalties have remained strong, impeding efforts to establish a national identity and a robust system of political parties. There are large numbers of independent MPs and of small parties with weak ideological ties and negligible organisational structures. Speculation over rifts between coalition parties or within parties is rife in the local media. Coalition governments are therefore prone to corruption, short-termism and gerrymandering. It is not unusual for opposition MPs to be tempted on to the government benches with offers of ministerial portfolios and other sinecures. The outgoing government in 2002 had placed a high priority on cleaning up the political system, especially after the excesses of the Skate and Chan administrations. Sir Mekere’s main vehicle for reform was the Political Integrity Act, which aims to improve the transparency of the political system and to penalise MPs who change their allegiance. However, recent events indicate that the act has not worked as well as was hoped.

General election results (no. of seats gained by nominated candidates) Party 1992 1997 2002a Pangu Pati (PP) 22 12 6 People’s Democratic Movement (PDM) 15 10 14 People’s Action Party (PAP) 13 5 6 People’s Progress Party (PPP) 10 17 9 People’s National Congress (PNC) – 7 2 Melanesian Alliance (MA) 9 4 3 League for National Advancement (LNA) 5 – – National Alliance (NA) 2 8 19 Other minor parties – 10 32 Independents 32 36 17 Undeclared – – 1 Total 108b 109 109 a Includes the results of the supplementary election in May 2003. b Following the death of a candidate, voting in one constituency was postponed. Source: National press.

Main political figures

Sir Michael Somare The prime minister, Sir Michael Somare, widely known as “the Chief”, was voted into office for the third time on August 5th 2002. In 1972 he had become chief minister of Papua New Guinea (PNG) in the run-up to self-government. Following the granting of independence in 1975, he won two elections in 1977 and 1982. Sir Michael leads the National Alliance (NA), which won 19 of 103 declared seats in the 2002 election. Sir Michael is the first prime minister to head a government operating under new political integrity laws, which are designed to provide a more

stable political environment, but have not yet proved effective. His success in the current parliament in fending off vigorous attempts to petition for a vote of no confidence has raised hopes that he might serve out a full term, becoming the first prime minister ever to do so. Sir Mekere Morauta Sir Mekere Morauta, a former finance secretary and governor of the Bank of Papua New Guinea (the central bank), relinquished the post of leader of the parliamentary opposition and took his PNG Party (formerly the People’s Democratic Movement) into Sir Michael’s governing coalition and himself on to the back benches in May 2004. Sir Mekere previously served as prime minister from July 1999 to June 2002. During his time in office Sir Mekere received the strong backing of the international donor community as he attempted to push ahead with vital economic reforms. However, these reforms proved to be domestically unpopular and contributed to his failure to retain the post of prime minister in 2002. Sir William Skate Sir William Skate, knighted in January 2005, was prime minister from 1997 to 1999. His short term as prime minister was plagued by allegations of corruption and characterised by poorly thought-out economic policies that contributed to a period of economic deterioration (although he was also unfortunate in holding office during the 1997-98 El Niño drought that devastated both agricultural and mining exports). In May 2004 his Papuan National Congress was dumped from the governing coalition and he was ousted as parliamentary speaker. In early 2005 he was “released” by his party and moved to sit on the parliamentary cross benches. International relations and defence

Ties with Australia are firm, PNG’s diplomatic, economic and financial ties with Australia have generally but are subject to friction been strong, but disputes between the two countries are not uncommon. In a sign of strengthening relations, in December 2003 PNG and Australia agreed on a new framework for co-operation and partnership, known as the Enhanced Co-operation Programme (ECP). However, it was only approved by PNG’s parliament in July 2004 following protracted negotiations over the issue of legal immunity for the seconded Australian personnel. Under the four-year programme, Australian officials were to fill senior public-sector positions and Australian police officers were to be deployed to help to improve law and order. In early 2005 a total of 149 police and civil servants had been deployed out of the planned total of 210 police offices and 64 civil servants. However, in mid-May the programme came to an abrupt end. This followed the PNG’s Supreme Court ruling that the ECP was unconstitutional owing to its provision offering immunity from prosecution to Australian police and officials operating in PNG under the programme. Shortly before this development, the government had threatened to suspend the programme following a diplomatic spat over the Australian government’s refusal to apologise for an incident in late March, when Sir Michael had to remove his shoes during a security check at an Australian airport. Both sides, however, appear keen to resolve the ECP issue, with the foreign minister, Rabbie Namaliu, visiting his Australian counterpart, Alexander Downer, in late May.

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Adherence to the “One China” Within days of coming to power in 1999 Sir Mekere renounced his policy has not been strong predecessor’s hastily devised aid-for-recognition agreement with Taiwan and said that PNG would retain its traditional ties with China—the “One China” policy. However, in 2002 a visit to Taiwan by the then deputy prime minister, Allan Marat, and Arthur Somare, the East Sepik governor and Sir Michael’s son, soon after the formation of the government, raised questions in some quarters about PNG’s commitment to the One China policy. Sir Michael’s subsequent directive to his foreign affairs minister to issue consular corps plates for Taiwan’s 13-year-old trade mission, protested against by China, was defended by his government as being wholly apolitical; the government cited precedents in other countries, and reaffirmed its adherence to the One China policy. The interest in investing in PNG’s gas and mineral development that China expressed following a state visit to the country early in 2004 by Sir Michael and a large retinue of PNG business leaders is indicative of efforts to build good relations between the two countries. Ties were strengthened by the recent takeover by the China Metallurgical and Construction Company of the much- delayed Ramu nickel-cobalt project.

PNG co-operates with The building of the road from the town of Vanimo in PNG to Jayapura in the Indonesia Indonesian province of West Papua in 1996 has substantially increased crossborder movement of tourists and small business entrepreneurs. However, tension along the border rose temporarily following a spate of attacks towards end-2002, allegedly launched by members of the separatist group, Papua Freedom Fighters (OPM), from the PNG side of the border. The government has so far shown its willingness to co-operate with Indonesia in attempting to secure the joint border area and both sides have agreed to co-operate in security operations to rid the area of OPM operatives and their training camps. Under the agreement between PNG and Indonesia, which was renewed in 2003, PNG authorities may have to turn over to Indonesian authorities West Papuan dissidents fighting for independence and crossing into PNG territory. PNG allows Indonesian citizens to apply for PNG citizenship if they have been in the country for ten years and wish to stay.

PNG is an active member of PNG has signed a number of border agreements with Indonesia. It is an active regional organisations member of the Pacific Islands Forum, a member of Asia-Pacific Economic Co-operation (APEC), and has observer status in the Association of South-East Asian Nations (ASEAN). PNG is a signatory to the Cotonou Agreement between the EU and African, Caribbean and Pacific countries. Commercial and aid ties with Europe, Japan and China are growing. PNG is a founding member of the Melanesian Spearhead Group (MSG) and the Melanesian Free-Trade Agreement, which covers some 30 goods. (In addition to the other two co-founders, the Solomon Islands and Vanuatu, the MSG includes Fiji and the New Caledonia independence coalition, the Kanak Socialist National Liberation Front.) The functioning of the MSG has been hampered by tension between PNG and the Solomon Islands over border incursions during the Bougainville secessionist conflict, and again more recently as a consequence of the Solomon Islands’ political and economic crisis.

Military spending is low In 2003 military spending amounted to just 0.7% of GDP. Frustration at the political management of the Bougainville crisis, budgetary cuts and political scandals led the army to force the resignation of Sir Julius Chan, the then prime minister, in the Sandline affair in 1997. This set a precedent for military intervention in PNG’s political affairs. A small mutiny in early 2001 caused the government to rethink its reform plans. However, a similar mutiny a year later in another part of the country was quickly dealt with by the military.

Military forces in the region PNG Fiji Australia Indonesia Army personnel 2,500 3,200 25,300 233,000 Navy personnel 400 300 12,850 45,000 Air force personnel 200 - 13,650 24,000

Source: International Institute for Strategic Studies, The Military Balance, 2004/05.

Resources and infrastructure

Population

The population growth rate The mid-2000 census showed a population of 5.19m, reflecting average annual is high growth since 1990 of 3.5% compared with 2.3% between 1980 and 1990. Under-enumeration in the 1990 census could partly explain the sharp jump in average annual growth rates. The National Capital District grew fastest between 1980 and 1990 at 4.7% per year, but between 1990 and 2000 it grew more slowly than the national average. Areas of high average annual growth included the Western Highlands (2.7%), Enga (2.1%) and the Southern Highlands (5.4%, the highest rate recorded). According to IMF estimates, the population stood at 5.71m in mid-2003. The majority of the population are Melanesian, although there are considerable numbers of Polynesians and Micronesians as well as a small minority of Australians and ethnic Chinese.

Population density is among The population density, at around 11 persons per sq km, is among the world’s the world’s lowest lowest. The highest concentration is in the Highlands region. Around 40% of the national population is under 15 years of age and 3% is over 65. According to data from the UN Development Programme (UNDP), in 2002 the urban population stood at 13.2% of the total, up from 11.9% in 1975. Low population density (the product of a long-isolated, Neolithic history) and the favourable growing conditions of the moist tropics have together led to “subsistence affluence”. This may help to explain the slow commercialisation of agriculture, the root cause of inadequate economic and employment growth. Fewer than one in five people in the labour force work for salary or wages. Most people who receive cash incomes do so as small farmers. However, a large and growing proportion (presently more than one-third, mostly male) of the labour force is unemployed and depends on the private welfare (wantok) system or crime for sustenance.

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Population, 2000 % av annual growth Province Population 1990-2000 Western 152,067 3.2 Gulf 105,050 4.2 Central 183,153 2.6 NCD 252,469 2.6 Milne Bay 209,054 2.8 Northern 132,714 3.2 Southern Highlands 544,352 5.4 Enga 289,299 2.1 Western Highlands 439,085 2.7 Chimbu 258,776 3.4 Eastern Highlands 429,480 3.6 Morobe 536,917 3.5 Madang 362,805 3.6 East Sepik 341,583 2.9 West Sepik 185,790 2.8 Manus 43,589 3.0 New Ireland 118,148 3.1 East New Britain 220,035 1.7 West New Britain 184,838 3.5 North Solomons 141,161 n/a

Source: National Statistics Office, 2000 National Population and Housing Census.

Education

Basic education is not The language distribution in Papua New Guinea (PNG) is one of the most universal complex in the world, with over 800 languages in use. Although English is the official language of government, business and education, Tok Pisin (Pidgin English) is the country’s lingua franca, while Hiri Motu is widely used in the Papua region. Although most Papua New Guineans are multilingual and the adult literacy rate has improved (from 56.6% in 1990 to 64.6% in 2002), not all children receive a basic education. Education is provided by the government, voluntary organisations (notably churches) and the private sector, with expensive international schools in the main urban centres serving expatriates and the local urban elite. Under the recently released national education plan for 2005-14, the government hopes to achieve nine years of universal primary education by 2015. According to the UNDP, in 2001/02 the net primary enrolment rate stood at 77%, up from 66% in 1990/91, and the net secondary enrolment rate was 23%. The average number of years of schooling received by the workforce is less than one-half that in Indonesia. Better education would improve competitiveness, but would not resolve other underlying problems. The nation’s unemployed males lack opportunity not because they are uneducated, but because the absence of enforceable property rights in land deters private financing of customary land development. Low educational penetration needs to be seen in the light of the country’s late start in the development race. However, the education system is top-heavy: tertiary institutions consume a big share of the budget, while universal primary education is still some way off.

Health

Health indicators are poor As an indication of the poor standard of health in PNG, in 2003 infant mortality was 69 per 1,000 births compared with only 16 in Fiji and 31 in Indonesia according to the World Bank. Life expectancy at birth is relatively low, at around 57 years compared with nearly 70 years in Fiji. Data from the UNDP show that 35% of children under five are underweight and that only 42% of Papua New Guineans have access to improved water sources. In 2000 PNG had only seven doctors per 1,000 people, putting it on a par with countries such as Cameroon and Sierra Leone. UNDP data suggest that the number of adults living with HIV/AIDS is higher than 30,000. According to the medical adviser of the PNG’s National AIDS Council, Dr Joachim Pantumari, around 100 new cases of HIV infection are reported each month. Chronic and severe malnut- rition, however, is not prevalent. Only about 10% of the population lacks access to essential drugs. The vast majority continue to have access to communally held land, and the wantok system (a clan-based social-support mechanism) serves to redistribute wealth, dampen income inequality and protect almost everyone from outright destitution. However, this is less true in urban areas, where traditional social relations have often broken down. The Department of Health runs hospitals and dispensaries, co-ordinating much of the activity in this sector. However, various (subsidised) church groups, non-governmental organisations (NGOs) and provincial governments also play an important part in health service delivery. Charges for healthcare are related to ability to pay, and most people are treated free or for a small fee, when treatment is available.

Health statistics, 2003 Life expectancy at birth (years) Infant mortality (per 1,000 births) Fertility ratea Immunisation rateb Papua New Guinea 57.2 69 4.3 49 Fiji 69.7 16 2.6 91 Indonesia 66.9 31 2.4 72 a Births per woman. b Percentage of children under 12 months receiving measles vaccination. Source: World Bank, World Development Indicators.

Natural resources and the environment

Rugged terrain makes physical PNG’s total land area is 462,840 sq km, most of which is accounted for by the infrastructure costly eastern part of the main island of New Guinea. A few other large islands and hundreds of smaller ones make up the rest of the country. Located near the equator, PNG has a hot and humid climate with only slight seasonal temperature variations, although frosts do occur in some parts of the Highlands region. The wet season is from December to April. The terrain is rugged; the jagged mountainous interior, which rises to 5,000 metres on the New Guinea mainland, gives way to coastal lowlands and rolling foothills. The difficult terrain makes the building and maintenance of physical infrastructure costly, hindering the development of interior regions. It also means that only 30% of the total land area is suitable for cultivation. Forests and woodland cover more than 80% of PNG’s land area. Volcanic and seismic activity is common, particularly in the outlying island regions. Located on the

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Pacific “rim of fire”, the country has many mineral resources, including hydrocarbons. It also has a vast maritime economic zone.

Transport, communications and the Internet

Transport infrastructure is in a The road infrastructure is poorly developed and badly maintained; over 85% of poor state roads are unsealed. Most roads are concentrated around the main regional centres, including the capital, Port Moresby, and Lae. PNG is one of the few countries in the world where the capital is not accessible from the rest of the country by road. The highlands, where the bulk of the population lives, are particularly isolated from the capital. However, given the high cost of building and maintaining roads over unstable mountainous terrain, the economic benefits to be gained from doing so are not clear-cut. PNG has only around 20,000 km of non-urban roads. The national government is responsible for around 9,000 km of this network; the rest of it is owned by provincial authorities and the private sector, notably mining and logging companies. The road system has deteriorated rapidly in the past few years, with the deployment of international funding for road rehabilitation delayed by the government’s difficulty in funding its own contribution. It has been estimated that the poor condition of PNG’s roads adds Kina200m (US$55m) per year to the operating costs of road users. PNG has 17 main ports under the control of the PNG Harbours Board, which the previous government wanted to privatise. Around 300 smaller ports are owned by a variety of provincial governments and NGOs. Major investment to improve and expand PNG’s ports has taken place, largely financed with foreign aid. The Office of Civil Aviation is responsible for running 22 major airports and 25 smaller airstrips. Provincial governments are responsible for a further 160 airstrips. Others are run by NGOs, especially churches.

Telecoms are efficient, but not The services provided by the state-run telecommunications company, Telikom, widely available are efficient and profitable by standards in developing countries, mainly because of the high cost of international calls. However, access is not widely available. A private mobile phone network was introduced in Port Moresby and Lae in 1996, but penetration remains extremely low. According to the UNDP, in 2002 there were only 11 telephone mainlines per 1,000 people, and just three mobile phones per 1,000 people. Hopes of improved penetration and service standards associated with the proposed takeover of Telikom by private foreign interests (under the government’s privatisation programme) were dashed when the government decided in December 2004 not to proceed with the sell-off.

Use of the Internet is growing Internet usage is increasing, but still low, reaching around 14 users per 1,000 people in 2002, according to the UNDP. The electoral commission posted updates of the counting in the recent election on the web. The prime minister’s office maintains a website that carries media releases. It also carries the transcripts of two commissions of enquiry into superannuation funds. The Treasury provides details of the national budget on its website. The Bank of Papua New Guinea (BPNG, the central bank) runs a site containing its quarterly

economic bulletin and monetary policies. Both daily newspapers are available on the web. Penetration is low, however, and is hampered outside the main urban centres by poor access to electricity and telephone lines.

Energy provision

The electricity system is not The electricity system is operated by the government-owned PNG Power reliable (formerly the Electricity Commission, Elcom). The distribution system is restricted to the major cities, and power cuts are common. Most businesses have back-up generators, and those that need reliable electrical supplies often disengage entirely from the network and rely on their own generation systems. The Ministry of Energy Development has been formulating plans for rural electrification for some years, but lack of government funding has hampered progress severely. Electricity generation takes place mainly at major hydroelectric plants, which provide more than one-third of national electricity supplies. The potential for hydroelectric power generation is vast, but (as with mining ventures) land access issues are a major constraint. The first privately built and operated power station, a US$52.5m oil-fired plant run by Hanjung Power of South Korea, was opened in Port Moresby in April 1999. Stand-alone diesel generators supply many smaller centres. A small gas-fired generator on the Hides field in Southern Highlands province supplies electricity to the Porgera gold mine in Enga province.

The economy

Economic structure

Main economic indicators, 2004 Real GDP growth (%) 0.9a Consumer price inflation (av; %) 2.2 Current-account balance (Kina m) 334 Foreign debt (US$ m) 2,460b Exchange rate (av; Kina:US$) 3.23 a Economist Intelligence Unit estimate. b End-2003. Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; IMF, International Financial Statistics.

Oil, mining and forestry Papua New Guinea (PNG) is endowed with expanses of fertile agricultural land, dominate the economy extensive forestry and fisheries resources, and substantial gold, copper and other mineral resource deposits, as well as reserves of oil and natural gas. The legacy of long isolation and of a Neolithic history extending to recent times is a small, tribal population that is poorly educated and has subsistence attitudes to production. The public sector and the capital-intensive oil, mining and forestry sectors have dominated the post-independence economy. However, over 75% of the labour force is engaged in growing food crops for subsistence consumption or sale in nearby urban markets, and tree crops for export. Agricultural commercialisation has not kept pace with population growth, and high male unemployment co-exists with undeveloped agricultural land. The government

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employs two in every five formally employed persons, and accounts for about half of domestic credit (at the end of 2004) and more than one-half of the total payroll. The economy is open, with exports and imports combined accounting for nearly 90% of GDP in 2003.

Comparative economic indicators, 2004 Papua New Guinea Australia Indonesia New Zealand Fiji Samoa GDP (US$ bn) 4.3a 616.6 257.6 97.0 2.3b 0.3b GDP per head (US$) 744a 30,600 1,151a 23,836a 2,793b 1,670b Consumer price inflation (av; %) 2.2 2.3 6.1 2.3 3.3 16.4 Current-account balance (US$ bn) 0.1a -39.5 2.9 -6.2 -0.3b - Exports of goods (US$ bn) 2.5a 87.0 71.8 19.9 0.7b - Imports of goods (US$ bn) 1.5a 105.0 50.6 21.4 1.2b 0.2 Foreign trade (% of GDP) 92.7a 31.1 47.5 42.6 82.6b 50.3b a Economist Intelligence Unit estimates. b Data for 2003. Sources: Economist Intelligence Unit; Asian Development Bank; IMF.

Economic policy

A floating currency was PNG has only rarely strayed far from conventional policy: fiscal deficits have adopted in 1994 usually remained within IMF parameters; state ownership is generally limited to infrastructure utilities; heavily protected or subsidised industrialisation as a basis for growth has been largely avoided; and the state has not become the employer of last resort. Until 1994 the government followed a “hard kina” strategy, fixing the kina exchange rate to a basket of major currencies. This succeeded in containing inflation, as imports are a large component of supply. It also restrained wages, which were indexed to consumer prices. However, the fiscal profligacy spawned by the resources boom of the early 1990s, and the consequent import surge, proved too much for foreign reserves, and the kina was floated in October 1994. Under the floating regime reserves have been restored to comfortable levels, assisted by discretionary intervention in the foreign-exchange market by Bank of Papua New Guinea (BPNG; the central bank), but the currency has at times depreciated sharply, causing high inflation and economic contraction. However, in 2003-04 the kina gained ground against the US dollar (due in part to the latter’s weakness) and inflation subsided.

Relations with multilateral From 1990 the government submitted to the ministrations of the World Bank lenders have been strained and the IMF, a course of action it had avoided a decade earlier by borrowing overseas commercially. Successive governments in 1990s adopted a “tight” monetary policy, defined as using high interest rates in an attempt to shore up the value of the kina. In this way, the BPNG aimed to reduce the chances of cost-push inflation and restore business confidence in what was once regarded as a stable currency. The 1997 election, however, brought a new government, a weakening of resolve and strained relations with the multilateral agencies. These relations were repaired only in mid-1999, when parliament chose a former central bank governor and finance secretary, Sir Mekere Morauta, as prime minister. During the Morauta government, economic policy was firmly in the multilateral mould, although Sir Mekere insisted that his reform programme was home-grown, not imposed. He placed a high priority on main-

taining good relations with the multilateral institutions, knowing that without their support external funding would be impossible. The administration of Sir Michael Somare has had difficulty accessing some components of the con- ditional multilateral assistance the Morauta government negotiated; the World Bank recently cancelled its forestry programme and the Asian Development Bank has frozen its public-sector reform programme.

The privatisation programme Soon after coming to office in 2002, the government of Sir Michael amended stalls under Sir Michael the privatisation programme that was central to Sir Mekere’s outgoing government. The sale of the monopoly telephone company, PNG Telikom, to Fijian- based interests for Kina100m (US$25m) had been announced just five days before parliament was due to convene to elect the new government. New tenders were subsequently called by the new administration. By late 2004 an agreement had been negotiated with Econet Wireless, a firm representing Botswanan and South African interests, but the cabinet, sensitive to broad- based parliamentary resistance, rejected it. Soon after, Sir Michael took over the privatisation ministerial responsibilities and said that the government would revisit the matter in 2005. (However, the government did not take any action during the first half of 2005.) The government claims to favour contract management over sale as the best way to remove political interference and restore efficient operations in state- owned enterprises (SOEs). Reflecting the early work done in preparing the various SOEs for sale, some of them have returned to profitability. Sir Michael plans to continue to sell off selected state assets and, where possible, to use the proceeds to reduce the government’s debt burden. However, the government’s cashflow crisis, partly the result of the lack of progress in selling off non-core state assets in 2003, has dissipated. In 2004 the government reduced its debt after running a budget surplus because of stronger revenue stemming from high commodity prices, with only a negligible contribution from asset sales.

Spending priorities are open The expenditure decisions of successive governments have attracted criticism. to criticism Official investment has tended to be dominated by large industrial and infrastructure projects that did little to address the severe structural weaknesses in the country’s economic base. Successive governments have paid lip-service to the pressing need to promote agriculture, small-scale industry and, where viable, downstream processing. However, they have directed the bulk of their investment funds to building unproductive roads (such as a motorway through Port Moresby), other prestige projects (including a new airport terminal at Port Moresby, which furthermore added to the pressures on recurrent expenditure) and establishing import-substituting industries of dubious effectiveness (cement and tinned fish, for example). In the provinces, meanwhile, the most pressing infrastructure needs, such as roads vital to commerce, have been ignored.

Tax rates are competitive, but Government policy has incorporated competitive tax rates, especially in com- the tax base is limited parison with Australia, the source of most of PNG’s foreign direct investment (FDI). In recent years, prodded by multilateral institutions and membership of the Asia Pacific Economic Co-operation (APEC) forum, governments have begun to abandon some of PNG’s more protective tariffs and intrusive restrictions

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on business practice. However, there remains much that the government could do to remove structural impediments to the development of the private sector. These obstacles include poor infrastructure, problems with law and order, and a high-cost, low-skilled workforce. Slow commercialisation of the predominant semi-subsistence sector has limited the growth of demand for the goods and services produced by the small formal private sector. It has also restricted growth in the government’s tax base, but not in the demand for public expenditure on healthcare, education, and law and order. The resultant cumulative squeeze on the budget largely explains underlying current fiscal constraints.

A rare budget surplus is In recent years the government has maintained a tight grip on expenditure, recorded in 2004 which has led to an improvement in the budget balance—in 2004 the government recorded a budget surplus of Kina234m (US$72.5m), equivalent to around 1.7% of GDP. This compares with average annual budget deficits of Kina270m in 1999-2003. The impressive fiscal performance in 2004 largely reflects the rapid growth in revenue, in line with buoyant commodity prices. Budget receipts in 2004 increased by 9% compared with the level recorded in 2003. Tax receipts rose by 20% year on year, led by company tax, which increased by 47%. (Mineral and oil companies contributed Kina689m in taxes in 2004 compared with Kina538m in 2003.) Foreign grants, however, dropped by 31%. In 2004 total expenditure fell by 0.8% year on year, with recurrent expenditure only slightly over-budget.

Agriculture and fisheries have Government investment in and assistance to the agricultural sector fell during generally been neglected the 1990s; an agricultural price-support programme has been budgeted but not yet implemented. The Department of Agriculture and Livestock is now badly underfunded, affecting government-supported services in rural areas. However, the government’s Nucleus Agro-enterprises Project (introduced in the 2003 budget) aims to replicate, throughout PNG and across a range of crops, the nucleus agro-industries model of agricultural development, so successfully employed in palm oil, which has grown by 11% annually since 1980. Fisheries have also been neglected, with the bulk of the catch in PNG waters being taken by offshore operations, which provide little benefit to the domestic economy. However, there have been attempts to improve fisheries management and in 1998 the government announced reforms intended to secure better returns on the country’s stock of marine resources.

Mining and forestry suffer Government policy towards other sectors of the economy has been similarly inconsistencies in taxation discouraging. In the mining sector, governments have attempted to create a financial environment that encourages private-sector investment from abroad, while at the same time ensuring that the state receives a “fair” take of the revenue from minerals projects (through taxation, royalties and government equity stakes in all major ventures). Unfortunately, governments have not always managed to balance these competing interests well. Inconsistencies in policy, especially the tendency for governments to increase financial demands on the mining sector, have led to disagreements between the industry and politicians. Similar issues affect the forestry sector, where multilateral organisations have been pressing the government, with some success, to prevent the unsustainable harvest of timber.

In a positive move for the mining industry, in 2003 the government announced that it would phase out the mining levy gradually between 2004 and 2008. The levy is particularly galling to the industry because as a tax on production it directly reduces profitability and reserves. The move followed increases in spending on oil exploration programmes, which the government believes were a result of the reduction in the corporate tax rate from 45% to 30% in the budget for 2003 and of the removal of additional-profits tax on new petroleum developments until 2017.

Land usage rights are still Around 90% of land suitable for cultivation is covered by customary law. This problematic system of traditionally owned land hampers formal private-sector development (although it sustained rapid growth in informal coffee production during the 1960s and 1970s). Land that is not owned outright by a business cannot be offered as collateral against loans. Compensation for use of traditionally owned land can prove a substantial cost to large businesses operating in PNG. Further- more, identifying the rightful owners of land usually takes a long time. The most controversial component of the structural adjustment programme in the mid-1990s was a land registration process intended to record the correct traditional owners of land throughout the country. This was widely perceived in PNG as an attempt to remove land from the people, and created widespread discontent. The programme was eventually dropped.

The central bank focuses The BPNG was founded in 1973. It has gradually liberalised foreign-exchange on price stability regulations and moved towards open-market operations for the implementation of monetary policy. The BPNG has been relatively autonomous, although in 1998 the government’s decision to change the governor of the bank twice in just over three months raised fears that it was becoming more politicised. Legislation implemented in 2000 has strengthened the central bank’s autonomy. Under the Central Bank Act (2000), the BPNG is required to target price stability as its monetary policy objective, compared with the previous broad goal of monetary stability. In its January 2005 biannual Monetary Policy Statement the BPNG adopted a neutral monetary policy stance. This primarily reflects the fact that in 2004 it moved aggressively to cut interest rates—the BPNG cut the kina facility rate (KFR, the official interest rate used to indicate its monetary policy stance) six times in 2004, from 13% in January to 7% in October. The BPNG was able to adopt a looser monetary policy for most of 2004 owing to the lower inflation environment, the strength of the kina and the government’s prudent fiscal policy. Recent economic policy changes and initiatives

August 2002 Following a general election, Sir Michael Somare’s new government suspends the privatisation programme for review. November 2002 The 2003 budget aims to promote an export-led recovery. The company tax rate increases from 25% to 30%.

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March 2003 Parliament passes the amendment to the value-added tax (VAT) law. The constitutional amendment validates all operations under the provisions of the VAT law, and renames the tax a goods and services tax (GST). May 2003 The government suffers a cashflow crisis, owing to delays in the disbursement of funding from the Asian Development Bank (ADB) and receipts from its privatisation programme. The government turns to the domestic market for funds, thereby forcing Treasury bill rates up to 19%. November 2003 In the 2004 budget the government fails to identify the cuts in expenditure of 3-4% of GDP that were called for in the previous budget. The budget includes plans to raise US$50m in external commercial loans, and imposes a temporary 2% import levy to boost revenue. May 2004 The government announces that it is seeking to raise US$100m-200m in international bonds of five-, seven- or ten-year maturities at an interest rate of 10% through a US financier, Bears Stearns. However, it has not yet proceeded with the bond issues. October 2004 The central bank lowers the kina facility rate (an official rate that indicates the bank’s monetary policy stance) to 7%, the lowest level since its introduction in February 2001 at 15.5%. November 2004 The Somare administration hands down its third full budget, which provides for a deficit of 1% of GDP. The budget includes increased pay for public servants; a cessation of the 2% import levy collected throughout 2004; and the continuation of the phasing out of the mining levy introduced in 2000. December 2004 The cabinet rejects the agreement negotiated by its privatisation entity with Botswanan and South African interests for the sale of 51% of the state-owned monopoly telecom company, Telikom, and faces breach-of-contract action. March 2005 The government releases its medium-term development strategy 2005-2010, which is long on rhetoric but short on ways and means to bring unemployed land and labour resources into production, an internal imbalance that increasingly threatens the social fabric. Economic performance

Real GDP growth continues PNG’s economic performance during the past two decades can be summarised to disappoint in terms of low, unstable GDP growth and declining real non-mining GDP per head, despite abundant natural resources. This has been blamed on a number of factors, including a poorly developed infrastructure (particularly with respect

to transportation); the limited supply and high cost of skilled labour; official corruption and social disorder; an uneven distribution of income; and susceptibility to natural disasters. More fundamental reasons for poor economic performance in this young market economy are probably the culture-bound rigidities in land markets (affecting 97% of the land area) and labour markets (affecting three-quarters of the population), and an overweight public sector, coupled with the inability of conventional market-based policy to address them.

Gross domestic product (% real change) Annual average 2004a 2000-04a GDP 0.9 -0.2 a Economist Intelligence Unit estimate for 2003 and 2004. Source: Ministry of Treasury and Planning.

Resource projects determine During the early 1980s the pace of economic growth was determined by falling the pattern of growth agricultural export prices and declining copper and gold output from the Panguna mine on Bougainville. The opening of the Ok Tedi mine in 1984 led to a sharp improvement in PNG’s economy, which was further boosted by a modest upturn in agriculture. The premature closure of the Panguna mine in 1989 led to a contraction in the economy of 4.5%. During 1991-94 the economy expanded by over 40%, owing to the development of the Kutubu oilfield; two new gold mines; an investment invasion by Malaysian loggers retrenched by their own government; and a new government unable to resist the fiscal temptations of the export boom. The economy was boosted in 1996 by the construction of the Lihir gold mine and new palm oil production, but it was pulled back the following year by a drought induced by the El Niño climatic phenomenon, which not only damaged crops but also caused a fall in production at the largest mines, Porgera and Ok Tedi. A natural decline in oil output since its peak in 1993 has been a recent drag, but a substantial boost could come within the next few years from two major projects—a pipeline to take PNG gas to Australia, and a nickel-cobalt mine owned by Chinese interests.

Real growth in gross domestic product by sector, 2002 (% change, year on year) Mining -16.9 Agriculture 7.3 Manufacturing 2.6 GDP -0.8

Source: Ministry of Treasury and Planning.

Economic performance is The National Statistics Office has revised the national accounts for 1994-2002. revised upwards The revised data show a better economic performance than previous ad-hoc estimates by the Treasury or the central bank had indicated. However, some features undermine the data’s credibility. For example, one of the largest and strongest growth components, private consumption, is computed as a residual. According to government estimates of real GDP growth incorporated in the 2005 budget, the economy grew by 2.8% in 2003 and by 2.6% in 2004. On the basis of this data, the economy was 23% larger in 2004 than it was in 1994; since

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then the population has increased by about 30%, thereby indicating that real GDP per head has contracted.

Lack of demand accounts for The investment rate has only risen above 20% of GDP during the construction low non-mining investment phases of foreign-financed, capital-intensive resource projects. Private non- mining investment has remained largely below 10% of GDP. It has been stifled by over-regulation, poor security and lack of investor confidence, and has been further discouraged by the low levels of public infrastructure investment. However, the main cause of low non-mining investment is a lack of demand from the predominant informal sector, where rigidities in the land and labour markets hamper the export commercialisation of agriculture.

Employment levels are low The vast majority of Papua New Guineans derive their incomes from self- employment as farmers in the informal sector. The 1990 census put the formal unemployment rate for men at about 27% and that for women at about 30%. The central bank’s employment index, which excludes firms with fewer than 20 employees, showed a mere 1.9% growth in formal private employment (excluding the mining sector) between 1990 and 2001. However, since then employment has risen sharply, by 10% between 2001 and 2004. The strongest sector, the capital-intensive mining sector, which is also more reliant than the economy on expatriate labour, makes a relatively small contribution to employment growth. The largest formal employer, the public service, which directly and indirectly employs 75,000 persons, wishes to shed labour in an effort to improve its fiscal position.

Inflation has slowed Annual consumer price inflation (headline rate) accelerated from 9.3% in 2001 dramatically to 11.8% in 2002 and 14.7% in 2003, partly as a result of an increase in food prices. Underlying inflation, which excludes the prices of betelnut, fruits and vegetables, and the effects of government policy decisions on the prices of consumer goods, rose from 13.1% in 2002 to 16.5% in 2003. Although average annual inflation rose in 2003, during that year inflation slowed markedly from 20.7% year on year in the first quarter to 8.4% in the fourth quarter. This trend continued into 2004, with average annual inflation falling to 2.2%. In the fourth quarter of the year inflation stood at 2.4% year on year.

Inflation (% change) Annual average 2004 2000-04 Headline inflation 2.2 10.6 Underlying inflation 3.2 10.3

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

Regional trends

Regional disparities are high Successive national governments have made efforts to narrow differences in income, employment and social indicators among the 19 provinces and the National Capital District. The 1995 Organic Law (see Politics: Constitution, institutions and administration) introduced a more equitable system of

transfers from national government to the provinces, with payments made according to a formula, although regions with smaller populations are eligible for other revenue transfers. Provincial governments also have some independent revenue-raising powers. Despite such efforts, regional disparities remain, partly reflecting the concentration of government in Port Moresby, the uneven development of export crops and the unavoidable localisation of mineral extraction and processing activities. Large-scale mineral and forestry projects normally provide services to the local community in the form of roads, health centres and schools, as well as providing employment opportunities and substantial compensation packages to local communities for land exploitation rights. Regional rivalries and the problem of securing land have also hindered economic migration other than to the major urban centres, where unemployment and crime rates are high.

Economic sectors

Agriculture

Agriculture is the main source The agricultural sector is important both for subsistence and for the export of of income for most people cash crops. The export of agricultural (excluding forestry) commodities, mainly coffee, cocoa, copra and copra oil, palm oil and rubber, accounted for a fifth of total export revenue in 2004, and remains the principal source of livelihood for about 85% of the population. Cash crops are cultivated on large estates as well as on smallholdings. Smallholder production has not kept pace with population growth since independence. The output of large holdings has fallen, partly because of the restrictions imposed by the system of communally held land. There is little processing of agricultural output, although an increasing proportion of copra, and all palm oil, is exported as oil.

The logging industry is Over 70% of the land area of Papua New Guinea (PNG) is covered with forests, struggling and the logging industry, which mainly supplies China, Japan and South Korea, is an important part of the economy. Logging export volume dropped to 1.9m cu metres in 2004 from 2m cu metres in 2003, but this was up slightly from 1.8m cu metres in 2002. The industry, however, faces a number of problems. The debate over the future of PNG’s logging industry has recently intensified, with environmental groups, including Greenpeace, criticising the government’s management of the country’s forestry resources and alleging that the forestry minister, Patrick Pruaitch, has been acting in the interests of logging firms and not resource owners. In reply, Mr Pruaitch has accused the environmental non- governmental organisations of undermining the government’s attempts to expand the economy, and he has stated that logging firms are operating within the plans approved by the government. In May 2005 the World Bank cancelled its Forestry and Conservation Project after it failed to reach an agreement with the government on a number of key issues. The project, which was introduced in 2001 and was supported by a

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World Bank loan of US$17.4m and two Global Environment Facility grants totalling the equivalent of US$17m, had been suspended since 2003.

Fishery resources are extensive PNG has about 8,300 km of coastline and over 600 islands and large rivers. Altogether, PNG’s exclusive economic zone covers an area of 2.4m sq km. The largest fish resource is tuna, but Spanish mackerel, barramundi, crayfish and prawns are also available in large quantities. Freshwater fishing and fish farming have been developed to a small extent. PNG sells tuna-fishing rights to mainly Asian operators. A fraction of the catch is processed onshore for export, but most goes directly to foreign markets. Fish exports are currently valued at around Kina350m-400m (US$110m-125m) annually, according to the National Fisheries Authority (NFA), and have been growing since 1997 at 15-20%. (Lower export values for marine products published by the Bank of Papua New Guinea—the central bank—reflect the fob basis of valuation.) Tuna accounts for the majority of fish exports: annual exports of canned tuna are worth Kina80m (US$22m), those of frozen tuna are worth Kina70m and those of fresh chilled tuna Kina30m. The NFA believes, optimistically, that fisheries exports could reach Kina1bn (US$275m) by end- 2010, depending on market access to the EU and the US.

Mining and semi-processing

Reliance on mining and PNG has a large stock of mineral resources, and the country has become petroleum is high increasingly reliant on mineral exploitation for investment, government revenue and foreign exchange. The 1990s witnessed a boom in the mining and petroleum sector as the Misima, Porgera and Lihir gold mines began production (in 1989, 1990 and 1997 respectively), and the Kutubu, Gobe and Moran oil projects commenced production (in 1992, 1998 and 2001 respectively). New projects are likely to be developed in the next few years, for example at the US$850m Ramu nickel/cobalt deposit in Madang, now owned by the China Metallurgical and Construction Company (CMCC). The mine has an estimated lifespan of 40 years, and should create more than 1,800 jobs. The PNG Gas Project has advanced to the front-end engineering and design (FEED) phase, and the project’s fate could be decided by early 2006.

The government holds stakes The government is an active participant in the mining and petroleum sectors, in mining projects normally exercising its option over 30% of new mineral projects and 22.5% of major petroleum projects. (The government has elected not to exercise its option in the Ramu nickel/cobalt project, allowing CMCC to hold the 85% needed to access concessional finance.) Given the importance of these sectors to the economy, the government has sometimes been heavy-handed in its policy formulation. An example is the fly-in, fly-out tax that directly affects the enclave-based minerals sector and its largely expatriate workforce. Owing to concerns about the lack of exploration activity, in its 2003 budget the government introduced special fiscal terms that were designed to provide an incentive to the industry to explore. The tax rate for new petroleum projects developed before 2018 from prospecting licences issued before 2008 has been reduced from 45% to 30%. The additional-profits tax for mining and the first tier

of the additional-profits tax for petroleum have also been abolished. The changes have had an immediate impact—a total of 50 new exploration licence applications were received in 2004 compared with only 15 in 2003. Other important players in the mining sector are landowner groups. Although the state owns the minerals, oil and gas, their development depends on landowners granting access. Landowners usually receive equity stakes in new projects from the government’s share, as well as royalties that they share with provincial governments. Companies developing new mining sites are also usually required to provide more direct benefits for local residents, in the form of roads and community projects.

Gold mining sector recovers PNG has two major gold mines. The Porgera mine in the Enga Highlands is the longer established of the two, and was due to cease mining in 2006 and to continue processing stockpiled low-grade ore until 2012. Its life has been extended with the addition of 7m oz of proven underground gold reserves. The Lihir gold mine, located on an island off New Ireland, produced its first gold in May 1997 and had an estimated 40-year life, including processing of stockpiled ore, although mining will cease in 2023 at current reserves and production levels. Gold production at the Porgera mine reached about 1m oz in 2004, a sharp recovery from the low level of 560,000 oz in 2002, which resulted from election-related disruptions to the mine’s electricity supply in the third quarter of that year. Lihir’s production, confronted by mining and metallurgical challenges, fell to 550,000 oz in 2003, after exceeding the designed 600,000-oz target in each of the preceding two years, before recovering to design levels of 600,000 oz in 2004. Lihir’s operators expect output to increase to 700,000 oz in 2005 through higher ore grades and increased plant efficiency. A smaller-scale gold mine operates at Tolukuma in Central province. Another, on Misima island in Milne Bay province, closed in May 2004 after 15 years working a deposit that had originally been worked 100 years earlier. There are plans for the development of other gold mines. The Kainantu gold project in the Eastern Highlands is scheduled to come on stream by the end of 2005, producing around 100,000 oz a year. By end-2005 construction should have commenced on the Hidden Valley gold and silver deposit project, in Morobe province, with planned output of 387,000 gold equivalent oz per year over a nine-year mine life.

Ok Tedi is the main operating PNG’s main operating copper mine is at Ok Tedi, in Western Province, and was copper mine run by an Australian firm, BHP, before that company gifted its 52% holding to a trust company for the benefit of PNG and withdrew. Development of the mine took almost eight years and cost US$1.4bn. Ok Tedi also produces gold in concentrate as a by-product. Its life has recently been extended by two years to 2012, partly because of improvements in throughput. Production at another important copper mine, Panguna, on the island of Bougainville, was halted by the secessionist troubles in 1989, now resolved (see Politics: Political background). However, as the mine was a catalyst for the troubles in the first place, there is a danger that reopening it would reignite hostilities. There is also the issue of the huge investment, estimated to be up to US$1bn, necessary to rehabilitate the mine. Furthermore, the name of Bougainville Copper Limited is

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synonymous with the Bougainville conflict. In June 2001 the company announced its intention to sell its mining assets. It is likely that the mine would have a better chance of reopening if it acquired new owners.

Moran output props up crude In December 1990 the government gave US-based Chevron Niugini the oil production go-ahead to develop the Kutubu oilfield at an estimated cost of US$1bn. The development included a 275-km pipeline to a terminal in the Gulf of Papua and a small oil refinery to supply field operations. It came on stream in mid-1992, and provided a boost to PNG’s export sector. This was followed by the development of the Gobe field and, in 2001, of the Moran field. However, oil production is declining rapidly, and current reserves are expected to be exhausted by 2012. In 2003 increased production at the new Moran field compensated for the natural decline in the older fields.

InterOil exports first shipment Shipments of refined petroleum products from the Napa Napa oil refinery, of refined petroleum which is operated by Canada’s InterOil, commenced in August 2004, marking a major step in PNG’s industrial development. The Kina700m (US$225m) refinery received its first shipment of crude oil from the Kutubu sea terminal in neighbouring Gulf province in June. The refinery is targeted to have an annual output of around 12.8m barrels of refined products, around half of which will be exported. In addition to operating the Napa Napa refinery, InterOil’s operations in PNG include retail and commercial distribution. In September 2004 the company opened its first InterOil Products service station in the country. Its assets include three terminals, seven depots and more than 40 retail sites.

There have been two major PNG has significant gas reserves in the Gulf of Papua. The Hides gas and gas discoveries condensate field in Southern Highlands was discovered in late 1987 and has possible gas reserves of 2.2trn cu ft. It generates electricity for the Porgera gold mine. There have been further discoveries of gas/condensate in Elvala and P’nyang in the Papuan basin and in Angore, which is only 19 km from the Hides discovery. There are also gas reserves at Kutubu and other oil projects in PNG. The PNG Gas Project

The exploitation of natural gas reserves may offer the greatest potential for the economy of Papua New Guinea (PNG) in future years. The development of a 2,655-km pipeline that could tap over 6trn cu ft of gas reserves in available fields lies at the centre of plans to fulfil this potential. The pipeline is in three parts: a pipeline from the Kutubu oil- and gasfields in the Southern Highlands province to a point near Kikori on the Gulf of Papua; a coastal gas-processing facility in the Gulf, producing natural gas to be piped to Australia and liquefied petroleum gas for PNG’s domestic and export markets; and a gas pipeline across the Torres Strait seabed to Australia and on to various markets by routes yet to be finalised. The project, which had been stalled at the planning stage for several years, primarily owing to the failure to secure a customer base, progressed to the front-end engineering and design (FEED) phase in early 2005. (The project has proceeded on a revised development plan that makes it potentially viable at lower volumes.) According to PNG-based Oil Search’s chief executive, Peter Botten, the project could commence operations, selling gas to Australian customers, in 2008. Oil Search has a

54% stake in the project. Other stakeholders include the US’s ExxonMobil, PNG’s state-owned Mineral Resources Development Corporation and Japan’s Nippon Oil. Manufacturing

Manufacturing growth has The manufacturing sector’s share of GDP has changed little since been slow independence, remaining at about 9%. There are two broad categories of manufacturing in PNG: the processing of agricultural products for export, and the transformation of imported inputs into final products (mainly food, packaging and building materials) for the domestic market. Low growth in agricultural processing reflects slow growth in crop production (itself owing to barriers to private financing posed by the system of communal property rights in land) and limited scope for viable downstream processing. However, the country’s biggest palm oil producer, New Britain Palm Oil, has begun producing refined palm oil, mainly for export. A proposal for a cocoa processing factory to be financed by a 30% levy on the export of cocoa beans is being staunchly resisted by grower groups. A small, fragmented and low-growth domestic market constrains the “other manufacturing” sector.

Protection has not promoted Although generous tariff protection and, in some cases, quantity restrictions on manufacturing growth imports enabled industries to establish themselves, this protection did not promote growth. Since PNG joined the Asia-Pacific Economic Co-operation (APEC) forum, most such tariffs and restrictions have been lowered or removed. Under the reform programme three tariff rates were struck—a 20% standard rate, a 30% protective rate and a prohibitive rate of 45%. The programme requires these rates to fall to 15%, 25% and 40% respectively in 2006. Exceptions to this broad regime include sugar (70%), wood products (75%) and salt (40%). The government has so far resisted calls to retard the rate of decline in tariffs, but is considering reviving the Industry Assistance Board to consider requests for continuing protection on a case-by-case basis.

Construction

Construction is heavily Construction industries contribute about 5% of GDP (this figure is estimated, dependent on mineral projects owing to the difficulty in evaluating free and low-paid inputs in rural projects). To a large extent, the construction industry is dependent on projects in the minerals sector. Public infrastructure projects such as roads, ports and airports are also important, and major aid projects funded by multilateral and bilateral agencies have concentrated on these sectors. In recent years the lion’s share of road expenditure has been absorbed by the national capital, Port Moresby, where it is least needed.

Demand for low-cost housing The number of new buildings under construction has fluctuated widely from goes unmet year to year. Demand for housing has been constrained to some extent by the shortage of available land and the reluctance of banks to grant long-term credit. A non-bank provider of home finance closed down in June 2001, owing to a lack of business. Even so, construction lagged behind demand for low- and medium-cost housing, partly as a result of over-concentration on high-cost units at a time when the rate of migration to urban areas was high.

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Construction activity in Port Port Moresby is expecting a building boom in 2005, following a long period of Moresby is set to pick up low activity, stimulated by low office vacancy rates, high bank liquidity and low interest rates. (However, expected demand for premium residential rental properties stemming from the Australian Economic Co-operation Programme has been stymied by the recent collapse of the scheme.) Projects include a Kina50m (US$15.5m) Japanese embassy building and a Kina2.5m fit-out by the EU to its premises in the newest of the city’s office towers. Two office blocks of six and nine stories costing Kina15m and Kina20m respectively are also in the pipeline. The Public Officers’ Superannuation Fund plans to build 36 home units for Kina23m on Touaguba Hill overlooking down-town Port Moresby and its harbour, as well as two low-cost developments for its members. On another front, Port Moresby’s 30-year-old sewerage system could be set for a US$60m upgrade funded by the Japanese government on highly concessional terms.

Financial services

Banking sector is small but The financial services sector in PNG, although relatively sophisticated, is small profitable and mainly urban-based. As economic growth is derived mainly from major resource developments financed offshore, banking sector credit to the private sector has remained stagnant since the early 1990s. The credit policies of the formal financial sector are cautious. They favour large clients (many of which are subsidiaries of foreign firms) and short-term financing, particularly in the form of government securities (at end-2004 short-term government securities constituted 40% of the asset base of commercial banks). Bank lending is further hindered by the difficulties of land registration, low population density (which increases transaction costs) and security concerns. Many commercial banks were encumbered with substantial bad loans following the poor performance of the plantation sector in the 1980s and the Bougainville crisis, which began in 1989. Despite this, and in contrast to most private-sector businesses, PNG’s banking sector has posted record profits in recent years, the result of strong government demand at high interest rates together with healthy foreign- exchange earnings.

Bank South Pacific is the The most important commercial banks are Bank South Pacific, Westpac Banking dominant commercial bank Corporation (PNG) and Australia New Zealand Banking Group (PNG). Bank South Pacific accounts for more than half of the sector’s assets, following its merger with the previously state-owned Papua New Guinea Banking Corporation (PNGBC) under the government’s privatisation programme. Before privatisation PNGBC had by far the largest branch network, covering all the urban centres, whereas the operations of most other banks have been traditionally confined to the wealthier provincial capitals. There are also merchant banks and a number of finance companies, which had combined assets of Kina377m (US$120m) at end-2004. Savings and loan societies are important for small savers and borrowers; their funds totalled Kina228m at end-2004, up from Kina140m at end-2003. The Investment Corporation of PNG aims to increase the participation of PNG citizens in business, both in existing foreign- owned enterprises and in new businesses. It is the most important wholly government-owned financing organisation. There are also two pension funds,

the Public Officers’ Superannuation Fund and its private-sector equivalent, NasFund (formerly National Provident Fund, the subject of a commission of enquiry into huge losses a few years ago, from which it has recovered strongly).

The stock exchange is fairly The long-awaited Port Moresby Stock Exchange opened for public trading in insignificant June 1999 with one listed company, a diversified PNG retailer, Steamships Trading. A second company, Oil Search, the largest holder of oil and gas reserves in PNG, listed soon after, followed by Orogen Minerals (which merged with Oil Search in 2002) and Lihir Gold. A total of 13 stocks are now listed. Trading is usually sluggish. Some of the listed companies, including Steamships, Oil Search and Lihir, already trade actively on the Australian Stock Exchange. In 2004 total market capitalisation of the Port Moresby Stock Exchange expanded by 21% to Kina11.7bn (US$3.6bn). The volume of stocks traded in 2004 totalled nearly 7m shares, with a value of Kina12.2m (US$3.8m), compared with turnover of only around 3m shares worth Kina7.8m in 2003.

Other services

Tourism remains hampered by The tourism industry has great potential, particularly in niche markets such as a range of problems adventure, ecotourism and diving. However, potential visitors have been deterred by the high cost of visiting the country and, more importantly, by PNG’s serious problems of law and order. In 1995 it was estimated that there were about 42,500 foreign visitor arrivals, and this figure increased to over 60,000 between 1996 and 1998, partly because of cost savings resulting from the depreciation of the kina. The number of foreign visitors has since fallen back to around 54,000 in 2001 and 2002, and more than 56,000 in 2003. Of the visitor total in 2003, around 63% were travelling on business, 26% on holiday and the remainder mainly visiting friends and relatives. The largest source of visitors to PNG is Australia (around 55% in 2003), followed by Japan. The government-owned airline, Air Niugini, recorded a 10.3% year-on-year expansion in domestic passengers and a 7.5% rise in international passengers in 2004. Many tourists now arrive on cruise ships, and about 15 such vessels visit every year. Bougainville has reopened as a tourist destination after a 12-year break. The tourism sector is dominated by a few large, mostly expatriate-owned operators, which have developed impressive facilities in various parts of the country. Small-scale indigenous activity is limited, and is often extremely expensive for the standard of service provided. The administration of Sir Michael Somare has included tourism in its export drive, with the aim of restoring the country’s battered economy.

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The external sector

Trade in goods

Foreign trade, 2004 (Kina m) Merchandise exports (fob) 8,151 Merchandise imports (cif) -5,409 Trade balance 2,743

Source: IMF, International Financial Statistics.

Large merchandise trade The merchandise trade balance has been in substantial surplus since 1992, surpluses have been recorded primarily as a result of the rapid expansion in mining, petroleum and forestry export production in the early 1990s, and later because of a domestic economy depressed by the weakening kina following the float in 1994. The trade surplus fell sharply in late 1997 and early 1998 as a result of the drought induced by the El Niño climatic phenomenon, which affected both agricultural and mining production. The merchandise trade surplus (fob-cif) deteriorated again in 2002, according to the IMF, falling to Kina1.9bn (US$488m at the average exchange rate in 2002), but picked up strongly in 2003, rising to Kina3.2bn, before dropping to Kina2.7bn in 2004.

Climatic conditions are In 1995 and 1996 favourable weather conditions, and high world commodity important to the export sector prices, contributed to improvements in export earnings from agricultural products. The drought in Papua New Guinea (PNG) in 1997 and early 1998 hit the agricultural sector hard, and PNG’s Cocoa Board noted that cocoa trees would not recover from the drought until June 1998. The drought also caused a temporary halt in output from both the Ok Tedi and Porgera mines, as they need water for transportation and the production process. In 1997 the volume of exported copper consequently fell by almost 40%. Low water levels in the Fly River, in Western Province, also disrupted exports of copper concentrate from Ok Tedi in September-November 2002. According to the IMF, export revenue expanded to Kina7.8bn in 2003 and Kina8.2bn in 2004, up from around Kina6.4bn in 2002. High world commodity prices and increased output both contributed to the buoyancy of export values in 2003-04.

Main exports, 2004 Kina m % of total Gold 2,755.9 33.9 Crude oil 1,625.2 20.0 Copper 1,544.2 19.0 Palm oil 438.7 5.4 Logs 324.6 4.0 Coffee 283.8 3.5 Cocoa 218.0 2.7 Total incl others 8,130.7 100.0

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

Gold accounts for the biggest Minerals (mainly gold and copper) and crude oil account for the majority of share of export revenue export revenue. In 2004 these exports made up 73% of the total, with gold

alone accounting for 34%. In 2000 gold and crude oil each made up around 34% of total exports, but since then the proportion of exports accounted for by crude oil has deteriorated, falling to around 20% in 2004. The agricultural sector accounted for 21% of total exports in 2004, with palm oil, coffee and cocoa recording the largest shares. Forestry products made up 5% of total exports in 2004, and marine products less than 2%.

Imports are closely related to The value of merchandise imports has generally been closely related to the construction trends construction phases of major mining and petroleum projects, and to changes in the exchange rate. Mining sector imports fell by almost 25% in 1997, owing mainly to the completion of the Lihir gold mine, whereas imports associated with the oil industry increased from Kina34m (US$7m) to Kina108.9m, reflecting materials needed for the Gobe oil project. From 1998 to 2004 the kina value of imports continued to increase, but imports declined in US-dollar terms during most of the period, reflecting the weakening trend in the exchange rate. Merchandise imports (cif basis) increased marginally in 2003 to Kina4.6bn, before rising by 17% to Kina5.4bn in 2004, according to the IMF.

Australia remains by far the Much of PNG’s merchandise trade is conducted with Australia—around 52% of largest trade partner imports and 25% of exports in 2003, according to the IMF. After Australia, Singapore supplies the most imports, at around 20% of the total in 2003. Additional important sources of imports are New Zealand, China and Japan. Other major export markets are Japan, China, and a number of European countries. In 2003 Japan accounted for around 7% of PNG’s exports, while China was the destination for nearly 6%.

Main trading partners, 2003 Exports fob to: % of total Imports cif from: % of total Australia 25.3 Australia 51.5 Japan 7.1 Singapore 20.1 China 5.9 New Zealand 7.5 Germany 3.5 China 4.8 UK 2.5 Japan 3.7 Indonesia 1.9 Malaysia 3.1

Source: IMF, Direction of Trade Statistics.

Invisibles and the current account

Current account, 2004 (Kina m) Trade balance 3,448 Services balance -2,402 Income balance -1,320 Transfers balance 584 Current-account balance 310

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

The deficit on the invisibles The trade account has been in surplus since 1992, but there have been account grows continuous and growing deficits on the services and income accounts (in kina terms). Income account outflows have increased as payments on interest, profit

and dividends (profit and dividends are related to the overseas investments in PNG’s mining sector) have risen. This increase has been only partly offset by the consistent surplus on transfers, which is related to aid flows, mainly from Australia and increasingly also Japan.

The current account returns to After several years of surpluses, the current account recorded a deficit of surplus in 2003-04 Kina167m (US$116m at the average 1997 exchange rate), about 2.4% of GDP (as measured by national sources), in 1997. This was mainly because of the reduction in the size of the trade surplus, resulting from the effect of the drought on exports. The current account returned to surplus in 1998, at a level of Kina124m, and the surplus more than trebled in 1999 on the back of higher exports and high kina export prices for most of PNG’s export commodities. It more than trebled again to Kina973m in 2000, before falling slightly to Kina943m in 2001. In 2002 the current account fell back into the red, recording a deficit of Kina502m, primarily owing to a smaller merchandise trade surplus. However, the current account posted a surplus of Kina496m in 2003, reflecting an impressive improvement in the merchandise trade account, before slipping back to a surplus of Kina310m in 2004.

Capital flows and foreign debt

The capital account has mainly In 1996 a surplus of Kina58m (US$44m at the average exchange rate in 1996) been in deficit was recorded on the capital account, the first in seven years. This was the result of several factors: the inflow of proceeds from the public float of half of the government-owned resource holding company, Orogen Minerals; the com- mencement of investment in the Lihir gold mine; and the repatriation of some funds held offshore. Another surplus in 1997 was followed by a deficit of Kina364m in 1998, which was driven by higher net private-capital outflows that reflected short-term loan repayments by the mineral companies. According to the central bank, the Bank of Papua New Guinea (BPNG), the capital account deficit expanded to Kina650m in 2000 as mineral companies and the government increased loan repayments. Multilateral and bilateral support for the country’s economic reform programme reduced the deficit on the capital account to Kina264m in 2001, and then produced a rare surplus of Kina320m in 2002. In 2003 the capital and financial account balance dropped back to a deficit of Kina183m, according to the BPNG, which narrowed in 2004 to Kina18m. The net capital outflow in 2004 resulted from short-term money- market investments and hedging transactions by mineral companies, which more than offset equity investments and a drawdown of offshore balances.

Australia continues to provide Aid flows remain an important source of external funding. Foreign grants from large amounts of aid all sources represented 21% and 19% of total receipts in 2002 and 2003, respectively, but fell to 12% in 2004 as government development spending was lower than planned. The country does not fully utilise foreign aid because the government finds it increasingly difficult to fund its share of projects. Australian aid is particularly important. Before independence, the share of Australian aid in total government revenue was close to 60%, but after a series of five-year agreements and unilateral decisions by the Australian government, the flow of aid has been gradually reduced. Despite some debate in Australia

over its government’s aid policy to PNG, the amount of aid committed to PNG in the Australian government’s fiscal year 2004/05 (July-June) budget was similar to that in recent years, at around A$300m (US$220m at the average exchange rate in 2004). Under the Extended Co-operation Programme, Australia had agreed to provide a further A$200m per year over four years, mainly to fund the deployment of 300 Australian police, justice and treasury personnel in PNG. However, the programme came to a premature end in May 2005, less than a year after it had been implemented.

The foreign debt burden has According to the World Bank, total external debt has falling steadily in recent been fairly stable years, dropping to below US$2.5bn in 2003 from around US$2.7bn at end-1999. As most of PNG’s external debt is denominated in US dollars, the depreciation of the kina in the late 1990s raised the cost of borrowing from overseas considerably. Between 1993 and 2002 the government drew down and repaid approximately equal amounts of foreign debt, but the foreign debt level (in Kina terms) more than doubled from Kina2.7bn in 1998 (around US$1.3bn at the 1998 average exchange rate) to Kina5.6bn in 2002 (US$1.4bn at the 2002 average exchange rate), as a result of unrealised currency losses. The weakening of the US dollar during 2003 resulted in unrealised currency gains, the first full-year gains since 1994. These gains, together with net loan repayments, reduced outstanding public-sector foreign debt to Kina4.7bn at end-2003 and Kina4.3bn at end-2004, according to the BPNG.

External debt (US$ m; debt stocks as at year-end) 2003 % of total Long-term debt 2,227 90.5 Public & publicly guaranteed 1,500 61.0 Private non-guaranteed 727 29.5 Short-term debt 111 4.5 Use of IMF credit 122 5.0 Total external debt 2,460 100.0

Source: World Bank, Global Development Finance.

Foreign reserves and the exchange rate

Foreign-exchange reserves Foreign-exchange reserves, which in 1978 were equivalent to over ten months rebound of total imports, had been nearly exhausted by mid-1994, causing the authorities to float the kina. Reserves had picked up to the equivalent of 6.3 months of imports by end-1996, but the drought-related current-account deficit in 1997, together with slower investment flows, reduced import cover to 1.9 months by September 1999. A US$80m swap arrangement with the Reserve Bank of Australia (RBA, Australia’s independent central bank) in December 1999, followed by multilateral support for economic reforms and a solid trade performance, boosted reserves to US$287m by end-2000, equivalent to 5.4 months of non-mining imports. By end-2001 further multilateral support, coupled with lower import demand (the product of a contracting economy and rising import prices), had strengthened reserves to US$423m (equivalent to 8.7 months of non-mining imports). However, reserves dropped to US$322m at end-2002, partly owing to the central bank’s defence of the kina in late 2002. In

2003 the reserves position again improved, reaching US$494m by the end of the year, largely in line with the strong export performance and the central bank’s participation in the foreign-exchange market. This trend continued in 2004 and reserves ended the year at US$633m, equivalent to 6.7 months of non- mining imports.

The kina regains ground The currency was floated in October 1994. In its first year of trading it fell by against the US dollar almost 17% against the US dollar from Kina0.98:US$1 to Kina1.18:US$1. After its flotation, the currency became vulnerable to the changes in PNG’s external trade position, the domestic political scene and other shocks. In the late 1990s and early 2000s the El Niño-induced drought, low world commodity prices and political turmoil all had a negative impact on the currency. However, in line with the general weakness of the US dollar, the kina rebounded in 2003, rising to an average of Kina3.55:US$1 and appreciating by a further 9.8% year on year in 2004. It ended 2004 at Kina3.13:US$1. The kina has nevertheless continued to slide against the Australian dollar, depreciating by an annual average of 8.7% in 2003 and 2% in 2004.

Regional overview

Membership of organisations

The Pacific Islands Forum The Pacific Islands Forum (PIF) is the most important regional organisation. It was formerly known as the South Pacific Forum, which in turn developed from the South Pacific Bureau for Economic Co-operation, established more than 40 years ago. The forum officially adopted its new name at its annual meeting in 2000, recognising that not all of its members were in the “South” Pacific since the admission of former US trust territories north of the equator. The forum was created in 1971 in response to the spread of self-government in the region and the need of the new states for a political forum. The current members are Australia, the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea (PNG), the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu and Vanuatu. The forum meets each year at head-of-state/government level, and immediately after the meeting ministers spend two days in consultation with the “forum dialogue partners”—Canada, China, the EU, France, Japan, Malaysia, the Philippines, South Korea, the UK, the US and (from 2000) Indonesia. A separate session is held with Taiwan by the five forum-member countries that recognise it as a sovereign nation. A Forum Secretariat with a staff of about 70 is based in Suva, the capital of Fiji. It administers a series of programmes aimed at promoting regional co-operation among member states through trade, investment, economic development, and political and international affairs. It has also developed a growing portfolio of technical training programmes as part of broader initiatives for institutional strengthening, good governance and accountability. Operations are funded by contributions from member governments and donors. Current donors are the dialogue partners together with Australia, New Zealand, the Commonwealth Secretariat and Germany. Since October 1994 the forum has had observer status at the UN General Assembly. During early 2004 a review was held of the PIF’s functions; it is possible that a rather more integrated Pacific Federation could emerge. The PIF’s secretary-general is now an Australian, Greg Urwin. The issues agreed for discussion at the 2003 and 2004 annual summits give an indication of the future direction of debate. Central to the agenda are issues such as pooled regional governance, greater co-operation on regional air transport, security and crossborder crime, and the role of foreign aid, as well as the perennial issues of climate change and the impact of globalisation and trade liberalisation on small island economies. A specially convened meeting of the PIF's 16 government leaders in Auckland, New Zealand in April 2004 agreed on a "Pacific Plan" to achieve closer political and economic co-operation between PIF members and to intensify the efforts of the Fiji-based PIF secretariat in implementing leaders' wishes. For the first time the PIF secretary- general has the authority, in consultation with the incumbent PIF chair, to call meetings of leaders or foreign ministers for speedy action in dealing with a crisis. Some regional officials had hinted before the meeting that the PIF could be turned into an EU-style institution, although the idea was quickly dismissed

by several island leaders as premature and probably unworkable given the region's huge geographic spread, the small size and weakness of most of the island economies, scant resources, and barriers such as high transport and energy costs and cultural differences.

The Pacific Community A second regional organisation is the Pacific Community (formerly the South Pacific Commission), formed in 1947 by Australia, France, the Netherlands, New Zealand, the UK and the US. These countries were the colonial powers in the region at that time, and they insisted that the organisation be non-political, dealing only with technical issues and matters of practical co-operation. It now has 26 members and continues as a non-political body, offering technical advice, assistance, training and research. Its headquarters are in Nouméa, the capital of New Caledonia, with a substantial presence in Suva. It is a bilingual (English and French) organisation with a staff of around 175 and a limited budget, which is augmented by special funding for particular projects. It has an integrated work programme based around the development of the region’s land-based, marine-based and human resources. Of particular note is the Pacific Community’s Ocean Fisheries Programme.

Asia-Pacific Economic APEC started life as a forum for informal discussion between six members of Co-operation (APEC) forum the Association of South-East Asian Nations (ASEAN), Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and their six dialogue partners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea and the US. In 1991 China, Hong Kong and Taiwan became members, followed by Mexico and Papua New Guinea in 1993 and Chile in 1994. Peru, Russia and Vietnam joined in 1998. APEC describes itself as "the primary vehicle for promoting open trade and practical economic co-operation" in the region, with the goal of advancing "Asia-Pacific economic dynamism and sense of community". APEC has had a permanent secretariat since 1992, and also runs four permanent committees—on budget and managerial issues, trade and investment, economic trends generally, and economic and technical co-operation. In addition, there are 11 working groups—on agricultural technical co-operation, energy, fisheries, human resources, industrial science and technology, marine resource co-operation, small and medium-sized enterprises, telecommunications, tourism, trade promotion and transport. There is also an APEC business advisory council (ABAC), which includes up to three senior private-sector representatives from each member country. APEC as a whole has its headquarters in Singapore, while ABAC is based in the Philippines. APEC's main business is done at annual meetings of member states' ministers of fo re ign affairs and e cono mic affairs, whi ch are fol lowe d by i nfo rmal gatheri ngs of members' heads of state. Every other ministerial meeting is held in a South- east Asian country. The chairmanship of the forum rotates on a yearly basis. During the 1990s APEC’s star first waxed brighter and then started to wane. The high point was probably reached in 1994, when members agreed a timetable for the liberalisation of trade across the region: the ambitious aim was to eliminate all trade barriers by 2020, and then to extend reciprocal concessions to non-members. In 1995 and 1996 APEC debated how best to achieve this target, but discussions in 1997 and 1998 were driven off course by the regional

financial crisis. APEC’s response to the crisis—generally worded exhortations to member states to develop financial and capital markets, and so on—was far from convincing and signalled the inherent weaknesses of the organisation. Subsequent meetings also provided other distractions from the trade liberalisation theme: East Timor in 1999, information technology in 2000 and security (following the September 11th terrorist attacks on the US) in 2001. Discussion returned to trade relations in 2002, but was only very general in nature. The 2003 meeting in the Thai capital, Bangkok, made little further progress, concluding with broad commitments to multilateral trade and investment liberalisation and to improving regional security arrangements. These commitments were reiterated by the November 2004 meeting, held in the Chilean capital, Santiago. The meeting’s communiqué also acknowledged the growing number of regional and bilateral trading arrangements (without condemning or commending them), and touched in the most general way on contemporary problems such as maritime security and HIV/AIDS. The unfortunate conclusion to be drawn from recent meetings is that APEC has in effect gone back to its roots and become an informal talking shop, giving up all aspirations to be a serious regional reformer.

Other regional organisations The secretary-general of the Forum Secretariat chairs the Council of Regional Organisations of the Pacific (CROP). CROP brings together the PIF, the Pacific Community and six other regional organisations: the Forum Fisheries Agency (based in Honiara, Solomon Islands); the Pacific Islands Development Programme (based in Hawaii); the South Pacific Regional Environment Programme (based in Apia, Samoa); the South Pacific Applied Geoscience Commission (based in Suva); the South Pacific Tourism Organisation (also based in Suva); and the University of the South Pacific (based in Suva, but with campuses and centres throughout the region). A further regional organisation, although narrower in membership than either the PIF or the Pacific Community, is the Melanesian Spearhead Group (MSG), which brings together the Solomon Islands, PNG, Vanuatu, Fiji and the New Caledonia independence coalition, the Front de Libération Nationale Kanak Socialiste. The MSG aims to promote co-operation between members in economic, political and cultural matters, and is implementing a free-trade agreement between its members.

Appendices

Sources of information

National statistical sources Bank of Papua New Guinea, Annual Report, Port Moresby Bank of Papua New Guinea, Quarterly Economic Bulletin, Port Moresby Department of Mining and Petroleum, Quarterly Bulletin Ministry for Treasury and Planning, Economic & Development Policies, Volume 1, 2005 budget papers

International statistical sources Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries, 2004 IMF, Direction of Trade Statistics (quarterly and annual) IMF, International Financial Statistics (monthly) IMF, Papua New Guinea: Selected Issues and Statistical Appendix, November 2004 OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual) UN Development Programme, Human Development Report World Bank, Global Development Finance (annual) World Bank, World Development Report

Select bibliography and Sean Dorney, Papua New Guinea: People, politics and history since 1975, Random websites House, Australia, 1990 Ila Temu (ed), Papua New Guinea: A 20/20 Vision, National Centre for Development Studies and National Research Institute, Australia, 1997 Isabella Tree, Islands in the clouds: travels in the highlands of New Guinea, Lonely Planet Publications, 1996 Adrian Lipscomb et al, Papua New Guinea: a travel survival kit, Lonely Planet Publications, Australia, 1998 Suzanne Campbell-Jones and Meg Sheffield, Destination Papua New Guinea, Port Moresby, 1995 Australian Agency for International Development (AusAID): www.ausaid.gov.au Department of Finance and Treasury: www.treasury.gov.pg Post Courier newspaper: www.postcourier.com.pg Prime minister’s office: www.pm.gov.pg The Independent newspaper: www.niugini.com/independent/ The National newspaper: www.thenational.com.pg UN Food and Agriculture Organisation, Statistics Database: www.fao.org/

Reference tables

These reference tables provide the most up-to-date statistics available at the time of publication.

Populationa (m unless otherwise indicated) 1999 2000 2001 2002 2003 Total 5.21 5.33 5.46 5.59 5.71 % change, year on year 2.6 2.3 2.4 2.4 2.1 a Mid-year estimates. Source: IMF, International Financial Statistics.

Formal employment in the private sector by industry (Mar 2002=100 unless otherwise indicated; period averages) 2000 2001 2002 2003 2004 Retail 102.8 100.6 98.2 99.9 100.7 Wholesale 115.0 102.7 102.8 113.4 117.0 Manufacturing 108.8 99.5 102.5 107.5 112.2 Building & construction 128.0 92.9 90.5 98.7 96.7 Transport 103.2 99.4 106.3 105.8 107.9 Agriculture, forestry & fisheries 103.8 102.2 104.1 119.0 117.5 Financial & business 106.2 100.5 102.9 108.4 111.1 Mining 103.4 96.9 98.8 97.6 102.3 Total excl mining 106.5 100.6 102.2 109.9 111.1 % change, year on year 1.5 -5.5 1.6 7.5 1.1

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

Central government finances (Kina m unless otherwise indicated) 1999 2000 2001 2002 2003 2004 Total revenue 2,569 3,009 3,185 3,231 3,610 3,940 Tax 1,921 2,315 2,294 2,370 2,678 3,220 Non-tax (incl foreign budgetary grants) 648 694 891 861 932 719 Total expenditure 2,801 3,201 3,544 3,682 3,734 3,706 Recurrent expenditure 2,066 2,352 2,425 2,542 2,695 2,802 Development expenditure 736 849 1,119 1,140 1,039 904 Budget balance -232 -192 -360 -450 -124 234 % of GDP -2.6 -2.0 -3.7 n/a n/a n/a

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

Central government revenue (Kina m) 2000 2001 2002 2003 2004 Tax revenue 2,315 2,294 2,370 2,678 3,220 Taxes on income & profit 1,470 1,509 1,487 1,787 2,223 Personal tax 544 599 690 758 827 Company tax 692 687 570 731 1,071 Other direct taxes 234 223 227 297 326 Excise duties 294 295 296 285 327 Taxes on international trade 223 172 191 186 177 Value-added tax 218 198 290 312 316 Other indirect tax 110 120 107 110 178 Non-tax revenue 187 172 170 240 240 Total internal revenue 2,502 2,466 2,540 2,917 3,460 Foreign grants 507 719 691 693 479 Total revenue & grants 3,009 3,185 3,231 3,610 3,940

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

Central government expenditure (Kina m) 2000 2001 2002 2003 2004 Recurrent expenditure 2,352 2,425 2,542 2,695 2,802 National departmental 1,243 1,242 1,357 1,192 1,557 Provincial governments 564 589 588 595 672 Interest payments 420 433 437 740 376 Foreign 136 181 188 161 138 Domestic 284 253 248 579 238 Other grants & expenditure 128 165 165 178 208 Net lending & investments -2 -4 -5 -10 -10 Development expenditure 849 1,119 1,140 1,039 904 Total expenditure 3,201 3,544 3,682 3,734 3,706

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

Gross domestic product (market prices) 1998 1999 2000 2001 2002 Total (Kina m) At current prices 7,789 8,781 9,515 9,948 10,992 At constant (1983) prices 3,635 3,804 3,757 3,670 3,639 % change, year on year -1.1 4.6 -1.2 -2.3 -0.8 Per head At current prices (US$) 1,533 1,685 1,785 1,822 1,966 At constant (1983) prices (Kina) 662 730 705 672 651 % change, year on year -9.5 10.3 -3.4 -4.7 -3.1

Sources: IMF, International Financial Statistics; Ministry of Finance and Treasury.

Gross domestic product by sector (Kina m; current market prices) 1998 1999 2000 2001 2002 Agriculture 2,430 2,521 2,544 2,429 3,034 Oil & gas extraction n/a 818 1,137 1,118 847 Mining & quarrying 1,639 1,269 1,525 1,909 1,984 Manufacturing 722 798 795 797 938 Electricity & other utilities 88 100 113 118 137 Construction 370 364 374 383 429 Commerce 710 834 830 858 989 Transport & storage 386 430 420 488 504 Finance & real estate 81 289 321 358 381 Community & social services (incl defence) 1,045 1,096 1,134 1,283 1,438 GDPa 7,789 8,781 9,515 9,948 10,992 Non-mining & petroleum GDP 6,224 6,694 6,852 6,921 8,161 a Sum of sectors less imputed bank service charges, plus import duties minus subsidies. Source: Ministry of Finance and Treasury.

Gross domestic product by expenditure (Kina m; constant 1998 prices) 1998 1999 2000 2001 2002 Private consumption 4,629.7 5,626.5 4,406.9 4,900.2 4,825.4 Government consumption 1,409.3 1,397.8 1,449.0 1,551.7 1,552.1 Gross fixed capital formation 1,090.7 1,033.7 1,784.4 1,887.1 1,833.8 Change in stocks 306.7 364.6 129.0 159.9 167.0 Exports of goods & services 3,942.3 3,640.0 3,831.4 4,230.2 4,167.7 Imports of goods & services 3,575.1 4,114.2 3,850.6 4,988.4 4,885.2 GDP 7,803.6 7,948.3 7,750.2 7,740.7 7,660.9

Source: National Statistics Office.

Money supply (Kina m unless otherwise indicated; year-end) 2000 2001 2002 2003 2004 Currency in circulation 285 272 366 399 420 Demand deposits 987 1,049 1,169 1,309 1,795 M1a 1,272 1,321 1,535 1,708 2,215 % change, year on year 3.1 3.9 16.2 11.3 29.7 M3b 3,747 3,905 4,270 4,233 5,075 % change, year on year 7.1 4.2 9.7 -0.9 19.9 a Notes and coins in circulation plus demand deposits. b M1 plus savings deposits, term deposits and other items (net). Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Consumer prices 2000 2001 2002 2003 2004 Index 1977=100 Food 518.5 568.2 665.2 753.5 757.4 Drink, tobacco & betelnut 649.8 737.1 806.0 920.7 940.3 Clothing & footwear 375.9 419.8 457.0 478.2 490.4 Rents, council charges, fuel & power 242.2 257.2 265.1 281.1 301.0 Household equipment 488.4 497.6 531.4 606.5 604.7 Transport & communications 848.3 898.9 995.8 1,216.0 1,242.2 Others 374.9 402.7 400.4 458.8 532.7 All groups 546.1 596.8 667.3 765.4 782.0 % change, year on year Food 13.6 9.6 17.1 13.3 0.5 Drink, tobacco & betelnut 18.3 13.4 9.3 14.2 2.1 Clothing & footwear 15.7 11.7 8.9 4.6 2.6 Rents, public charges, fuel & power 7.4 6.2 3.1 6.0 7.1 Household equipment 13.6 1.9 6.8 14.1 -0.3 Transport & communications 18.2 6.0 10.8 22.1 2.1 Other 16.5 7.4 -0.6 14.6 16.1 All groups 15.6 9.3 11.8 14.7 2.2

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

Commercial production and value of forestry, agriculture and marine resources (export data) 2000 2001 2002 2003 2004 Logs ‘000 cu metres 1,398.5 1,212.2 1,834.0 2,016.0 1,859.0 Kina m 283.5 234.3 365.5 369.6 324.6 Coffee ‘000 tonnes 66.6 51.6 63.1 68.8 63.0 Kina m 294.8 188.8 201.9 298.5 283.8 Palm oil ‘000 tonnes 336.3 327.6 323.9 326.9 339.0 Kina m 306.6 290.5 389.9 421.3 438.7 Cocoa ‘000 tonnes 38.0 36.5 34.9 40.3 41.5 Kina m 84.6 110.3 226.3 257.7 218.0 Copra oil ‘000 tonnes 48.0 27.1 28.2 47.7 45.1 Kina m 65.8 27.3 33.3 67.4 81.0 Copra ‘000 tonnes 67.2 46.4 15.8 8.4 19.2 Kina m 59.9 15.5 10.7 6.5 17.2 Marine products ‘000 tonnes 1.8 5.1 15.6 17.8 7.9 Kina m 33.7 77.2 94.1 125.3 58.2 Tea ‘000 tonnes 8.5 8.8 5.2 6.6 8.1 Kina m 20.4 22.0 18.1 19.3 22.9 Rubber ‘000 tonnes 3.7 3.6 3.8 4.2 3.8 Kina m 6.4 6.8 8.8 12.3 13.8 Note. Break in series from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Commercial production and value of major minerals and petroleum (export data) 2000 2001 2002 2003 2004 Gold Tonnes 72.8 69.1 59.1 68.4 66.2 Kina m 1,950.8 2,115.1 2,294.8 2,811.2 2,755.9 Copper ‘000 tonnes 126.8 170.1 170.1 230.6 173.9 Kina m 595.4 859.1 1,017.7 1,415.0 1,544.2 Crude oil ‘000 barrels 23,629.2 21,369.7 15,370.5 14,983.4 12,395.1 Kina m 1,921.7 1,889.4 1,431.2 1,631.9 1,625.2 Note. Break in series from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Foreign trade (Kina m) 2000 2001 2002 2003 2004 Merchandise exports (fob) 5,813 6,077 6,387 7,862 8,152 Merchandise imports (cif) -3,196 -3,633 -4,442 -4,617 -5,409 Trade balance 2,617 2,444 1,945 3,245 2,743

Source: IMF, International Financial Statistics.

Main exportsa (Kina m; fob; % change year on year in brackets) 2000 2001 2002 2003 2004 Agricultural 955.5 801.1 1,084.9 1,390.8 1,688.0 (-18.0) (-16.2) (35.4) (28.2) (23.9) Forest products 308.8 310.9 414.1 416.0 427.7 (16.1) (0.7) (33.2) (0.5) (2.9) Logs 283.5 234.3 365.5 369.6 324.6 (10.9) (-17.4) (56.0) (1.1) (-12.2) Marine products 33.7 77.2 94.1 125.3 58.2 (10.9) (129.1) (21.9) (33.2) (-53.6) Minerals (incl silver) 4,494.6 4,895.6 4,774.0 5,890.0 5,956.8 (27.5) (8.9) (-2.5) (23.4) (1.1) Gold 1,950.8 2,115.1 2,294.8 2,811.2 2,755.9 (26.2) (8.4) (8.5) (22.5) (-2.0) Copper 595.4 859.1 1,018.7 1,415.0 1,544.2 (3.7) (44.3) (18.6) (38.9) (9.1) Crude oil 1,921.7 1,889.4 1,431.2 1,631.9 1,625.2 (39.0) (-1.7) (-24.3) (14.0) (-0.4) Total 5,792.6 6,084.8 6,367.1 7,822.1 8,130.7 (16.2) (5.0) (4.6) (22.4) (3.9) a Break in series from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Main trading partners (US$ m) 1999 2000 2001 2002 2003 Exports fob to: Australia 734 843 646 645 1,009 Japan 325 317 279 252 256 China 78 182 111 145 210 Germany 185 117 106 77 127 UK 71 78 54 67 90 Indonesia 40 7 11 60 67 US 127 36 39 88 64 Imports fob from: Australia 608 553 522 536 559 Singapore 146 222 194 205 253 New Zealand 47 43 41 48 94 China 29 25 19 27 61 Japan 64 45 47 46 47 Malaysia 41 38 28 32 39 Indonesia 33 33 28 30 38

Source: IMF, Direction of Trade Statistics.

Balance of payments, national series (Kina m) 2000 2001 2002 2003 2004 Merchandise exports 5,813 6,105 6,387 7,842 8,151 Merchandise imports -2,779 -3,165 -4,197 -4,231 -4,703 Trade balance 3,034 2,940 2,190 3,611 3,448 Services credit n/a n/a 630 829 629 Services debit n/a n/a -2,640 -3,092 3,031 Services balance n/a n/a -2,010 -2,263 -2,402 Income credit n/a n/a 106 58 62 Income debit n/a n/a -894 -1,757 1,382 Income balance n/a n/a -788 -1,699 -1,320 Transfers credit n/a n/a 334 1,137 821 Transfers debit n/a n/a -229 -290 -237 Transfers balance n/a n/a 106 847 584 Current-account balance 973 943 -502 496 310 Direct investment n/a n/a 74 371 83 Portfolio investment n/a n/a -5 -166 -349 Financial derivatives n/a n/a 0 83 -31 Other investment n/a n/a 251 -470 279 Capital & financial account balance -650 -264 320 -183 -18 Net errors & omissions 36 29 -57 40 42 Overall balance 359 708 -239 353 334 Note. Data presented in new format from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Net official development assistance (US$ m) 1999 2000 2001 2002 2003 Bilateral 212.3 268.6 198.0 197.1 218.8 Australia 155.5 198.2 158.2 180.4 208.9 New Zealand 8.7 6.7 6.8 5.9 7.7 Japan 37.1 55.8 26.2 4.4 -3.1 Germany 3.0 3.9 3.3 3.2 2.5 Multilateral 3.9 5.2 1.7 6.1 2.2 Asian Development Bank 3.6 0.2 -3.0 -1.3 -1.6 EU 0.0 0.6 4.3 4.9 3.3 UN Development Programme -0.1 2.0 0.3 1.6 0.9 Total incl net flows from Arab countries 216.0 275.4 203.1 203.3 220.8

Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients.

Public debt outstanding (Kina m; debt stocks as at year-end) 2000 2001 2002 2003 2004a Domestic (incl other loans) 1,783.3 2,115.1 2,588.3 3,022.9 3,181.4 Treasury bills 1,577.2 1,748.8 2,169.1 2,755.3 2,236.2 Inscribed stock 206.1 366.3 283.8 174.7 898.0 External 3,838.3 4,982.2 5,594.6 4,709.1 4,314.4 International agencies 3,683.5 4,822.0 5,464.1 4,547.8 4,118.5 Commercial loans 137.5 140.3 107.4 135.9 183.1 Other loans 17.3 19.8 23.1 25.4 12.8 Total public debt 5,621.6 7,097.3 8,182.9 7,732.0 7,495.8 a Preliminary. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end) 1999 2000 2001 2002 2003 Total external debt 2,690 2,590 2,500 2,480 2,460 Long-term debt 2,580 2,500 2,330 2,300 2,227 Public & publicly guaranteed 1,520 1,490 1,400 1,482 1,500 Private non-guaranteed 1,060 1,010 932 818 727 Short-term debt 98 50 68 64 111 Interest arrears on long-term debt 0 0 0 0 0 Use of IMF credit 22 39 108 116 122 Public & publicly guaranteed long-term debt 1,520 1,490 1,400 1,480 1,500 Official creditors 1,450 1,430 1,330 1,390 1,410 Multilateral 919 863 852 895 898 Bilateral 530 567 481 497 512 Private creditors 68 60 65 87 94 Banks 53 54 63 87 94 Bonds 0 0 0 0 0 Total debt service 182 282 264 273 286 Principal 126 197 190 208 217 Interest 56 85 74 65 69 Ratios (%) Total external debt/GNP 70.4 75.7 82.8 90.8 89.9 Debt-service ratioa 9.7 12.9 12.7 15.0 11.9 Short-term debt/total external debt 3.6 1.9 2.7 2.6 4.5 Concessional long-term debt/total long-term debt 36.8 35.5 32.0 34.9 36.2 Note. Long-term debt is defined as having original maturity of more than one year. a Debt service as a percentage of earnings from exports of goods and services. Source: World Bank, Global Development Finance.

Foreign reserves (US$ m unless otherwise indicated; end-period) 2000 2001 2002 2003 2004 Foreign exchange 274.5 413.6 315.0 489.9 631.9 SDRs 12.2 8.7 6.1 3.7 0.7 Reserve position in the IMF 0.2 0.4 0.5 0.6 0.7 Total reserves excl gold 286.9 422.7 321.5 494.2 633.3 Gold (national valuation) 9.1 7.4 21.9 25.2 28.5 Total reserves incl gold 296.0 430.1 343.4 519.4 661.8 Memorandum items Commercial banks’ foreign assets 95.8 112.2 153.1 106.7 116.6 Commercial banks’ foreign liabilities 18.1 24.2 26.0 16.9 21.9 Commercial banks’ net foreign assets 77.7 88.0 127.1 89.8 94.7 Import cover Months of total imports 4.0 6.1 4.2 4.9 5.3 Months of non-mining imports 5.4 8.7 6.2 6.1 6.7

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

Exchange rates (Kina per foreign currency unit; period averages) 2000 2001 2002 2003 2004 A$ 1.598 1.826 2.110 2.312 2.369 US$ 2.780 3.360 3.887 3.551 3.225 ¥ (100) 2.563 2.768 3.097 3.118 2.982 £ 4.151 4.829 5.817 5.804 5.903 € 2.544 3.011 3.652 4.016 4.006 SDR 3.625 4.167 5.023 4.975 4.776

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

Editors: Danny Richards (editor); Gerard Walsh (consulting editor) Editorial closing date: June 28th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]