Papua New Guinea

Country Report

Papua New Guinea

Papua New Guinea at a glance: 2005-06

OVERVIEW The governing coalition, led by the prime minister, Sir Michael Somare, should have a large enough parliamentary majority to defeat a possible no-confidence motion when parliament resumes. However, the political scene remains unsettled. By contrast, the economic outlook is fairly positive. Inflationary pressures are easing, and improvements in agriculture and mining output should contribute to steady real GDP growth in 2005-06. The current account will swing into deficit in 2005 as weak export revenue combines with higher imports related to mining activity and infrastructure projects.

Key changes from last month Political outlook • Although there is a question mark over whether an application for a vote of no confidence will be approved upon parliamentrs return in November, there is clearly a limit to the governmentrs stalling tactics. Sir Michael, however, should be able to secure the simple majority that would be required to defeat a no-confidence motion. Economic policy outlook • The finance minister, Bart Philemon, has said that the budget for 2005, which has yet to be announced, will continue to show fiscal restraint with across-the-board expenditure cuts. Economic forecast • The kina continues to appreciate against the US dollar, and by early October it was trading at around Kina3.12:US$1 compared with Kina3.30:US$1 in January. In 2004 as a whole the kina will average around Kina3.20:US$1, reflecting an appreciation of nearly 12% year on year.

October 2004

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Contents

Papua New Guinea

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

15 Economic policy

20 The domestic economy 20 Economic trends 21 Oil and gas 23 Mining 24 Agriculture, fisheries and forestry

25 Foreign trade and payments

List of tables

8 International assumptions summary 10 Forecast summary 15 Central government finances 16 Public debt outstanding 18 Money supply 19 Quarterly inflation 20 Exchange rates 22 Mineral exports by volume 24 Agricultural exports by volume 25 Exports 26 Balance of payments

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List of figures 12 Papua New Guinea: gross domestic product 12 Papua New Guinea: consumer price inflation 18 Papua New Guinea: interest rates 21 Papua New Guinea: exchange rate, 2004 22 Papua New Guinea: Kutubu oil prices 27 Papua New Guinea: foreign-exchange reserves

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Papua New Guinea October 2004 Summary

Outlook for 2005-06 The governing coalition, led by the prime minister, Sir Michael Somare, should have a large enough parliamentary majority to defeat a possible no-confidence motion when parliament resumes. However, the political scene remains unsettled. By contrast, the economic outlook is fairly positive. Inflationary pressures are easing, and improvements in agriculture and mining output should contribute to steady real GDP growth in 2005-06. The current account will swing into deficit in 2005 as weak export revenue combines with higher imports related to mining activity and infrastructure projects.

The political scene The National Alliance-led coalition government has been successful in preventing the opposition from launching a motion of no confidence. In addition to adjourning parliament, the government has employed other controversial tactics to frustrate the opposition. The opposition members of parliament (MPs) have boycotted parliamentary sessions to protest against rulings determining where they should sit in the houseat least five political parties have MPs claiming to be on opposite sides of the house. The UN has agreed to a final extension of its mission in Bougainville. The Enhanced Co- operation Programme with Australia has commenced.

Economic policy The IMF has commended the government on its progress in stabilising the economy. The governmentrs fiscal position has improved; in the first half of 2004 it recorded a budget surplus. The Bank of Papua New Guinea (the central bank) has eased it monetary policy stance by cutting its leading indicator interest rate. The governmentrs efforts to sell the telecommunications company, Telikom PNG, have proved controversial.

The domestic economy The employment level has continued to rise. Inflation has slowed further and the kina has strengthened. Crude oil production and export volume have declined, but prices have reached record highs. The Highlands Gas Project has received a boost from plans by an Australian alumina refinery plant to change from coal to gas fuel. Gold output at the Lihir goldmine has risen, but copper shipments have been curtailed. Coffee and cocoa exporters have enjoyed mixed results.

Foreign trade and payments In the first half of 2004 export revenue increased steadily, and the import bill dropped slightly in kina terms. The current account remains in surplus and foreign-exchange reserves have picked up. Editors: Danny Richards (editor); Graham Richardson (consulting editor) Editorial closing date: October 4th 2004 All queries: Tel:(44.20)7830 1007 E-mail:[email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Independent State of Papua New Guinea

Form of state Constitutional monarchy

Head of state Queen Elizabeth II, represented by the governor-general, who is nominated by the national parliament. Sir Silas Atopare vacated the position in October 2003, and Sir Paulius Matane was sworn in on June 29th

The executive The National Executive Council, presided over by the prime minister, has executive powers; the prime minister is proposed by parliament and appointed by the head of state

National legislature Unicameral national parliament of 109 members elected for a period of five years (currently comprises 103 members, with elections having been declared void in six seats); of the total, 89 members represent "open" constituencies, and the remainder represent 19 provincial constituencies and the capital district

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

Legal system A series of regional and magistratesr courts leading to a Supreme Court at the apex

National elections June-July 2002; the next elections will be in 2007

National government Sir Michael Somare, the leader of the National Alliance (NA), was elected prime minister by parliament in August 2002

Main political organisations National Alliance (NA); Peoplers Democratic Movement (PDM); Peoplers National Alliance (PNA); United Resources Party (URP); Peoplers Progress Party (PPP); Pangu Pati (PP); PNG Party; Advance PNG Party (APP); Peoplers National Congress (PNC)

Main members of the National Prime minister Sir Michael Somare Executive Council Deputy prime minister Vacan t

Key ministers Agriculture Mathew Siune Defence Mathew Gubag Education Michael Laimo Environment William Duma Finance & treasury Bart Philemon Foreign affairs Rabbie Namaliu Forestry Patrick Pruaitch Health Melchior Pep Inter-government relations Peter Barter Internal security Bire Kimisopa Justice Mark Maipakai Mining Sam Akoitai Petroleum & energy Moi Avei State enterprises & information Puka Temu Tourism & culture David Basua Trade & industry Paul Tiensten Works Gabriel Kapris

Central bank governor Wilson Kamit

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Economic structure

Annual indicators 2000a 2001a 2002a 2003b 2004b GDP at market prices (Kina bn) 9.7b 10.4b 11.5b 13.5 14.4 GDP (US$ bn) 3.5b 3.1b 3.0b 3.8 4.5 Real GDP growth (%) -1.2 b -2.3 b -0.8b 1.8 2.3 Consumer price inflation (av; %) 15.6 9.3 11.8 14.7a 3.4 Population (m) 5.3 5.5 5.6 5.7a 5.8 Exports of goods fob (US$ m) 2,094.1 1,812.9 1,639.7 2,200.7 2,494.7 Imports of goods fob (US$ m) 998.8 932.4 1,077.5 1,187.3 1,299.9 Current-account balance (US$ m) 345.3 282.0 -129.1 139.2 73.0 Foreign-exchange reserves excl gold (US$ m) 286.9 422.6 321.5 494.2a 626.2 Total external debt (US$ bn) 2.6 2.5 2.5 2.6 2.5 Debt-service ratio, paid (%) 12.9 12.7 15.2 15.1 15.7 Exchange rate (av) Kina:US$ 2.78 3.39 3.90 3.56a 3.19 a Actual. b Economist Intelligence Unit estimates.

Main origins of gross domestic product 2002 % of total Components of gross domestic product 1999 % of total Agriculture 26.9 Private consumption 69.7 Industry 41.6 Government consumption 16.9 Mining 28 Investment 16.4 Services 31.5 Exports of goods & services 47.3 Imports of goods & services 50.4

Principal exports fob 2003 US$ m Principal imports cif 1994 US$ m Gold 789 Machinery & transport equipment 552 Crude oil 458 Manufactured goods 313 Copper 397 Food & live animals 216 Palm oil 117 Chemicals 92

Main destinations of exports 2003 % of total Main origins of imports 2003 % 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

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Quarterly indicators 2002 2003 2004 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4Qtr 1 Qtr 2 Qtr Prices Consumer prices (2000=100) 125.6 130.0 139.0 140.3 140.4 141.0 143.0 143.0 Consumer prices (% change, year on year) 12.2 14.8 20.7 18.9 11.8 8.5 2.9 1.9 Financial indicators Exchange rate Kina:US$ (av) 3.99 4.14 3.79 3.66 3.44 3.36 3.30 3.21 Exchange rate Kina:US$ (end-period) 4.02 4.02 3.66 3.55 3.38 3.33 3.25 3.22 M1 (end-period; Kina m) 1,571 1,630 1,652 1,678 1,759 1,897 1,774 n/a M1 (% change, year on year) 22.2 15.0 7.9 3.6 11.9 16.4 7.4 n/a M2 (end-period; Kina m) 3,220 3,312 3,259 3,147 3,196 3,298 3,111 n/a M2 (% change, year on year) 4.1 4.0 1.2 -4.5 -0.8 -0.4 -4.5 n/a Sectoral trends, exports Copra ('000 tonnes) 4.8 0.7 1.9 2.4 1.3 2.8 4.9 4.2 Copra oil ('000 tonnes) 6.5 11.6 9.3 14.4 12.8 11.2 7.6 11.7 Cocoa ('000 tonnes) 8.9 10.5 8.1 13.6 10.1 8.5 10.4 9.0 Coffee ('000 tonnes) 25.9 17.8 7.9 14.5 28.3 18.1 8.2 17.3 Logs ('000 cu metres) 409 621 543 478 488 507 495 433 Gold (tonnes) 11.9 16.1 17.1 14.6 17.9 18.8 17.7 17.0 Fish ('000 tonnes) 1.4 2.7 6.4 6.8 4.1 0.5 2.7 1.0 Oil, crude ('000 barrels) 3,607 3,632 3,748 4,107 4,272 2,857 3,268 3,791 Foreign trade & reserves Exports fob (Kina m)a 1,571 1,780 2,038 1,875 1,922 2,007 1,971 2,103 Gold 494 737 717 585 726 784 726 686 Oil, crude 371 404 473 441 419 300 352 473 Imports fob (Kina m)a -1,119 -1,103 -1,083 -1,072 -1,001 -1,075 -1,032 -1,067 Trade balance (Kina m) 452 677 955 803 921 932 939 1,036 Foreign reserves (US$ m) Reserves excl gold (end-period) 362.0 321.5 313.7 340.4 400.9 494.2 487.5 n/a a Balance-of-payments basis. Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; IMF, International Financial Statistics.

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Outlook for 2005-06

Political outlook

Domestic politics Although the prime minister, Sir Michael Somare, has so far managed to avoid facing a vote of no confidence, the political scene in Papua New Guinea (PNG) remains unstable. Sir Michael is the first prime minister to lead an administration since the enactment of the Organic Law on the Integrity of Political Parties and Candidates, which in theory stabilises the government by preventing individual members of parliament (MPs) from being enticed away from the party to which they were affiliated upon election. However, this has not been the case, and at least five political parties are now believed to have split, with some of their MPs now in government and some in opposition. This makes it difficult to estimate with any certainty the level of support that Sir Michael commands. Despite this uncertainty, Sir Michael should be able to secure the simple majority that would be required to defeat a no-confidence motion. Sir Michael has been functioning under the threat of such a motion since February 2004. However, his adept political manoeuvring, primarily through a series of timely parliamentary adjournments, has so far thwarted the oppositionrs efforts. The latest adjournment, called in early August amid reports that MPs had taken weapons into the parliamentary complex, entails the suspension of parliament until November 2nd. In effect, it means that the no- confidence issue has been avoided for another three months. The oppositionrs last attempt to secure a no-confidence motion was rejected on "technical grounds". This was no surprise, given that the government had previously removed all opposition members from the Private Business Committee, the body that deliberates on parliamentary motions. Although there is a question mark over whether the application for a vote of no confidence will be approved upon parliamentrs return, there is clearly a limit to the governmentrs stalling tactics. A motion will probably be granted eventually, not necessarily because the opposition parties put forward a credible argument, but simply because the protagonists face no risk or constraint in pursuing such a motion. The government, particularly Sir Michael, faces all of the risk. Sir Michael will therefore attempt to continue to play for time in the hope that the Constitutional Development Committee comes up with a proposal on the no-confidence issue that will change parliamentary dynamics in his favour. Although Sir Michael is expected to remain in office, the political scene will remain fractious in 2005-06, preventing effective government. The recent focus on no-confidence motions and a number of subsequent adjournments means that the government has made little progress in dealing with social and law- and-order issues, which continue to prevent the country from embarking on a path towards sustained development. Security is particularly poor in the Southern Highlands province, home to large oil- and gasfields. Although the government decided recently not to declare a state of emergency in the

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province and suspend the powers of the provincial government, such action could be taken if security threats in the region intensify.

International relations PNGrs relations with Australia will remain on a firm footing in 2005-06, boosted by the recent commencement of the Kina2bn (US$625m) Enhanced Co- operation Programme (ECP). Under the ECP, aside from providing aid (currently of around US$200m a year), Australian officials will take up senior public- sector positions, and 210 Australian police officers will be deployed to help to improve law and order. The first group of officers arrived in Bougainville in late August. The deal had been under threat owing to differences of opinion over legal immunity for Australian officials deployed to PNG. By resolving this issue, the foreign affairs minister, Sir Rabbie Namaliu, and his Australian counterpart, Alexander Downer, have been keen to demonstrate the strong ties that exist between the two countries. However, the recent discord between the two sides appears to have encouraged PNG to make efforts to move away from its traditional dependence on Australia. For example, PNG has made progress in improving diplomatic and economic ties with China.

Economic policy outlook

Policy trends The governmentrs performance in maintaining economic stability has earned it the praise of the IMF and has enabled the Bank of Papua New Guinea (BPNG, the central bank) to adopt a more accommodative monetary policy stance. There remain some contentious policy issues though, most notably plans to sell state assets, including the telecommunications company, Telikom PNG, and a rigorous retrenchment programme. The government has confirmed its commit- ment to both policies, but some backsliding is possible. The government has been growing increasingly frustrated with its failure to obtain funds from multi- lateral donors, owing to problems in meeting donor conditions attached to the disbursement of funding. However, the government also appears to have been inefficient in drawing down aid commitments. As a result, the government earlier this year announced its intention to tap the international bond market for the first time, to raise US$100m-200m for development. However, political pressure over the high cost of this method of financing and the probable difficulty in attracting interest from international investors will limit the like- lihood of such a venture being successful.

Fiscal policy The governmentrs fiscal position is expected to show continued improvement in 2004, with the budget deficit estimated to drop to around 0.3% of GDP, down from 0.9% in 2003 and 3.9% in 2002. Although planned expenditure cuts that were promised in the 2003 budget were missing in the 2004 budget, the government has maintained a tight grip on recurrent expenditurein the first half of 2004 recurrent expenditure dropped slightly year on year and was equivalent to around 43% of the full-yearrs budget. The finance and Treasury minister, Bart Philemon, has said that the budget for 2005, which has yet to be announced, will continue to show fiscal restraint with across-the-board expenditure cuts. Budget revenue has been fairly robust, with tax receipts rising by nearly 12% year on year in the first half of 2004 and equivalent to nearly 50% of the full-year budgeted amount. Continued economic growth in 2005-06

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should bring some further improvement in tax receipts. One area of concern remains the slow pace of expenditure on development projects. In the first half of 2004 the government spent only 20% of its full-year development expenditure budget, of which around 35% is set aside for financing much- needed infrastructure projects. Foreign grants therefore remain weak; the government needs to speed up counterpart spending in order to facilitate the disbursement of international aid.

Monetary policy The BPNG has eased its monetary policy stance over the past year, with the kina facility rate (KFR, the official interest rate used to indicate its monetary stance) falling to 9% in September down from a high of 16% in mid-2003. Looser monetary policy has been made possible this year by lower inflation, the strength of the kina and the governmentrs prudent fiscal policy. Lower interest rates in turn have benefited the budget position. Given that the government is keen to stimulate private-sector activity by reducing interest rates, and assuming that inflation and the budget deficit remain under control, the central bank will probably maintain a fairly accommodative monetary policy stance in 2005-06, and commercial bank lending rates are expected to fall.

Economic forecast

International assumptions Papua New Guinea: international assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 4.9 4.3 4.0 OECD 2.1 3.5 2.7 2.5 EU25 1.1 2.4 2.5 2.2 Exchange rates ¥:US$ 115.9 108.9 107.5 106.0 US$:€ 1.132 1.226 1.285 1.288 SDR:US$ 0.714 0.680 0.664 0.663 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.38 US$ 3-month commercial paper rate 1.10 1.40 3.00 4.94 Commodity prices Oil (Brent; US$/b) 28.8 36.1 32.0 28.0 Gold (US$/troy oz) 362.8 421.3 375.0 337.5 Food, feedstuffs & beverages (% change in US$ terms) 6.6 8.6 -4.2 8.9 Industrial raw materials (% change in US$ terms) 12.8 20.2 -0.3 -3.6 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. The pace of world GDP growth (at purchasing power parity) will slow in 2005-06 to around 4.1% a year from 4.9% in 2004. At an annual average GDP growth rate of around 5.9%, Asia and Australasia (excluding Japan) will enjoy the fastest rate of expansion of any world region in 2005-06. Although Japanrs GDP growth is forecast to slow to around 1.6% a year in 2005-06 from 4.2% in 2004, these overall trends bode well for PNG, given that around 40% of the countryrs exports head for Australia, China and Japan. PNGrs exporters have benefited from rising crude oil and gold prices, which together account for

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more than 50% of the countryrs exports, but prices for both commodities will fall back in 2005-06. A major risk to PNGrs economy remains its vulnerability to such swings in international prices for its leading export commodities.

Economic growth Without regularly published GDP data, it is difficult to estimate with any confidence the actual performance of the economy so far this year. Although the governmentrs most recent estimate of real GDP growth of 2.8% in 2004 is probably optimistic, economic activity in the mining and petroleum sectors has picked up and agricultural output (based on actual export volumes) has been fairly robust for most commodities. There are some concerns, however, over recent abnormal weather conditionsunprecedented heavy rains in Port Moresby, pervasive cold temperatures and devastating winds in the island regions. The National Weather Office has therefore warned that the country could face another El Nino-related drought, which most recently occurred in 1997 and plunged the country into extreme dry conditions for a full year. Despite such concerns, the outlook for the economy in 2005-06 is fairly bright, with GDP forecast to grow by more than 2% annually. On the output side, mineral exploration is reviving from negligible levels after a decade of decline. In terms of specific projects, the Napa Napa oil refinery commenced operations in June, more oilfields in the Moran project will come on stream in the second half of this year and construction of the Kainantu goldmine is expected to be completed in the second half of 2005. On the expenditure side, looser monetary policy and firm prices for most agricultural commodities should ensure that private consumption and investment grow steadily in 2005-06.

Inflation Annual consumer price inflation has eased markedly and is estimated to average around 3.4% this year, down from 14.7% in 2003. The sharp drop in the rate of increase in the consumer price index is largely the result of the recent strength of the kina and fairly stable food prices, which account for over 40% of the consumer price index basket. The outlook for inflation in 2005-06 is fairly positive compared with the high rates in recent years. This primarily reflects the improvement in the governmentrs fiscal regime. After tightening its monetary policy stance in 2003, which contributed to the recent easing of inflation, the central bank is now adopting a looser policy to help to support economic growth. Although this may contribute to a pick-up in inflationary pressures over the next year or so, assuming that the government maintains a tight hold on its fiscal operations and the kina remains fairly stable, annual inflation will remain in single digits in 2005-06.

Exchange rates The kina has continued to appreciate against the US dollar, and by early October it was trading at around Kina3.12:US$1, compared with Kina3.30:US$1 in January. The kina has also strengthened against the Australian dollar, partly reflecting the depreciation of the Australian dollar against the US dollar from the highs recorded in early 2004. The Economist Intelligence Unit expects the kina to weaken slightly against the US dollar in late 2004 and into 2005, owing to inflows into the mining sector and the agricultural recovery. We consider a significant weakening of the kina unlikely, given that the forecast deterioration in the current account will be partly offset by stronger foreign direct investment receipts. Indeed, international reserves will remain high compared with the

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level in recent years, thereby enabling the BPNG to intervene in the currency market to provide support for the kina when necessary. Therefore, the kina is expected to remain fairly stable in 2005-06.

External sector In line with the high prices received for PNGrs main exportsgold, crude oil and copperand fairly weak demand for imports, the merchandise trade surplus is estimated to reach around US$1.2bn this year. However, in 2005 and 2006 prices for these leading export commodities will decline: global crude oil prices are expected to fall by an annual average of 12%, gold prices by 11% and copper prices by 7%. In line with these trends and the forecast expansion in the import bill (owing to increased mining-related imports in particular), the merchandise trade surplus will deteriorate over the next two years, falling to below US$900m in 2006. The combined deficit on the services and income accounts will remain fairly stable in US dollar terms in 2005-06, averaging around US$1.3bn, and the current transfers surplus will remain fairly healthy. The overall current-account position will therefore mainly reflect trends in the merchandise trade account: in 2004 the current account will remain slightly in surplus, but will drop back into deficit in 2005 and widen in 2006.

Papua New Guinea: forecast summary (% unless otherwise indicated) 2003a 2004a 2005b 2006b Real GDP growth 1.8 2.3 2.2 2.3 Gross agricultural production growth 1.5 2.8 2.3 2.5 Consumer price inflation (av) 14.7c 3.4 7.3 8.7 Consumer price inflation (year-end) 8.4c 5.0 9.0 8.0 Short-term interbank rate 13.4c 12.7 12.0 11.0 Government balance (% of GDP) -0.9 -0.3 -1.1 -1.0 Exports of goods fob (US$ bn) 2.2 2.5 2.4 2.4 Imports of goods fob (US$ bn) 1.2 1.3 1.4 1.5 Current-account balance (US$ bn) 0.1 0.1 -0.2 -0.2 Current-account balance (% of GDP) 3.7 1.6 -4.0 -4.6 External debt (year-end; US$ bn) 2.6 2.5 2.4 2.4 Exchange rate Kina:US$ (av) 3.56c 3.19 3.25 3.40 Exchange rate Kina:¥100 (av) 3.075c 2.932 3.023 3.208 Exchange rate Kina:€ (year-end) 4.20c 3.87 4.47 4.38 Exchange rate Kina:SDR (year-end) 4.95c 4.62 5.18 5.21 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

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The political scene

The government manages to The ruling National Alliance coalition has frustrated attempts by the opposition avoid no-confidence motion to oust the prime minister, Sir Michael Somare, through a no-confidence motion. The governmentrs success has been based on its ability to use its parliamentary strength to adjourn parliament at key junctures. After resuming on July 26th, the government adjourned parliament on August 3rd, immediately before opposition parties entered the chamber. (Parliament will resume on November 2nd.) The leader of government business, Patrick Pruaitch, claimed "overwhelming" security threats to members of parliament (MPs) as the reason for the adjournment. Sir Michaelrs argument was that the three monthsr adjournment was reasonable after parliament had satisfied the constitutional sitting requirement for the 12-month period ending July 29th. However, his calculations differ from those of the Ombudsman Commission, which had warned, subsequent to the adjournment from July 9th to July 26th, that by the end of the 12-month period parliament would have sat for only 57 days, six short of the constitutional requirement. The commission already has a case before the Supreme Court concerning this matter, and it is reportedly considering filing another in relation to the current adjournment. In addition to adjourning parliament, the government has adopted other controversial tactics to avoid facing a no-confidence motion. Its most effective move has been stacking the parliamentary Private Business Committee with government members. This committee vets notices of motions of private memberrs bills, including those concerning no-confidence motions. On July 7th Paias Wingti, an independent MP and a former prime minister, who proposed the motion nominating Peter OrNeill, the leader of the opposition and the Peoplers National Congress (PNC), as alternate prime minister supported by 11 other signatures. However, his proposal was rejected by the committee because it did not have a seconder. The following day the motion (with Bill Skate, the former parliamentary speaker, as seconder) was rejected again because it was handed to the clerk of parliament and not the chairman of the committee as stipulated under standing orders. Mr Wingtirs appeal to the Supreme Court to invalidate the committeers rejection was also rejected.

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Opposition MPs boycott The governmentrs ability to adjourn parliament was made easy by opposition parliamentary sessions MPs boycotting parliamentary sessions. Opposition parties claim to have 47 MPs, but this is difficult to verify because they have boycotted parliament during recent sittingsonly Mr OrNeill, Mr Skate and Mr Wingti graced opposition benches, probably to monitor government activity. On August 3rd the opposition parties arrived at parliament en masse and proceeded to a conference room to put the finishing touches to their strategy to push for a no- confidence motion. They entered the parliamentary chamber late only to find that parliament had been adjourned until November 2nd. The opposition claims that it boycotted parliament, not to mask the thinness of its ranks, but to protest against the parliamentary speaker, Jeffrey Nape, who determined where they sat in the chamber. A number of parties have members in both government and opposition, and Mr Nape has ruled that some opposition members must sit with government in accordance with political-party resolutions.

Political party instability In a recent media interview, the registrar of political parties, Paul Bengo, remains a problem claimed that many MPs do not fully comprehend the Organic Law on the Integrity of Political Parties and Candidates, with the split of five parties Peoplers Progress Party (PPP); United Resources Party (URP); PNG Party; Pangu Pati (PP); and Peoplers Action Party (PAP)going against the spirit of the law. Mr Nape has also determined that eight URP members are independents, thereby recognising only the mining minister, Sam Akoitai, and Chimbu regional MP, Peter Launa, as members of the party. The determination was immediately rejected by Tim Neville. The partyrs leadership has been in dispute since Mr Neville took a group of independents into the URP and wrested leadership away from Mr Akoitai. Mr Nape claims that the independents joined the party after the revised integrity law, which closed off this option, came into effect; Mr Neville claims that the shift happened before then. In another case of party instability, the government claims the loyalty of seven PAP MPs; the opposition claims four. The opposition faction of PAP is challenging the appointment of higher education minister, Brian Pulayasi, as a replacement for Moses Maladina as party leader.

Sir Michael sacks his deputy In the lead-up to parliamentrs resumption on July 26th, both the government designate and opposition appeared confident that they would prevail in any future no- confidence debate. Sir Michaelrs confidence, however, was dealt a blow in early August following the receipt of the resignation of Mr Maladina, the then leader of the PAP, from the posts of minister of agriculture and deputy prime minister. Doubting the authenticity of the resignation and suspecting Mr Maladinars involvement in a plot to topple him, Sir Michael sacked Mr Maladina from his new post as national planning minister, a move that was then supported by Mr Maladinars party sacking him as leader. The government suspected that the opposition would attempt to suspend standing orders, paving the way for the notice of the no-confidence vote to be dealt with directly by parliament. Presumably, the government was surprised by its good fortune, when opposition MPs failed to show up on time on August 3rd and were thereby

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unable to prevent parliament from being adjourned. Mr OrNeill was quick to remind Sir Michael that his ruse had only bought time.

Forum asks for new The National Development Forum, an annual meeting of the government, ombudsman powers business and civil society groups, recently called for increased powers and funding for the Ombudsman Commission, leadership tribunals and law, order and justice institutions. The commission, which receives more than 3,000 complaints a year, had previously made futile attempts to get the previous parliament to increase the dismissal-from-office penalty for guilty politicians from three to ten years. It is now seeking powers to prosecute, owing to the fact that its investigations are conducted in confidence, and prosecuting institutions to which it refers cases have to initiate their own investigations. The forum also recommended that leadership tribunals have the discretion to determine the disqualification period from public office and restitution powers to repossess the properties of those found guilty of stealing public money. The strongest monetary penalty under the current law is a fine not exceeding Kina1,000 (US$330).

UN agrees to final extension of The UN has allowed its observer mission on Bougainville to remain until the Bougainville mission end of 2004 on the clear understanding that, given its growing commitments elsewhere, this would be "the final extension". Both levels of government have expressed satisfaction with progress on the Bougainville constitution and weapons disposal. It is thought that only 72 weapons remain to be destroyed. The situation concerning Francis Ona, the leader of the secessionist Bougainville Revolutionary Army, is still unclear. Although he did not declare any weapons to the UN mission, some of his men surrendered their weapons, and these have been destroyed. The UN mission must declare completion of the weapons disposal before elections for an autonomous Bougainville can proceed. The final draft of the constitution is reported to be ready for the constituent assembly. From there it will pass to the national executive council and ultimately the national parliament. Meanwhile, police presence and activities are being stepped up, with Bougainville leaders and the police commander in Bougainville exercising responsibilities following the delegations of police powers made late last year. The first batch of 50 Bougainvillean police personnel has graduated from the police training college in the capital, Port Moresby, and will be replaced by another 50 recruits.

The Enhanced Co-operation The first contingent of 18 Australian federal police (AFP) officers has been Programme commences deployed under the five-year Enhanced Co-operation Programme (ECP). The officers initially undertook pre-deployment training in language, cultural awareness and operational regulations in Port Moresby. Nine members of the police contingent were subsequently deployed to Buna, Alawa and Buin on Bougainville. The other nine will join them after a brief return to Australia. Three female officers of the first group will work with local women. By March 2005 a total of 210 AFP officers, along with 64 other public servants, are scheduled to be in PNG. Eight of the public servants are already working in the finance ministry and seven in the Treasury. Under phase one of the agreement,

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the Australian officers, apart from the Bougainville contingent, will be stationed in Port Moresby. When the PNG police commissioner is satisfied with improvements in the cityrs policing, including in finance, human resource, logistics and internal investigation departments, the officers will be deployed to Lae, Mount Hagen and the Highlands Highway. The ECP was agreed in December 2003, but it was only approved by PNGrs parliament in July 2004 following the Australian governmentrs acceptance of joint legal oversight instead of legal immunity for the Australian officials deployed to PNG, which Australia had initially required. However, there remains some opposition to the programme in its current form. The Morobe governor, Luther Wenge, who was the lone dissenter when parliament voted on the matter, wants to fast-track a special Supreme Court reference challenging the constitutionality of the economic package. The mayor of Tari in the Southern Highlands province, claiming that firearms are already being amassed in the province in readiness for the 2007 elections, wants some of the AFP stationed there, as they are in Bougainville. Others lament the concentration in the major towns, pointing to pervasive rural lawlessness. Tenants in downtown Port Moresby are also complaining of rents doubling as suitably located, high- rise or compound-style housing is sought for the influx of expatriates.

Economic policy

The IMF commends the The IMF has commended the government on its recent performance and has government's performance pledged to continue providing technical support. In late July the IMFrs deputy managing director, Augustin Carstens, visited PNG and met with the prime minister, Sir Michael Somare, and a number of government ministers. He said that he had been impressed by the governmentrs progress in restoring macroeconomic stability, particularly in reducing inflation and bringing down the budget deficit. During an address to the joint Board of Governors of the IMF and World Bank in early October, the finance minister, Bart Philemon, said that the government was continuing with its structural reform programme, which focuses on promoting good governance, sustaining macroeconomic stability, improving public-sector performance and removing impediments to business and investment. The governmentrs relations with the IMF were strained in the 1990s, but have improved in recent years. In late 2001, under the administration of Sir Mekere Morauta, the government completed for the first time a standby arrangement with the IMF.

A budget surplus is recorded in The central government recorded a surplus of Kina157m (US$52m) in the first the first half of 2004 half of 2004, equivalent to 1.2% of nominal GDP and marking a strong improvement compared with the deficit of Kina19m recorded in the year-earlier period. The government received around Kina1.6bn (US$525m) in revenue and grants and spent around Kina1.4bn. Despite rising by 12% year on year, the governmentrs total revenue in the first half was only equivalent to around 42% of the total amount budgeted for the full year. Tax revenue performed fairly well, reaching around 49% of the full-year target, but non-tax revenue and foreign grants receipts were equivalent to only 42% and 18.5% of the full-year budgeted amounts, respectively. In addition to the strong year-on-year increase

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in government revenue, the budget surplus recorded in the first half reflected the slow pace of expenditure. In the first half only 36% of the full-year budget had been spent, with expenditure remaining practically unchanged from the amount recorded in the year-earlier period. The government spent 43% of the full-year budget for recurrent expenditure in the first half, but only 20% of the development budget owing to slow project implementation and shortfalls in counterpart funding.

Papua New Guinea: central government finances (Kina m) 2002 2003 2004 Jan-Jun 2004 Outturn Outturn Budget Outturna Total receipts 3,231.3 3,610.2 3,837.1 1,601.8 Tax revenue 2,370.3 2,678.0 2,791.8 1,362.7 Personal tax 689.9 758.3 815.0 398.7 Company tax 570.2 731.0 712.4 315.8 Value-added tax 289.6 311.8 313.3 151.3 Non-tax revenue 169.9 239.2 195.6 81.8 Foreign grants 691.4 693.0 849.7 157.3 Expenditure 3,681.5 3,734.3 4,032.6 1,444.6 Recurrent expenditure 2,541.7 2,695.3 2,756.0 1,183.2 National departmental 1,357.1 1,192.4 1,272.7 562.5 Provincial governments 587.9 594.5 607.3 260.8 Interest payments 436.5 739.6 692.4 254.2 Foreign 188.4 160.8 177.4 81.2 Domestic 248.1 578.8 515.0 173.0 Other grants & expenditure 165.0 178.4 187.6 109.2 Net lending & investments -4.8 -9.6 -4.0 -3.5 Development expenditure 1,139.8 1,039.0 1,276.6 261.4 Overall balance -450.2 -124.1 -195.5 157.2 a Preliminary data. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Public debt continues to fall The government used the proceeds from its budget surplus, together with Kina61m of net domestic borrowings, to reduce its outstanding external debt. By end-June 2004 the government had reduced its total debt to Kina7.6bn, a reduction of 3.4% compared with the level outstanding at end-June 2003. Public external debt fell by 11.2% year on year, but this was partially offset by an increase of 9.5% in outstanding domestic debt. The total amount of Treasury bills outstanding increased by 12% year on year and accounted for 38% of total debt at end-June 2004. The bulk of the reduction in public external debt came from loan repayments worth Kina449m that were offset by just Kina27m worth of drawdowns. Unrealised exchange gains over the year accounted for around 22% of the total reduction.

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Papua New Guinea: public debt outstanding (Kina m; end-period) 2 Qtr 2000 2001 2002 2003 2004a Domestic 1,783.3 2,115.1 2,588.3 3,022.9 3,227.2 Treasury bills 1,577.2 1,748.8 2,169.1 2,755.3 2,866.1 Inscribed stock 206.1 366.3 283.8 174.7 301.7 Special BPNG loans 0.0 0.0 77.6 40.7 13.4 Other loans 0.0 0.0 57.8 52.2 46.0 External 3,838.3 4,982.1 5,594.6 4,709.1 4,326.9 International agencies 3,683.5 4,822.0 5,464.1 4,547.8 4,190.6 Commercial loans 137.5 140.3 107.4 135.9 124.6 Other loans 17.3 19.8 23.1 25.4 11.7 Total public debt 5,621.6 7,097.3 8,128.9 7,732.0 7,554.1 a Provisional data. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Demands for government The return to a budget surplus in the first half of 2004 has already brought a funds increase call from the parliamentary speaker, Jeffrey Nape, for the Kina1m district development programme funds, which were abolished for 2004, to be restored in the budget for 2005. These funds are provided in addition to the Kina500,000 (US$165,000) in district support grants that members of parliament (MPs) spend in their electorates. The fiscal surplus will also have encouraged PNGrs 74,000 public servants, backed by the private-sector trade union congress, in their claim for a 12% pay rise, which was reduced from 18% last year, based on increases in the consumer price index since 2002. The governmentrs offer, which was made after pointing out that 80% of the governmentrs operating budget is spent on salaries, is for a Kina500 bonus this year and a 3% raise in 2004 and 2005. Mr Philemon reminded his fellow MPs and public servants that they were "living off foreign donors" to the amount of 25 toea in the kina (ie 25% of public revenue). His recent address to the National Development Forum underlined the countryrs deep fiscal problem: population growth is outstripping growth in the tax base by a wide margin.

The government pushes ahead By mid-September the government had retrenched 155 civil aviation staff and with retrenchment programme 456 staff and 360 casual employees of the Works Department. Further retrench- ments are expected in the National Housing Corporation, National Museum and Arts Gallery and National Cultural Council. A two-week business start-up programme, which is funded by the UNrs International Labour Organisation and managed by the Small Business Development Corporation, is available to help retrenched public servants adjust to new means of making a living. In addition to the ongoing downsizing of the public service, an integrated payroll system that is being introduced this year at the national level will be extended to the provinces next year, and should eliminate the "ghosts" and excessive payments that currently plague the system. Moreover, the manual issuing of cheques has been discontinued throughout the government. The Asian Development Bank (ADB) has earmarked US$30m for public-sector reform.

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The government aims to Mr Philemon has foreshadowed amending legislation that will make it improve financial controls mandatory for chief executives of government departments and agencies to give greater recognition to the work of internal auditors, and to act on their reports and recommendations or be held liable and face penalties and possible prosecution. It is part of a crackdown on corruption and poor financial management in government departments, line agencies and statutory bodies. Mr Philemon has appointed financial controllers to manage the accounts of the fisheries and forest authorities, in which financial irregularities have been uncovered. A four-year ADB-funded institutional strengthening programme in the fisheries authority was concluded in early 2003. It is sobering to reflect that fisheries and forestry controlling authorities, which were once run as departments, were corporatised to remove political interference.

The central bank eases its The Bank of Papua New Guinea (BPNG, the central bank) has further eased its monetary policy stance monetary policy stance by cutting the kina facility rate (KFR, the official interest rate used to indicate the central bankrs monetary policy stance). The latest cut was announced in September, when the KFR was lowered to 9%, its lowest level since mid-2002 and down from a high of 16% in mid-2003. The BPNG has now cut the KFR by 100 basis points on seven occasions since July 2003. In its September monetary policy statement the BPNG supported its decision to cut the KFR by stating that there had been continued improvements in economic activity during the previous eight months; that the governmentrs fiscal management had been sound; that headline inflation had eased; and that international reserves were improving. The BPNG had previously indicated that it would take a more cautious approach to easing monetary policy owing to some risks to macroeconomic stability, namely the appreciation of the kina and rising oil prices.

The banking system is awash with liquidity, which increased by 5.8% quarter on quarter in the second quarter, following a 6.8% increase compared with the previous quarter. The BPNG continues to caution against the government crowding out the private sector. This concern seems more theoretical than real. Domestic credit markets appear to operate as distinct private and government

segments. Over the past three years, bank credit levels to the government have been volatile, with interest rates following closely. By contrast, private-sector credit levels and interest rates over the period have trended generally downward. At end-June 2004 private-sector credit had declined by nearly 6% year on year.

Papua New Guinea: money supply (Kina m; end-period) 2002 2003 2 Qtr 2004 % changea Domestic credit 2,850.3 2,620.1 2,588.5 -6.8 Non-government 1,593.8 1,497.1 1,442.2 -5.9 Central government 1,256.5 1,123.0 1,146.3 -8.0 Net foreign assets 1,419.4 1,613.2 1,874.8 67.3 Total money supply (M3) 4,269.2 4,233.3 4,463.3 14.5 a Compared with year–earlier period. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The state's efforts to sell The government has commissioned an Australian accounting firm, Deloitte Telikom remain controversial Touche Tomatshu, to review the processes and procedures followed by the Independent Public Business Corporation (IPBC), the governmentrs privatisation agency, in agreeing to sell 50.1% of the state-owned telecommunications company, Telikom PNG, to a Zimbabwean company, Econet Wireless Group (EWG). (This agreement still requires cabinet approval.) The review covers price adequacy, EWGrs capacity, and the EWG-Altech joint venture. (The South African-based Altech has agreed to purchase 50% of EWG for US$70m conditional on the Telikom-Econet deal going through.) The opposition leader, Peter OrNeill, has criticised plans for the ten-day review, preferring to start again and include the option of outsourcing management. The state enterprises and information minister, Dr Puka Temu, responded by pointing out that rehabilitating the telecommunications network nationwide over the next five years would cost Kina500m (US$165m), an investment that is unlikely to be made under government ownership. In addition to concerns over EWGrs financial and technical capacity, the proposed sale of Telikom remains controversial, with a Fiji-based company, Amalgamated Telecom Holdings (ATH), planning legal action against the IPBC for breach of contract. (ATHrs agreement with the former PNG government to buy a 50.1% stake in Telikom was rescinded by the current government.) The trade minister, Paul Tiensten, added to the confusion surrounding the proposed sale, when he recently raised the prospect of ATH having another attempt to reach a purchasing agreement after hinting that the government was unsure about the deal with EWG.

The domestic economy

Economic trends

Employment levels continue Annual private-sector employment growth (excluding the mining, quarrying to rise and petroleum sectors, and the Bougainville region) reached 3.9% in the first quarter of 2004. All sectors except finance and other business services recorded growth during this period. Employment in agriculture, forestry and fisheries rose by 8.1% year on year, and in manufacturing and construction the pace of employment growth was slightly slower at 5.7% and 4.5% respectively. In retail and wholesale trade, and transportation the pace of growth was slower than the average, and in finance and other business services employment fell by 3%, despite increased employment by finance companies. Employment in the mining sector rose sharply, up by 11.7% in the first quarter compared with the year-earlier period. The sources of employment growth are broad and include: the development of a timber and plywood mill in the Southern region; growth in food and beverage manufacturing in the island and Morobe regions; maintenance work on the Highlands Highway; the construction and maintenance of schools and hospitals funded by international donors; the expansion of logging and cocoa, coconut and palm oil plantations; the expansion of exports of canned and fresh tuna in the Momase and island regions; and a revival of a poultry processor in the National Capital District.

Inflation slows further in the According to the headline consumer price index, consumer prices remained second quarter unchanged in the second quarter of 2004 compared with the first quarter, and the year-on-year increase in prices slowed to an average of only 1.9%, down from 2.9% in the first quarter and 14.7% for 2003 as a whole. In the second quarter, prices in the food category, which accounts for around 40% of the consumer price index basket, rose by 2.8% year on year. The fastest pace of growth in prices was recorded in the clothing and footwear category, up by 4.1% year on year, followed by rents, council charges and fuel (3.3%). In the drinks, tobacco and betelnut category, which has a weighting of 20%, prices rose by only 0.7% year on year, and in the transport and communications category prices fell by nearly 2%. Underlying consumer price inflation, which excludes the prices of betelnut, fruits and vegetables, and the effects of government policy decisions on prices of consumer goods, rose by 0.7% quarter on quarter and 2.6% year on year. Papua New Guinea: quarterly inflation (1977=100) 2002 2003 2004 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Consumer price index 709.9 758.9 766.2 766.8 769.8 780.7 780.7 % change, year on year 14.8 20.7 19.0 11.8 8.4 2.9 1.9 Underlying inflationa 451.3 476.2 492.3 496.6 496.6 501.6 505.3 % change, year on year 17.3 21.1 21.4 14.5 10.0 5.3 2.6 a Revised series. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The kina continues to According to data from the Bank of Papua New Guinea (BPNG, the central strengthen bank), at the end of June the kina had appreciated against the Australian dollar by 6.7% year on year, against the US dollar by 10.1% and against the euro by 4.2%. However, in the first half of the year the kina averaged around Kina2.39:A$1 compared with Kina2.30:A$1 in the year-earlier period, a depreciation of 3.9%. In line with the general weakness of the US dollar, the kina appreciated from an average of Kina3.69:US$1 in the first half of 2003 to Kina3.25:US$1 in the first half of 2004, a strengthening of 13% year on year. The kina continued to appreciate against the US dollar in the third quarter, and in late September it was trading at around Kina3.12:US$1.

Papua New Guinea: exchange rates (Kina per unit of foreign currency; annual averages unless otherwise indicated) Oct 1st 1999 2000 2001 2002 2003 2004 A$ 1.659 1.613 1.753 2.110 2.311 2.27 US$ 2.57 2.78 3.39 3.90 3.56 3.12 ¥ 0.022 0.026 0.028 0.031 0.031 0.028

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

Oil and gas

Crude oil production The overall decline in crude oil production continues to reflect natural declines continues to decline in the Kutubu and Gobe oilfields. Overall production in June fell to a low of 1.2m barrels, down from more than 1.4m barrels in the year-earlier period. In the first six months of the year crude oil exports dropped to 7.1m barrels, down from 7.9m barrels in the year-earlier period and 8.1m in January-June 2002. Although production and export volumes are falling, PNGrs crude oil production firms are benefiting from record high prices. Kutubu crude oil prices have risen sharply in recent months, jumping from around US$40/barrel in July to more than US$50/b in early October, the highest level since production began in the early 1990s.

InterOil exports first shipment Shipments of refined petroleum products from the Napa Napa oil refinery, of refined petroleum which is operated by Canadars InterOil, commenced in August, marking a major step in PNGrs industrial development. The Kina700m (US$225m) refinery, which has the capacity to refine 32,500 barrels per day of crude oil, received its first shipment of crude oil from the Kutubu sea terminal in neighbouring Gulf province in June. In addition to operating the Napa Napa refinery, InterOilrs operations in PNG include retail and commercial distribution. In late September 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.

Tax holidays for gas firms are The prime minister, Sir Michael Somare, is expected to announce new tax planned holidays, scaled to the level of funds invested in the countryrs vast natural gas resources, during an official state visit to Japan in March next year. PNGrs ambassador to Japan, Michael Maue, speaking to business executives and government officials on PNGrs independence anniversary in September, foreshadowed the proposal. Japanrs Mitsubishi and Itochu are already in negotiations concerning gas projects in PNG. Mitsubishi is planning to pipe gas from the Southern Highlands and Gulf provinces for processing outside the capital, Port Moresby. Itochu Corporation is part financing the governmentrs participation in the Highlands Gas Project.

The Highlands gas pipeline The Highlands Gas Project, which centres on the long-delayed construction of a project receives a boost 2,655-km pipeline to pump gas from the PNG Highlands to Queensland, Australia, received a much-needed boost recently. In the midst of the Australian federal election campaign, the Australian government offered the operators of the Gladstone Alumina Refinery in Queensland A$10m (US$7m) towards converting its boilers from coal to gas feed, provided the Queensland government matches the funding. If the conversion goes ahead, the refinery would source its gas from the proposed pipeline from PNG, thereby ensuring sufficient customer demand to allow the Highlands Gas Project to proceed to front-end engineering and design. The project has been stalled at the planning stage for a number of years owing to problems in securing customer demand.

Mining

Gold output at Lihir expands Gold exports increased by 9.5% year on year to 34.7 tonnes in January-June. At the Lihir gold mine, production in the second quarter was 165,000 oz (4.7 tonnes), a better performance than in each of the quarters of 2003 and much better than the first quarter of 2004, when output totalled only 112,000 oz owing to planned and unplanned shutdowns. The miners operator, Lihir Gold, is targeting 600,000 oz for the full year despite the poor first-quarter performance and a third quarter also affected by a planned shutdown. In order to improve the sustainability of the miners operations, Lihir Gold has built a 30- mw geothermal plant, which is expected to save the company US$10m a year from May 2005. A further 20-mw power expansion will make the mine virtually energy self-sufficient. The company is seeking support overseas for a US$100m-120m expansion that would increase production to around 850,000 oz annually from 2007. In other developments in the gold mining sector: • The Tolukuma mine recorded its 16th consecutive quarter of gold production in excess of 7,000 oz in the second quarter of 2004. Year-end reserves increased to 203,000 oz; • Misima produced its last gold (21,067 oz) in the second quarter. The processing of all stockpiled low-grade and mineralised waste was completed and the mills were shut prior to dismantling; • a mining lease for the Kina400m Hidden Valley gold project in Wau, Morobe province is expected to be issued in October; and • feasibility studies being conducted at Imwauna gold project in Milne Bay could lead to the granting of a mining lease and the start of gold production in 2006, yielding 40,000 oz gold per year over four-five years.

Copper shipments curtailed by Copper exports reached 95,400 tonnes in the first half of 2004, a drop of nearly low water levels in Fly river 19% year on year. This poor performance reflects reduced shipments out of the Ok Tedi copper mine caused by low water levels in the Fly river. However, higher prices more than offset the drop in volume, and copper export value rose by 14.8% year on year in the first half to Kina815m. (Stimulated by growth in China, world copper prices have soared recently.) The low levels of water in the Fly river remain a major concern for the operators of the Ok Tedi mine. In September the company had suspended dredging, mining and hauling operations, and it has been conducting awareness campaigns to conserve water and fuel.

Papua New Guinea: mineral exports by volume 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtra Crude oil ('000 barrels) 3,748 4,107 4,272 2,857 3,268 3,791 Copper ('000 tonnes) 64.5 53.2 43.8 69.1 46.3 49.1 Gold (tonnes) 17.1 14.6 17.9 18.8 17.7 17.0 a Provisional data. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Agriculture, fisheries and forestry

Coffee and cocoa exporters An early coffee season resulted in exports of 17,300 tonnes of coffee in the enjoy mixed results second quarter, boosting exports in the first half to 25,500 tonnes, a year-on- year expansion of nearly 14%. However, export revenue for the coffee sector rose by only 3% year on year in the first half to Kina105m, with the rise of the kina against the US dollar more than offsetting higher world prices because of a poor season in Brazil, the worldrs largest producer. By contrast, world cocoa supply was buoyant, resulting in lower prices in the second quarter of 2004 than in the year-earlier period. This, together with a stronger kina, resulted in a sharp reduction in prices received by PNG exporters. Cocoa export volume also dropped, falling by 10.6% year on year in the first half to 19,400 tonnes. Accordingly, cocoa export value decreased by 28.6% year on year to Kina111m.

Copra production is buoyant Copra production in the first half of 2004 increased by 20% year on year to 48,000 tonnes. Export volume also rose strongly during this period, jumping to 9,100 tonnes compared with only 3,600 tonnes in the year-earlier period. World prices were also stronger, reflecting global production shortfalls coupled with excess demand for edible oils. Muted by the stronger kina against the US dollar, prices received in the second quarter were up by nearly 15% year on year. However, export volume of copra oil plunged by 18.6% year on year in the first half to 19,300 tonnes. This outcome is primarily the result of increased competition among copra buyers, reflecting the impact of the collapse of the 100-year-old government-owned marketing board and the creation of the industry regulator, Kokonas Indastri Koporasen, in 2002. Despite lower export volume, export value rose by 6% year on year in the first half to Kina37.2m owing to higher export prices.

Expanding plantations boost The continued expansion of palm oil plantations resulted in higher export palm oil output volume of palm oil in the first half of the year compared with the year-earlier period. Export volume rose by 9.1% year on year to 194,000 tonnes. New Britain Oil Palm, which accounts for over one-half of the countryrs output, plans to expand into the Solomon Islands with the purchase of a plantation on Guadalcanal. Another palm oil enterprise, Higaturu, in Oro province, has reported a planned increase in its milling capacity to 70-90 tonnes of oil palm fruits per hour from the present 45 tonnes per hour. It is also considering a new US$4m 20-tonnes-per-hour mill in the Kokoda area. Ramu Sugar has also stated that it has 1,000 ha of oil palm already planted and a second 1,000 ha awaiting the rainy season. The company has announced the acquisition of a neighbouring ranch with 7,000 ha for possible future additional oil palm or other agricultural development.

The forestry industry is upset The Forestry Industries Association is dismayed at draft downstream processing by government plans policies based on the governmentrs control of location, product, price and marketing. It has said that existing red tape makes the country an unreliable supplier, which is reflected in poor export prices, and that the new policies, could only make matters worse. The volume of logs exported in the first half of the year fell by 9.1% year on year to 928,000 cu metres. Prices also fell over this period, thereby resulting in a drop of 16.3% year on year in log export value.

Fisheries exports plummet The fisheries sector is struggling, with export volume of marine products plunging to only 3,700 tonnes in the first half of 2004, compared with 13,200 tonnes in the year-earlier period. Higher prices, however, helped to prevent a similar drop in export value. In the first half exports of marine products totalled Kina34.7m, down by around 51% year on year. In a positive development, the Kavieng fishery facility (which comprises a processing plant and office funded by the Australian governmentrs development agency, AusAid, and a long-line wharf funded by the Asian Development Bank) has now been commissioned.

Papua New Guinea: agricultural exports by volume ('000 tonnes unless otherwise indicated) 2002 2003 2004 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtra Cocoa 8.9 10.5 8.1 13.6 10.1 8.5 10.4 9.0 Coffee 25.9 17.8 7.9 14.5 28.3 18.1 8.2 17.3 Tea 1.0 1.2 1.9 1.8 1.3 1.6 2.3 2.1 Copra 4.8 0.7 1.5 2.1 1.3 2.8 4.9 4.2 Copra oil 6.5 11.6 9.3 14.4 12.8 11.2 7.6 11.7 Palm oil 76.5 75.5 94.8 83.1 75.2 73.8 101.1 92.9 Rubber 1.1 0.8 1.0 1.0 1.0 1.2 0.8 0.7 Logs ('000 cu metres) 409.0 621.0 543.0 478.0 488.0 507.0 495.0 433.0 a Provisional data. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Foreign trade and payments

Export revenue expands Export revenue in January-June totalled Kina4.1bn (US$1.3bn), up by 4.1% year steadily in the first half on year, primarily owing to a strong performance in the second quarter, when revenue jumped by 12.2% year on year. (In line with the strong appreciation of the kina against the US dollar during this period, in US dollar terms the expansion in exports has been more impressive.) Gold export revenue was fairly strong in the first half, rising by 8.5% year on year to Kina1.4bn in line with higher volumes and firm prices. Gold remains the most important export commodity and accounted for 35% of total export revenue during this period. Export revenue from copper also increased year on year in the first half, rising by nearly 15% to Kina815m (US$265m). However, revenue from crude oil exports dropped by nearly 10% year on year to Kina825m, with declining export volume offsetting high prices. The agriculture sector enjoyed a strong export performance in January-June, with revenue rising by 14.5% year on year to Kina773m, around 19% of total export revenue. Palm oil exports, which accounted for 34% of the total, rose by nearly 7% year on year to Kina263m in line with a strong second-quarter performance. Revenue from cocoa exports plunged by 29% year on year in the first half to Kina111m, and coffee export revenue picked up only slightly to Kina105m. In the "others" category revenue almost doubled year on year in the first half, thereby providing much of the overall increase in agriculture export revenue during this period. Export revenue from forestry and marine products was poor, dropping by 14% and 51% year on year, respectively, in January-June.

Papua New Guinea: exports (Kina m) 2003 2004 2001 2002 2003 Jan-Jun Jan-Juna Agricultural products 801.1 1,084.9 1,362.2 674.9 772.8 Forestry products 310.9 414.1 415.8 216.2 185.8 Logs 234.3 365.5 369.6 192.4 161.0 Marine products 77.2 94.1 125.3 71.0 34.7 Minerals (incl silver) 4,895.6 4,774.0 5,890.0 2,940.9 3,071.0 Gold 2,115.1 2,294.8 2,811.2 1,301.2 1,412.2 Crude oil 1,889.4 1,431.2 1,631.9 913.5 825.1 Copper 859.1 1,018.7 1,415.0 709.8 814.9 Total 6,084.8 6,367.1 7,793.3 3,903.0 4,064.3 a Provisional data. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The value of merchandise imports in January-June reached Kina2.1bn, down by 2.6% year on year. (However, the appreciation of the kina against the Australian dollar and the US dollar masks the expansion in the import bill in foreign currency terms.) General imports, which accounted for around 75% of the total, were valued at Kina1.6bn, down by 8.8% year on year. Imports by firms in the petroleum sector dropped by 9% to Kina39m, reflecting low capital expenditure by all petroleum projects. Imports by firms in the mining sector, however, increased by 25.6% year on year to Kina486m. This was in line with the higher capital expenditure by gold producers. In the second quarter of the year general imports declined by 6.1% year on year, offsetting year-on-year increases in imports in the mining and petroleum sectors.

Australia accounts for an In January-June Australia accounted for 57% of imports and 44% of exports, up increasing share of trade slightly from the ratios recorded in the year-earlier period, according to the Bank of Papua New Guinea (BPNG, the central bank). Japan was the second-largest export market in the first half, accounting for 8.3% the total, followed by Germany, with 6.1%. However, in the second quarter Germany accounted for a slightly higher share than Japan. China and the UK each accounted for around 5% of the total, with South Korea and the Philippines following closely with 4.4% and 4.1% respectively. Although only the seventh-largest export destination, the US is the second-largest source of imports. In the first half the US accounted for nearly 9% of all imports. Imports from China more than halved in the second quarter compared with the total in first quarter and in the year-earlier period. In January-June imports from China accounted for 4.8% of the total, less than Singapore (8.4% of the total) and Japan (5%). (The BPNGrs data on trade partners differs from the data published by the IMF, which are incorporated in the Annual indicators table.)

The current account remains In the second quarter, in line with the year-on-year expansion in export in surplus revenue and the slight decline in the import bill, the merchandise trade surplus expanded by nearly 30% year on year to more than Kina1bn. However, owing to a slight year-on-year decline in the first quarter, the merchandise trade surplus in the first half rose by only 12.3% compared with the surplus in the year-earlier period. The current account recorded an overall surplus of nearly

Kina200m in the first half compared with only around Kina19m in the year- earlier period. The deficit on the services account rose to Kina1.3bn in the first half, up by nearly 5% year on year. Although services debits dropped by 3% year on year, partly reflecting lower payments for transportation and insurance associated with imports, services receipts contracted by 27% year on year. The deficit on the incomes account fell by 17.5% year on year to Kina901m in the first half of the year owing to lower dividend and interest payments by the government and mining companies operating in PNG. However, this was partly offset by the declining surplus on the transfers account, which dropped by 30% year on year to Kina394m in the first half.

The capital and financial accounts recorded a deficit of Kina197m in the first half of 2004, up from Kina66m in the year-earlier period. Foreign direct investment inflows totalled Kina63m in the first half compared with an outflow of Kina201m in the year-earlier period, and net portfolio investment inflows totalled Kina31m. However, other investment outflows amounted to Kina267m in the first half, reflecting high net loan repayments by both the government and the private sector in the first quarter.

Papua New Guinea: balance of payments (Kina m) 2003 2004 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtra Merchandise exports 1,875 1,922 2,007 1,971 2,103 Merchandise imports -1,072 -1,001 -1,075 -1,032 -1,067 Trade balance 803 921 932 939 1,036 Services balance -600 -476 -576 -746 -524 Income balance -887 -306 -301 -413 -488 Net transfers 296 82 201 287 107 Current-account balance -388 221 256 67 131

Papua New Guinea: balance of payments (Kina m) 2003 2004 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtra Net direct investment -104 -20 510 56 7 Portfolio investment 263 -99 -212 355 -324 Financial derivatives -4 39 34 -8 -16 Other investment 316 -23 -347 -532 265 Capital & financial account balance 471 -103 -15 -129 -68 Net errors & omissions -24 36 53 -2 20 Overall balance 60 154 295 64 -83 International reservesb 1,283 1.437 1,731 1,668 1,751 a Provisional data. b End-period. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Foreign-exchange reserves At the end of June 2004 foreign-exchange reserves stood at Kina1.8bn pick up (US$550m), similar to the level in kina terms that was recorded at end-2003. These reserves provide cover for five months of total imports and nearly seven months of non-mineral imports. However, in US dollar terms, foreign-exchange reserves have risen. According to the BPNG, in early September international reserves reached a record level of US$621m.