Papua New Guinea Papua New Guinea at a Glance: 2002-03

COUNTRY REPORT

Papua New Guinea Papua New Guinea at a glance: 2002-03

OVERVIEW The prime minister of Papua New Guinea, Sir Mekere Morauta, will face a stern test of his leadership in the run-up to the next election in June 2002. The government will press ahead with its contentious economic reform programme, supported by the IMF and the World Bank, although this will progress more slowly as the election nears. Opposition groups will seek to capitalise on public resentment towards the government, and domestic protests are likely to become more common. Economic activity will pick up in 2002-03 as two major resources projects finally get under way. Inflation will be relatively restrained in 2002-03. Key changes from last month Political outlook • The difficulty in getting a quorum is a sure sign that this parliament is coming to an end. It is to be hoped that it can still deliver the first vote for Bougainville autonomy by the end of 2001. Economic policy outlook • The government delivered the budget for 2002 on November 27th 2001. It carries a deficit equivalent to 2% of GDP, and is in effect a six month budget—a supplementary budget will be proposed in July 2002 after the election. Opposition MPs have vowed not to support the budget alleging that it is designed purely to get the government votes. Economic forecast • The exchange rate remains weak and consumer prices rose in the third quarter by 10% year on year. Interest rates may have to follow. Electoral spending in the first half of 2002 will exacerbate these adverse trends.

January 2002

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

15 Economic policy

19 The domestic economy 19 Economic trends 21 Oil and gas 22 Mining 23 Agriculture and fisheries 24 Infrastructure 25 Financial and other services

25 Foreign trade and payments

List of tables

10 International assumptions 11 Forecast summary 16 Central government budget 20 Quarterly inflation 20 Money supply 22 Mineral exports, by volume 24 Agricultural exports, by volume 24 World commodity price forecasts 26 Balance of payments 27 Exports 27 Exchange rates 28 Public debt outstanding

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List of figures

12 Gross domestic product 12 Kina real exchange rates 21 Consumer prices 21 Kutubu oil prices 22 Mineral exports 27 Exchange rates 28 Public debt outstanding

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Summary

January 2002

Outlook for 2002-03 The prime minister of Papua New Guinea (PNG), Sir Mekere Morauta, will face a stern test of his leadership in the run-up to the next election in June 2002. The government will press ahead with its contentious economic reform programme, supported by the IMF and the World Bank, although this will progress more slowly as the election nears. Opposition groups will seek to capitalise on public resentment towards the government, and domestic protests are likely to become more common. Economic activity will pick up in 2002-03 as two major resources projects finally get under way. Inflation will be relatively restrained in 2002-03.

The political scene Parliament has been debating the future of Bougainville. The weapons disposal programme has started. The government has opposed a lawsuit against the resources company, Rio Tinto. It has also agreed to process asylum seekers bound for Australia. Provincial governmental grants may be written off. The Supreme Court has ruled in favour of provincial governments. The electoral roll still needs to be updated. Sir Michael Somare is now officially leader of the opposition. PNG and Indonesia have agreed to a repatriation plan.

Economic policy The IMF’s support programme has reached completion. A budget deficit of 2% of GDP has officially been projected for 2002. An expenditure shortfall in the third quarter of 2001 contributed to a budget surplus in that period. Privatisation proceeds will be applied to debt relief. A tax credit scheme has been applied to agriculture. The budget assumptions are optimistic, and the progress of the privatisation programme has been mixed. The Bank of South Pacific has acquired the Papua New Guinea Banking Corporation.

The domestic economy A small fall has been recorded in private-sector employment. Inflation is running at 10% year on year in late 2001. Reserve money has expanded. Fiscal- stability legislation has offered hope for the future of the PNG-Queensland gas pipeline. Other projects have boosted the pipeline’s prospects. Oil production has declined. There has been renewed interest in an agricultural price- stabilisation scheme. Coffee production has increased.

Foreign trade and A trade surplus offset an invisibles deficit in the third quarter of 2001. Mineral payments and oil exports receipts were up by over 20% year on year in the same period. Key commodity exports have suffered from low prices. Mining capital expenditure has lifted the import bill. The central bank has tried to slow the pace of depreciation of the kina. The currency depreciation has pushed up the kina value of public debt.

Editors: Danny Richards (editor); Graham Richardson (consulting editor) Editorial closing date: December 12th 2001 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

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

National legislature Unicameral national parliament; its 109 members (currently 104 are sitting, with five vacancies) are elected for a period of five years, 89 representing “open” constituencies and the rest representing 19 provincial constituencies and the capital district

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

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

National elections June 1997; next general election due in June 2002

National government Sir Mekere Morauta, the leader of the People’s Democratic Movement (PDM), was elected prime minister by parliament on a vote of 99:5 on July 14th 1999

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

Main members of the National Prime minister & minister for finance Sir Mekere Morauta Executive Council Deputy prime minister & minister for forestry Michael Ogio

Key ministers Agriculture Simeon Wai Bougainville affairs Moi Avei Civil aviation Ludger Mond Defence Kilroy Genia Education Muki Taranupi Environment Herowa Agiwa Fisheries Ron Ganarafo Foreign affairs John Waiko Health Tommy Tomscoll Home affairs William Ebenosi Labour & employment Fabian Pok Lands & physical planning Charlie Benjamin Justice Puri Ruing Mining Chris Haiveta Petroleum & energy Roy Yaki Planning & rural development Andrew Kumbakor Privatisation Vincent Auali Public service Philemon Embel Trade & industry Tukape Masani Transport & works Alfred Pogo

Central bank governor Wilson Kamit

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Economic structure

Annual indicators

1996a 1997a 1998a 1999a 2000b GDP at market prices (Kina bn) 6.9 7.1 7.8 8.8b 9.7 GDP (US$ bn) 5.2 4.9 3.8 3.4b 3.5 Real GDP growth (%) 7.8 –3.9 –3.8 7.5b –1.2 Consumer price inflation (av; %) 11.6 3.9 13.6 14.9 15.6a Population (m) 4.4 4.2 4.6 4.7 5.1a Exports of goods fob (US$ m) 2,529.8 2,160.1 1,773.3 1,927.4 2,088.9 Imports of goods fob (US$ m) 1,513.3 1,483.3 1,078.3 1,071.4 998.9 Current-account balance (US$ m) 189.0 –192.3 –28.8 97.2 323.5 Foreign-exchange reserves excl gold (US$ m) 583.9 362.7 192.9 205.1 308.5 Total external debt (US$ bn) 2.5 2.6 2.7 2.7 2.6 Debt-service ratio, paid (%) 16.3 20.5 8.6 9.6 14.5 Exchange rate (av) Kina:US$ 1.32 1.44 2.07 2.57 2.78 a

December 12th 2001 Kina3.85:US$1

Origins of gross domestic product 2000a % of total Components of gross domestic product 2000a % of total Agriculture 30.4 Private consumption 57.0 Mining & quarrying 23.4 Government consumption 17.7 Manufacturing 8.9 Investment 13.0 Construction 4.0 Exports of goods & services 56.7 Electricity, gas & water 0.6 Imports of goods & services –44.4 Services 32.8 GDP at market prices incl change in stocks 100.0 GDP at factor cost 100.0

Principal exports fob 2000 US$ m Principal imports cif 1994 US$ m Gold 701 Machinery & transport equipment 442.9 Crude oil 691 Manufactured goods 334.0 Copper 214 Food & live animals 204.2 Logs 111 Chemicals 85.9 Palm oil 110 Mineral fuels & lubricants 40.8 Coffee 106 Total incl others 1,526.5 Total incl others 2,038.6

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total Australia 29.7 Australia 49.8 Japan 11.2 Singapore 20.0 China 6.4 Japan 4.1 Germany 4.1 New Zealand 3.9 South Korea 3.8 Malaysia 3.4 UK 2.7 Indonesia 3.0 a Actual. b EIU estimates.

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1995=100) 158.8 163.4 167.7 175.0 178.1 179.7 182.6 188.7 % change, year on year 18.3 13.2 19.6 21.9 12.2 10.0 8.9 7.8 Financial indicators Exchange rate Kina:US$ (av) 2.78 2.75 2.95 2.52 2.65 2.99 3.25 3.15 Kina:US$ (end-period) 2.96 2.70 2.62 2.45 2.76 3.07 3.30 3.33 M1 (end-period; Kina m) 1,367 1,344 1,294 1,252 1,259 1,373 1,257 1,262 % change, year on year 32.8 21.0 16.1 –3.5 –7.9 2.2 –2.8 0.8 M2 (end-period; Kina m) 2,982 2,982 2,929 2,990 3,029 3,132 3,085 3,108 % change, year on year 6.5 9.2 4.2 2.5 1.6 5.0 5.3 4.0 Sectoral trends Exports Copra ('000 tonnes) 16.6 19.9 29.6 16.9 10.5 10.2 5.0 4.8 Copra oil ('000 tonnes) 11.3 6.9 15.1 9.8 14.9 8.2 8.1 8.5 Cocoa ('000 tonnes) 6.0 4.5 14.2 9.9 9.0 4.9 10.2 8.3 Coffee ('000 tonnes) 13.9 14.3 10.2 20.5 16.7 19.2 11.3 11.7 Logs ('000 cu metres) 230 288 312 322 352 412 338 344 Gold (tonnes) 18.5 17.0 19.4 17.2 17.0 19.2 18.5 18.8 Fish ('000 tonnes) 0.6 0.5 0.4 0.5 0.4 0.5 0.2 0.8 Oil, crude ('000 barrels) 7,735 7,749 5,889 6,613 6,604 4,523 6,529 4,069 Foreign trade & reserves Exports foba (Kina m) 1,504 1,426 1,554 1,388 1,393 1,478 1,613 1,454 Gold 486 430 589 435 413 514 532 524 Oil, crude 415 509 458 460 551 454 610 359 Imports foba (Kina m) –717 –773 –758 –630 –659 –732 –806 –612 Trade balance (Kina m) 787 653 796 758 734 746 807 842 Reserves excl gold (end-period; US$ m) 106.1 205.1 175.7 268.1 248.5 308.5 277.7 338.4 a Balance-of-payments basis. Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; IMF, International Financial Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics During the run-up to the next election in June 2002 the prime minister, Sir Mekere Morauta, will struggle to successfully combine two key, but possibly contradictory, objectives: to press ahead with the domestically contentious and unpopular economic reform programme at the behest of international donors, and to woo the electorate in an attempt to win a second term in office. Sir Mekere has so far impressed international donors, particularly the World Bank and the IMF, with his determination to deal with the long-term economic problems of Papua New Guinea (PNG). Sir Mekere has taken the IMF and World Bank programmes through to completion, although the reform programme has suffered from a number of setbacks, and demonstrations by groups of soldiers, students and labour unions have illustrated the domestic antagonism towards economic reforms. Sir Mekere, however, cannot afford to bow to such pressure, as PNG remains heavily dependent on external financial support, which is tied to the government’s success in progressing with the reforms. To date Sir Mekere has been consistent in expressing his determination to proceed with reforms, but further public protests could alter his plans when the election nears. An election defeat for Sir Mekere would almost certainly lead to a switch in government policy thereby alienating international donors. Neither Sir Mekere’s incumbency nor his good international standing will give him an edge with the domestic electorate.

The fact that getting a quorum is becoming increasingly difficult is a sign that this parliament is coming to an end. Election campaigning will dominate the political scene in the first half of 2002 and party politics will come alive in March and April. This is the period when candidates must declare their allegiance to a registered political party, or if they succeed as an independent, they will be restricted in how they can vote on constitutional and supply issues. The issue of processing asylum seekers bound for Australia will be a major one in the lead-up to this election. The Australian government has promised to meet all the financial costs of processing, but the burden that such a programme will place on provincial areas and their governments, and the potential for social unrest, are causes for serious concern. Sir Mekere’s main election rivals—Sir Michael Somare, leader of the opposition and of the National Alliance (NA) and Bill Skate, the previous opposition leader and leader of the People’s National Congress—have expressed their opposition to the processing of asylum seekers in PNG and will attempt to make political capital out of the issue.

Voters will be able to choose between two opposite philosophies of development—centralisation and de-centralisation—at the next election. The ruling People’s Democratic Movement (PDM) has signalled its preference for centralising control of government expenditure in its budget for 2002. Non- parliamentary PDM figures have publicly argued for abolition of the

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provincial government system. The NA, in contrast, favours de-centralisation and has challenged PDM to make the issue an electoral one.

Bougainville During a special one-week session in late November parliament debated changes in the national constitution which will allow for Bougainville’s autonomy in early 2002. Parliament is expected to vote on the matter when it resumes on January 22nd and again two months later. After a decade-long rebellion on the island, autonomy became a real possibility with the signing of a peace agreement between the national government and Bougainville leaders on August 30th 2001. Reconciliation and disarmament issues need to be addressed in the coming months.

International relations The PNG government has agreed to participate in Australia’s “Pacific solution” to its problem of asylum seekers, which involves Pacific island- nations acting as processing centres for Australia-bound asylum seekers. The Australian government will meet the financial costs of the programme and has reportedly made an upfront payment of A$1m (US$520,000) as part of the agreement; it has already committed A$343m in aid for financial year 2001/02 and may now look more favourably on PNG’s demands for further development funding. The Indonesian province of Irian Jaya (also known as West Papua), which is home to a strong secessionist movement, still looms large as PNG’s biggest foreign-policy challenge. The Indonesian government’s autonomy proposals for Irian Jaya were endorsed by the parliament in October and will come into force in January 2002. However, there are fears that they may not transfer enough power to the area to appease the pro- independence movement, particularly in the wake of the alleged murder of its leader, Theys Eluay, in November.

Economic policy outlook

Policy trends As the next election for the government of Papua New Guinea (PNG) is due to take place in June 2002, the pace of economic reform may slow and, depending on the outcome of the election, may even be reversed. The current government under Sir Mekere Morauta will attempt to press ahead with its economic reform programme, despite increasing domestic opposition, in an effort to maintain the support of the IMF and the World Bank. Both institutions have expressed satisfaction with the government’s progress so far: the IMF disbursed US$24m in late September, the final tranche of its stand-by arrangement, and the World Bank has praised Sir Mekere’s reform efforts. However, the disbursement of the final tranche of its US$90m loan, due to be released by the end of 2001, is dependent on certain conditions being met, including improvements in fiscal and debt management. The privatisation programme is the most contentious issue in the reform programme and, after a number of delays, is finally moving ahead. Expressions of interest are being sought for the PNG Electricity Commission (Elcom), the local telecommunications operator, Telikom, and the Harbors Board while government has announced that the Bank of South Pacific, a locally owned PNG bank, is the preferred bidder for the Papua New Guinea Banking Corporation (PNGBC).

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Fiscal policy The 2002 budget, criticised by opponents for being too voter friendly, replaces grants to MPs for local development (“slush funds”), which World- Bank-imposed guidelines had made difficult to access, with a controversial increase in school-fee subsidies. The proposed budget carries a deficit of Kina215m (US$55.8m), equivalent to 2% of GDP, and is in effect a six- month budget—a supplementary budget will be proposed in July 2002 after the election. Lower-than-expected tax revenue receipts in the first half of 2001, particularly from the mining and petroleum sectors, led to a downwards revision in the government’s revenue estimates for the second half. Therefore, in order to maintain the “integrity” of the 2001 budget (the government had forecast a budget deficit equivalent to 1.3% of GDP in 2001, but the estimated deficit is now 1.8%), the budget allocation for several programmes, including the structural adjustment programme, was cut in August by a total of Kina80m (US$24m). Planned expenditure will have to be cut further if there are delays in the disbursement of external financing from the World Bank (US$35m) and the Asian Development Bank (US$25m) beyond the end of 2001, or if the government fails to raise sufficient funds domestically.

Monetary policy The governor of the Bank of Papua New Guinea (BPNG, the central bank), Wilson Kamit, has stressed that it will continue to take a cautious approach towards easing monetary policy. The BPNG will therefore maintain tight quantitative liquidity measures for the time being, particularly the cash reserve requirement of 5%, even though commercial banks have called for them to be eased. As inflation is gradually coming under control (the government has budgeted on an average 8.3% for 2002, following upturns in the second and third quarters of 2001 associated with kina depreciation in the second half of 2000), the central bank has lowered its kina facility rate (KFR, adjustments of which reflect the central bank’s monetary-policy stance). The KFR has stabilised around 12% after falling from its initial level of 15.5% when it was introduced in February 2001. Further lowering of interest rates in 2002-03 is expected, providing that budgeted privatisation proceeds are achieved, but in view of the weak exchange rate the decline will be gradual. Commercial lending rates will also come down, even though commercial banks have shown some reluctance to follow the central bank’s lead.

Economic forecast

International assumptions Following a sharp deceleration in world growth in 2001 to 2.2%, the prospects are brighter for the rest of the forecast period. The US economy is currently decelerating and the Economist Intelligence Unit now expects growth of only 1% in 2001, but there will be an improvement in 2002 and 2003, with US growth rising to 1.2% and 3.6% respectively. The Japanese economy is struggling with a worsening domestic situation and will remain subdued throughout the forecast period. In contrast, Australia, by far the largest trading partner of Papua New Guinea (PNG), is expected to buck the global trend, with relatively robust growth of 2.3% in 2001, rising to 3.5% and 3.8% in 2002 and 2003 respectively. PNG’s economic performance will

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continue to suffer from a sustained decline in international prices for its major commodity exports—oil, gold and coffee.

International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.7 4.2 Australia 3.3 2.3 3.5 3.8 US 4.1 1.0 1.2 3.6 Exchange rates (av) ¥:US$ 107.8 121.1 124.0 121.5 US$:¤ 0.924 0.898 0.963 1.015 SDR:US$ 0.758 0.784 0.766 0.749 Financial indicators ¥ 2-month private bill rate 0.24 0.18 0.10 0.10 US$ 3-month commercial paper rate 6.32 3.59 1.43 4.50 Commodity prices Oil (Brent; US$/b) 28.5 24.3 18.3 20.2 Gold (US$/troy oz) 279.3 268.8 255.0 250.0 Food, feedstuffs & beverages (% change in US$ terms) –6.1 –1.0 11.9 13.4 Industrial raw materials (% change in US$ terms) 13.4 –9.2 0.3 14.5 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Economic growth The current state of PNG’s economy is grim and it is estimated to have contracted by around 1.9% in 2001. A return to growth in 2002-03 is largely dependent on the progress of two major projects: the US$850m Ramu nickel and cobalt mining project and the US$3.5bn PNG-Queensland gas pipeline project. The likelihood that the projects will get the go-ahead in the near future has increased recently. Assuming that agreements for the projects are reached by early 2002, there will be a pick-up in investment, which will underpin a strengthening of growth to 1% and 2.5% in 2002 and 2003 respectively. Historically, projects of this size have led to sharp increases in investment and overall growth; our growth forecasts will be revised downwards significantly if there are further delays.

In terms of sectoral growth, deteriorating infrastructure and law and order problems will continue to affect agricultural production. (The government’s planned infrastructure programme, mostly aid-financed, should improve productivity generally provided the government can fund its share.) The agricultural sector is also suffering from a severe decline in commodity prices, which has constrained farmers’ incomes, domestic demand and investment. The coffee industry is suffering from the lowest prices for ten years and large plantations are being abandoned. Coffee prices will continue to decline, but prices for other key commodities such as cocoa, copra and palm oil will rise steadily in 2002-03. Crude-oil production in the first ten months of 2001 was down by 19% in volume terms when compared with the year-earlier period and will continue on a downward trend. However, declining production at the Kutubu and Gobe oilfields in 2002-03 will be partly offset by further

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development of the Moran oilfield, which will bring it into full production within a year. Higher production at the Lihir gold mine will also offset the falling production levels at the Porgera mine.

Forecast summary (% unless otherwise indicated) 2000a 2001a 2002b 2003b Real GDP growth –1.2 –1.9 1.0 2.5 Gross agricultural production growth 2.8 1.2 3.2 3.0 Consumer price inflation Average 15.6 c 9.2 9.0 8.2 Year-end 10.0 c 10.0 9.4 8.0 Short-term interbank rate 17.5 c 16.2 14.5 12.0 Government balance (% of GDP) –2.0 –1.9 –2.3 –1.8 Exports of goods fob (US$ bn) 2.1 1.8 1.7 1.9 Imports of goods fob (US$ bn) 1.0 1.0 1.1 1.3 Current-account balance (US$ bn) 0.3 0.1 –0.2 –0.3 % of GDP 9.3 2.4 –5.8 –8.3 External debt (year-end; US$ bn) 2.6 2.6 3.1 3.6 Exchange rates Kina:US$ (av) 2.78 c 3.37 3.87 3.95 Kina:¥100 (av) 2.58 c 2.78 3.12 3.25 Kina:A$ (av) 1.61 c 1.77 2.11 2.31 Kina:SDR (year-end) 4.00 c 4.88 5.21 5.31

a EIU estimates. b EIU forecasts. c Actual.

Inflation Quarterly year-on-year inflation rates have fallen continuously since the second quarter of 2000, reaching 7.9% in the second quarter of 2001 but turning up to 10% in the third quarter. Falling oil prices and fewer sales-tax rises will also help to restrain inflation in the forecast period relative to past years. Assuming that the government maintains fiscal discipline, inflation should average 8.8% in 2001-03.

Exchange rates The Bank of Papua New Guinea (BPNG, the central bank) will continue to intervene heavily in the currency market in an attempt to maintain a relatively stable exchange rate. Its position has been strengthened by high levels of foreign-exchange reserves (US$388m at end-September) as a result of IMF funding. However, central bank intervention in recent months has not offset the strong downwards pressure on the kina from the lack of exporter activity and high importer demand. The downward trend resulted in a record low of Kina3.91:US$1 in early December, dragging the estimated average exchange rate for the year down to Kina3.37:US$1. This downward trend will continue, albeit more slowly, with the kina averaging Kina3.87:US$1 in 2002 and Kina3.95:US$1 in 2003. Against the Australian dollar, the kina will depreciate to Kina2.11:A$1 and Kina2.31:A$1 in 2002 and 2003 respectively, from an estimated annual average of Kina1.77:A$1 in 2001.

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External sector We expect export receipts to have declined by 14.9% in 2001 (in US dollar terms). Revenue from oil exports has been affected by a sharp fall in oil prices—prices for local Kutubu crude oil fell by 12% in September alone. There is unlikely to be much of an improvement in export receipts in 2002 as world oil prices are forecast to fall by around 15%, and new supplies from the Moran oilfield will only partly offset declining production from the ageing Kutubu fields. We do, however, expect a slight improvement in export receipts in 2003. Imports of capital goods and construction materials for the development of minerals projects will rise significantly in 2002-03 and the trade surplus will fall from an estimated US$798m in 2001 to US$577m in 2002 and US$559m in 2003. Services debits will increase rapidly in 2002-03 in line with the increase in imports. The current account is therefore expected to record deficits of US$171m (5.8% of GDP) in 2002 and US$261m (8.3% of GDP) in 2003. These relatively large deficits will be sustainable only because the two minerals projects will be accompanied by significant capital inflows, namely commercial borrowings by PNG-based mining companies, and foreign direct investment.

The political scene

The parliament debates the The Papua New Guinea (PNG) parliament reconvened on November 22nd future of Bougainville 2001 with the future of Bougainville high on the agenda. The bills put before parliament would give effect to the Bougainville Peace Agreement signed on August 30th, which provides for the autonomy of the island, a guaranteed referendum on its political future (the outcome is subject to the final authority of the national parliament), and a weapons disposal plan that has been prepared in close consultation with ex-combatants. The agreement is the culmination of three years of negotiations following the ceasefire that ended nine years of conflict. The first of two votes, which both require a two-thirds majority, on the bills is expected in the next few weeks, with the second vote to be taken two months later.

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The weapons disposal The weapons disposal programme officially began in early December with a programme has started symbolic handover of weapons in Torokina in central Bougainville. A second group of ex-combatants in the Eivo area handed over their weapons on December 10th to UN peace monitors at Piva village, west of Bougainville. The minister of Bougainville affairs, Moi Avei (who is also the chairman of the ministerial committee on asylum seekers), has called on all ex- combatants to support the peace process by continuing to implement the agreed weapons disposal programme. Francis Ona, the rebel leader at the centre of the armed conflict, has taken no part in the peace process. He is reported to have said in a radio interview that he would not allow his “Mekamui Defence Force” to surrender their weapons nor join in the peace agreement. However, the defence chief of the Bougainville Revolutionary Army, Ishmael Toroama, is said to be “absolutely committed” to weapons disposal as specified in the agreement, which includes amnesty. The UN and a regional peace monitoring group have agreed to assist with the programme, and a proposal to establish a community trust fund to finance economic projects for ex-combatants in exchange for the handover of their weapons has reportedly gained support from the Australian government.

The government is opposing Mr Ona is alleging in a US Federal District Court that Rio Tinto (formerly a lawsuit against Rio Tinto CRA, owner and operator of the Panguna mine before it was forcibly closed in May 1989 by Ona’s rebel action), acting in concert with the PNG government, was responsible for despoiling the environment on Bougainville and for war crimes. The PNG government has urged the US government not to allow the case to proceed.

PNG agrees to process At Australia’s request, PNG is providing space for the processing of some 200 asylum seekers asylum seekers at its naval base at Lombrum in Manus province to determine their refugee status. The government will seek a written guarantee from Australia, which is paying all expenses, regarding the future of the first group of asylum seekers before agreeing to accept more for processing, according to Mr Avei. Australia has made no formal request for PNG to process more asylum seekers. Following a recent visit to Australia by the Indonesian foreign minister, Hassan Wirajuda, a regional meeting on asylum seekers has been scheduled for February 2002.

Provincial governmental Sir Mekere, who is the minister for finance as well as the prime minister, has grants may be written off admitted that the financial relationship between the national government and the provincial governments is not viable. In some cases up to four years’ worth of legally guaranteed grants to provinces are in arrears and still owed by the national government. Sir Mekere intimated that he might ask parliament to write off the arrears. The administrative arrangements for provincial government reform, which 1996 legislation envisaged would take one year to implement, have not progressed far either. Moreover, those sectors such as health and education that have been successfully decentralised may now see the process reversed.

Provincial governments are The Supreme Court has declared (by a vote of three to two) that the part of victorious in Supreme Court the organic law dealing with the suspension of provincial and local-level

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government is unconstitutional and has therefore reinstated the governor of the Southern Highlands province, Anderson Agiru, who sought the reference from the court, and his government. Also affected are the Western and Enga provinces, although the national government had already lifted Enga’s suspension.

In a related matter, the Supreme Court has declared that recent amendments to the National Capital District Commission (NCDC) Act are unconstitutional and has consequently restored the powers of the National Capital District governor, Philip Taku, and his administration. The amendments sought to replace the current commission, which consists of members of parliament representing the NCDC’s five constituencies, with a committee appointed by the government. The judges found that the rights of the MPs to hold such public office could be amended by a law that is reasonably justifiable for the purpose, but that the amendments did not in fact specify why it would be reasonably justifiable to abolish the right to hold such public office. Administration of the NCDC has been problematic since its devolution from the national government. In the latest twist, the parliament repealed the original act and its amendments on December 12th, replacing it with one that provides for an appointed committee representing community interest groups, including MPs ex officio, to govern the national capital.

The electoral roll still needs There appears to be a growing recognition in the government that the to be updated problems that plagued the 1997 elections will be inevitable in 2002 unless it takes action to update the electoral roll, an exercise that was started, but stalled after only three provinces had been covered. Many citizens were not able to vote in 1997 because their names were not on the roll, and many names that were on the roll were those of dead people. This resulted in a high proportion of disputed returns, and it took the courts a long time to resolve these. The electoral commissioner has been attempting to get further funding for the task. Notwithstanding the Kina45m (US$11.6m) estimated for election-related expenses it seems unlikely that the 2002 budget has adequately addressed the issue, given its extensive welfare—some say populist—measures and overall fiscal constraints. The government may need to seek assistance from Australia as it did for the 2000 census and for the drafting of the Bougainville legislation, when time was of the essence.

Sir Michael Somare is now The opposition coalition now officially comprises National Alliance (14 MPs); the opposition leader People’s National Congress (six); People’s Progress Party (four); and National Party (three). Sir Michael Somare, the leader of National Alliance, has taken over from Bill Skate as the leader of the opposition. The Pangu Party and the Papuan Action Party occupy the cross benches.

PNG and Indonesia agree to The 20th meeting of the PNG-Indonesia joint border committee in early a repatriation plan November heard that the border shared by both countries cuts across customary land, that commercial banks in both countries still do not accept the exchange of kina and rupiah despite previous agreements to have their respective banks rectify this matter, and that extradition arrangements

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between the two countries have yet to be completed. PNG and Indonesia are jointly to fund the repatriation to Irian Jaya of the 313 West Irianese who have been living outside of Vanimo in temporary refugee camps in PNG’s Sandaun province for 12 months. The UN Refugee Agency has withdrawn financial support because of PNG’s refusal to grant them refugee status.

PNG officials preparing for the 2002 national elections want a joint PNG/Indonesia team to travel to the Wara Smol area on the Indonesian side of the border to ascertain the preference of country of citizenship for people who had voted in PNG’s 1997 elections, but are now living in customary land in Irian Jaya, having crossed the border following local conflicts.

Economic policy

The IMF’s support The IMF’s stand-by facility of US$111m for balance-of-payments support programme is completed was completed in September with the payment of US$24m to the Bank of Papua New Guinea (BPNG, the central bank). Conditional budget support amounting to US$80m is still to be drawn down under the structural adjustment programme: the Asian Development Bank is to pay out US$70m, which will go towards public-sector administration reform, and the US$35m second tranche of the World Bank’s governance loan with associated assistance of US$25m from Japan is dependent on progress in several areas, including the forestry sector. The risks to accessing this support, according to the IMF, arise mainly from limited technical capacity to implement agreed measures.

A budget deficit of 2% of The authority of the prime minister, Sir Mekere Morauta, was overwhelming GDP is projected for 2002 when he was unanimously elected by the parliament in July 1999. Some two years later, however, in his other role as minister for finance, Sir Mekere presented the final budget of the sixth parliament on November 27th 2001 to a storm of criticism. The proposed budget carries a deficit of Kina215m (US$55.8m), equivalent to 2% of GDP, and reduces public debt by Kina122m, financed mainly by Kina303m of asset sales, net of Kina22m of privatisation commission expenses. Surplus funds carried over from the sale of PNGBC in 2001 is budgeted to complete the financing; though completion of the sale to the Bank of South Pacific is now expected early in 2002. External financing options have declined sharply with the completion of IMF and World Bank programmes, further exacerbated by PNG’s low credit rating.

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Central government budget (Kina m) Budget 1st half Estimate Budget 2000 2001 2001 2001 2002 Total receipts 3,008.7 3,223.3 1,116.0 3,123.9 3,285.7 Tax revenue 2,314.9 2,475.9 1,019.5 2,320.7 2,416.5 Personal tax 544.0 650.0 287.2 595.0 609.3 Company tax 692.0 636.7 246.4 632.1 661.8 Other direct tax 233.6 233.4 120.0 228.6 238.6 Indirect tax (incl VAT) 845.3 955.8 365.9 865.0 906.8 Non–tax revenue 187.2 197.0 73.0 231.2 201.3 Foreign grants 506.6 550.5 23.5 572.1 667.9 Expenditure 3,201.0 3,364.2 1,103.0 3,306.9 3,500.2 Recurrent expenditure 2,352.2 2,313.1 1,004.3 2,268.3 2,339.6 National Departmental 1,243.1 1,184.5 476.1 1,127.2 1,233.8 Provincial governments 563.9 584.7 233.9 570.5 554.8 Interest payments: 419.9 410.1 219.4 436.8 410.8 foreign 135.7 167.0 75.9 169.0 195.1 domestic 284.2 243.1 143.5 267.8 215.7 Other grants & expenditure 127.7 142.0 75.9 142.0 148.2 Net lending & investments –2.4 –8.2 –1.0 –8.2 –8.0 Development expenditure 848.8 1,051.1 98.7 1,038.6 1,160.6 Overall balance –192.3 –140.9 13.0 –183.0 –214.5 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Expenditure shortfall Preliminary estimates of the budgetary performance in the three-quarters to contributes to surplus September 2001 suggest the government recorded a surplus of Kina54.9m compared with Kina33.5m surplus for the year-earlier period. (The budget was projected to record a deficit of Kina140.9m for the full year.) Both revenue and expenditure were lower than in the corresponding period a year earlier, despite 9% annual inflation. The expenditure shortfall came mainly in the development budget. Mirroring the development expenditure shortfall, and symptomatic of the difficulties the government faces in implementing planned projects, foreign grants in the three-quarters to September 2001 were about Kina200m lower than in the same period a year earlier and represented just 20% of the full-year budget. Direct tax receipts for the three-quarters in 2001 exceeded those in the previous year by 7.3% and represented 71% of the full- year budget; indirect tax receipts, reflecting a contracting economy, were 9.9% down and represented just 60% of the full-year budget.

Privatisation proceeds will All proceeds of privatisation, the core of economic reform, are to be applied to be applied to debt relief debt reduction. This would free up additional expenditure, as a result of lower interest payments, which could be directed towards priority areas— infrastructure, health, education, law and order and agriculture. The budget envisages Kina26m of interest savings, a reduction of 6%, but the continuing deficit will greatly erode the debt-reducing capacity of the asset sales. The budget envisages two other savings: Kina89m from the cutting of the district development programme (“slush funds”) for the 89 open-seat MPs and a reduction of Kina103m on goods and services expenditure. Each MP participating in the district development programme chaired a district committee with responsibility for the allocation of its own Kina1m grant, but

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these committees were finding it difficult to provide the costed project- feasibility studies required by the World-Bank-supported economic reform programme in order for the grant money to be released. The budget cuts taxes and provides additional subsidies totalling Kina170m. Key measures include the following:

• The 4% mining levy, introduced in the 1999 supplementary budget, is to be phased out over four years at a cost in 2002 of Kina24m.

• Following completion of a review of the forestry sector, log export tax rates are to fall by 5 percentage points, an insufficient cut according to the industry association, and plantation logs are to be exempt from export tax at a cost in 2002 of Kina14m.

• Average personal tax rates will fall, at a cost in 2002 of Kina13m, as a result of raising the threshold so that low-income earners remain outside the tax net, a substantial administrative saving.

• The education subsidy will be more than doubled to Kina150m, which is the most controversial of the budget’s expenditure initiatives.

• Transfers to provinces are budgeted at just 37% of their entitlement under the organic law. This is explained partly by Kina123m of education and health expenditure for which the national government has assumed responsibility, but this still leaves the provinces short by about 25%.

• Public-sector wages and salaries are budgeted to increase by 7%. The budget provides Kina50m for 1,400 redundancies that are estimated to save Kina15m annually.

Tax credit scheme is The tax credit scheme, developed to allow mining and petroleum developers to applied to agriculture reduce their tax liabilities by funding community infrastructure and projects in their remote locations, has been extended to the agricultural sector. Generally, a lack of planning and implementation capacity on the part of the national and provincial governments has hampered infrastructure development. Therefore the use of the capacity of private-sector companies to build and maintain infrastructure in their areas permits quicker, more substantial and more cost-effective infrastructure development. The department of National Planning and Monitoring will become the administering agency.

Budget assumptions are Reflecting the agricultural sector’s light contribution to revenue, tax revenue is optimistic expected to grow by only 4.1% in 2002, despite the much higher rate of increase in nominal GDP assumed by the government. Much of the increase is predicated upon better collection of arrears and improved compliance as a result of enhanced enforcement, particularly for VAT which is budgeted to grow by a massive 27.7% (assisted by lower refunds to the mining and petroleum sectors reflecting the lower levy), and for non-mining corporate tax which is budgeted to grow by 12.6%. The budgeted 0.9% decrease in mining and petroleum tax receipts looks optimistic in the light of the assumed 2.4% contraction in the sector and a possible reduction in world prices.

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The 2002 budget assumes real GDP growth of 1.2%, inflation at 8.3% and 6- month treasury bill rates at 10%. It expects all the growth to come from the agriculture sector (5.1%), mainly from palm oil and cocoa, and that mining and petroleum will contract by 2.4% and other sectors by 0.1%. The oil price is assumed to be US$23.5 per barrel, which is 12% down on last year, and the gold price is assumed to be US$285 per ounce, which is 7% higher than last year. Both prices look optimistic from the perspective of current prices and in the light of a global economic slowdown extending well into 2002. The Economist Intelligence Unit forecasts lower prices for both oil and gold in 2002—averaging US$18.3 per barrel and US$255 per ounce respectively.

Privatisation is progressing In the government’s privatisation programme, 51% of the equity is for sale uncertainly compared with 49% originally. The act of preparing some state-owned businesses for sale has revealed their poor financial state. The government has written off a large debt owed by the PNG Electricity Commission (Elcom) and put in place a rescue package to keep Post PNG in operation. Air Niugini is still on the market and has been given a boost by Qantas allowing it to operate all flights between Australia and Papua New Guinea—this is a spin-off from the collapse of Ansett, Australia’s second-largest airline. The government has announced that the preferred bidder for 51% of Papua New Guinea Banking Corporation (PNGBC) is the locally owned Bank of South Pacific (BSP). Expressions of interest for Telikom and the power utility, PNG Power, are expected soon. A similar exercise for the Harbors Board is imminent. The government hopes to complete the sales of these enterprises by June 2002.

The Bank of South Pacific BSP was the successful bidder for 51% of the PNGBC ahead of the Australia and will take over PNGBC New Zealand (ANZ) Banking Group and Elders Finance of New Zealand. ANZ, following its recent takeover of Bank of Hawaii’s Pacific operations in PNG (as well as in Vanuatu and Fiji—and the acquisition of a majority stake in the Bank of Kiribati a month earlier), accounts for about 25% of commercial banks’ total assets in PNG, compared with BSP’s 19% and the target company’s 37%. The executive chairman of the PNGBC, Garth McIlwain, claims that the bank is on track to record a moderate profit in 2001. Industry sources believe any private entity that bought into PNGBC would operate initially under strict conditions laid down by the government, such as a freeze on staff shedding for one year and a freeze on branch closures for up to five years.

PNG Power has acquired The government is attempting to clean up the electricity industry by Elcom establishing a new company, PNG Power. The company is to acquire the assets (except the Sirinumu and Yonki dams) and the staff of Elcom. Its liabilities of Kina400m, Kina224m of which is owed to the government and is to be written off, will remain with the commission. PNG Power will have a monopoly licence for transmission and distribution and, for a number of years, a monopoly in generation. Average tariffs will be subject to incentive-based regulation, with a review of the tariff system in the tenth year. The key operational features of PNG Power are: 70,000 customers operating in 19 separate regions; installed capacity of 274 megawatts of electricity, of which 59% is hydroelectric and the remainder thermal; and a distribution network comprising 4,000km of transmission lines, 2,100 transformers and 390,000

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KVA of total distribution transformer capacity. The government has sought competitive tenders, for a minimum 51% stake in PNG Power. Tenders closed on November 30th, as they did for Telikom.

The Harbors Board will be High overheads make the Harbors Board unviable in its current form, so its restructured regulatory and commercial functions will be demerged into separate entities. The commercial functions, operating assets and required staff are to be transferred into a new pre-privatisation company, PNG Harbors, under the control of the privatisation commission. The Harbors Board would retain its existing regulatory functions and remaining staff until a new regulatory authority, the Maritime Safety Authority, is established. The government is considering both sale and lease options for the commercial assets. It wants to encourage local communities to bid for single wharf facilities. Regulations promoting open access to ports would protect the interests of local stevedoring companies.

A privatisation strategy for the Water Board, which is the water supplier to urban centres other than the national capital, and Eda Ranu, the national capital’s water supplier, has been approved by the commission and is awaiting government endorsement. An information package will soon be released to prospective tenderers for feedback.

The privatisation of SOEs is Preparations for sale of the 21 small state-owned entities, Ramu Sugar being the progressing largest, are progressing well. The structure of the People’s Unit Trust, the vehicle through which citizens will be able to own part of the major privatised businesses, has been approved and the government will call for tenders for the trust from fund managers and trustee companies internationally. The successful tenderer would establish the trust independently of the privatisation commission and the government and would raise funds and negotiate the purchase of interests in the various privatised entities.

The domestic economy

Economic trends

A small fall is recorded in Excluding the mining and hydrocarbons sector, employment fell by 3.3% in private sector employment the second quarter of 2001 from the previous quarter and 8.4% from the year- earlier period. The national capital led the decline in average annual employment, seeing its total fall by 10.6%, followed by the Highlands, with a fall of 7.1%. Outlying regions and the Madang/Wewak region bucked the trend, with employment figures growing by 8% and 4% respectively. Building and construction and business and financial services were the worst-affected industries, with contractions in average annual employment of about 20%. Employment in the agriculture, forestry and fishing sectors increased by 2.9% on an average annual basis, but contracted almost as much over the year. Similarly, average annual employment in the mining and oil industries rose by 2.8%, but contracted over the year by 8.2%.

Inflation is running at 10% Consumer prices increased by 3.8% quarter on quarter in the third quarter and year on year 10% year on year. The increase in the third quarter is the highest since the second quarter in 2000. Port Moresby recorded 4.6%, the highest quarterly inflation rate; Lae and Rabaul were around 3.6% and Madang and Goroka around 2.7%. Food prices jumped by 6.3% between the second and third quarters, and the drinks, tobacco and betelnut category by 3.6%. Underlying inflation (estimated by the Bank of Papua New Guinea (BPNG, the central bank) by eliminating betelnut, fruit and vegetables and the effects of government policy e.g. excise) was recorded at 2.6% quarter on quarter and 7.6% year on year rate. The government expects the average inflation rate for 2001 to be 9.8% and has budgeted on 8.3% in 2002.

Quarterly inflation Index: 1977=100 2000 2001 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr a Consumer price index 522.9 545.6 555.5 560.3 569.3 588.7 611.2 % change, year on year 19.6 21.8 12.2 10.0 8.9 7.9 10.0 Underlying inflationb 451.7 457.3 460.3 465.0 471.9 482.6 495.2 % change, year on year 16.7 13.2 6.4 5.7 4.5 5.5 7.6 a Provisional. b Revised series. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Money supply rises The central bank allowed reserve money—notes and coins in circulation and deposits with the central bank—to expand by 4.1% over the first half of 2001, following a contraction of 15.8% in 2000. The central bank’s benchmark interest rate, the kina facility rate, fell from its inaugural 15.5% in February 2001 to 12% in August where it has remained since. Treasury-bill rates have declined over the same period by a similar proportion, commercial bank lending rates less so and deposit rates more so. The central bank, despite calls by the commercial banks for it to ease its quantitative restrictions, retained its 5% cash-reserve requirement and 25% minimum liquid asset ratio. It also maintained its treasury-bill tap, thereby allowing non-bank investment in treasuries, drawing complaints from commercial banks as the central bank effectively becomes their main competitor as well as their regulator.

Money supply (Kina m; end–period) Year Year 2 Qtr 1999 2000 2000 2001 % changea Domestic credit 2,824.8 2,699.0 2,828.0 2,691.8 –4.8 Non–government 1,747.4 1,756.0 1,841.6 1,782.3 –3.2 Private sector 1,516.8 1,562.1 1,596.4 1,646.2 3.1 Official entities 158.5 124.1 160.7 116.6 –27.4 Non-monetary financial institutions 72.1 69.9 84.5 19.5 –76.9 Central government 1,077.4 943.0 986.4 909.5 –7.8 Net foreign assets 675.5 1,048.3 719.3 1,207.2 67.8 Total money supply (M3) 3,500.3 3,747.3 3,547.3 3,899.0 9.9 a 2 Qtr 2001 on 2 Qtr 2000. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Oil and gas

Fiscal stability legislation The government is hoping that enhanced fiscal stability legislation offers hope for gas pipeline proposed in the 2002 budget will be acceptable to project developers and the US$3.5bn PNG-Queensland gas pipeline project agreement can be signed before the end of 2001. In discussions on the amendments with the gas ministerial committee chairman, Moi Avei, developers have asked, in effect, for fiscal stability for project life. The government is offering 20-year stability. This is a step up from the existing period which is equivalent to the lesser of the project financing period or 20 years—unworkable when project partners have different financing periods. Mr Avei is hopeful that he can agree the basis of the 20-yearly review to be specified in the project agreement with the developers during the budget session. This would be the most positive sign in two years for the gas pipeline project. The level of the government’s equity in the project, thought to be about 15%, is still to be agreed. Japan’s Itochu Corporation is expected to part-fund the A$350m- A$450m financing requirement.

Other projects also boost The gas pipeline project was boosted by Rio Tinto’s announcement that in pipeline’s prospects December it would begin construction of a 1.4m tonnes/year aluminium refinery in Gladstone (expected to come on stream early in 2005) as part of a A$3bn first stage expansion of its operations there. The company has said it would convert its power plant from coal to gas when it becomes available at a reasonable price. The Queensland government is understood to be prepared to buy the rights to pipe up to 20 petajoules/year of gas in a new pipeline—possibly the Papua New Guinea (PNG) one—as an incentive for the construction of a gas-fired power station in Townsville in North Queensland.

Oil production declines Oil production had declined by 19% to 17m barrels in October 2001 compared with the year-earlier period, reflecting natural decline in the Kutubu and Gobe fields and a number of production disruptions in September and October. The oil production rate over the third quarter of 2001 was down 26% on the rate for the same quarter the previous year and 4.4% down on the year to date. The monthly average price for the local Kutubu crude declined by 18% in October

from the September average, with prices currently at a two-year low, as a result of being depressed by global recessionary fears and rising oil stocks.

Landowners from the Gulf and Southern Highland provinces of PNG have been at odds for 12 years over ownership of the land on which the Gobe petroleum project is located. The seven Gulf province landowner-stakeholders in the project have now agreed on how to share their 30% of the landowner payments held in a trust account for five years pending such resolution. However, the 15 landowner groups from the Southern Highlands province are still to work out how to divide their 70% stake.

Mining

The future for gold mining The Porgera gold mine produced 584,022 oz of gold in the three quarters to is bleak September 2001, 12% less than in the year-earlier period. The production of the Lihir mine for the third quarter of 2001 was 177,761 oz of gold and 524,555 oz for the three quarters to date. PNG risks losing its number ten world ranking for gold production unless it finds new mines quickly. The Misima mine has already ceased mining and is now just processing the low grade ore stockpiled there; Ok Tedi mine has nine years of production left; Porgera is in its mature stage and has about six years left; and Tolukuma is not expected to operate beyond 2014. Lihir, however, is a long-life mine, and is only just now reaching potential.

BHP Billiton will transfer its 52% interest in Ok Tedi Mining to a fully independent company in January 2002, which will hold the interests in trust on the behalf of the Western province and PNG. The national government and a Canadian mining company, Inmet, an 18% shareholder in Ok Tedi, have approved the arrangement. The Mining (Ok Tedi Mine Continuation 9th Supplementary) Agreement was passed by the parliament on December 11th 2001 by 58 votes to two. The legislation formalises the shareholder agreement and to the mine continuation pacts being negotiated between the operating company and the communities.

Mineral exports, by volume

2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtra Crude oil (‘000 barrels) 6,613 6,604 4,523 6,529 4,069 6,190 Copper (‘000 tonnes) 32.6 24.0 39.7 42.2 55.6 38.8 Gold (tonnes) 17.2 17.0 19.2 18.5 18.8 17.1 a Provisional. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Copper export volumes Copper was the outstanding export performer in the mining and hydrocarbons were up by 60% sectors—it recorded export volumes about 60% higher in both the third quarter and the three quarters to September 2001, relative to the year-earlier periods. Gold export volumes grew by 0.6% and 1.5% respectively, for those comparative periods. Oil export volumes declined between the third quarters of 2000 and 2001 by 6% and by twice as much between the year-to-date periods.

Agriculture and fisheries

A price stabilisation scheme The Kokopo MP and former prime minister, Sir Rabbi Namaliu, has called for gets renewed interest the re-introduction of a price stabilisation scheme, with funding of Kina100m (US$26m) from the privatisation programme, to be managed independently of politics by a transparent and accountable authority. However, academic studies of the earlier scheme recommended against its reintroduction and, if reintroduced, for its management by an independent industry organisation on a strictly self-funding basis. This is sure to feature prominently in the 2002 elections, unless prices recover before then.

New chairman is appointed A Rabaul-based businessman and Bougainvillean, Thomas Lomataku, has been for the cocoa board confirmed as chairman of a new-look cocoa board. On Bougainville, where 10 million trees were planted under a UN development programme supplemented by private nurseries, cocoa growers and producers have raised about Kina2.3m under a savings and loans scheme. Kina1.4m has been loaned back to members to help them buy tools and chemicals to look after their plots. A new corporation—to be known as the Kokonas Indastri Koporesin—is to be set up to replace the Copra Marketing Board. One of its key roles would be to facilitate a gradual privatisation of the marketing of coconut products and by-products.

Coffee production is Coffee production for the first ten months of the coffee year (October-September) growing to July 2001 increased by 13.6%, to 53,555 tonnes, compared to the year-earlier period. Nevertheless, the industry authority has revised downwards its production estimate for the 2001 calendar year to 60,000 tonnes. Exports for the first ten months, at 45,720 tonnes, were 3% lower than for the year-earlier period, as a result of exporters withholding stocks from May to July in the anticipation of higher prices. Export earnings for the same period totalled Kina176.7m, 26% less than the year-earlier period. Between October 2000 and July 2001, mild Arabica prices fell by 33% compared to a year earlier. Within PNG, average prices declined by 26%. The depreciation of the kina against the US dollar partially offset the price decline, although it also raised the cost of imported inputs.

The Ramu palm-oil project Investment Capital Holding, a consortium of leading businessmen in Papua attracts investment New Guinea looking to set up a joint venture with Chinese companies, has attracted the Yunan State Farmers’ Group to the Ramu palm-oil project. The government has budgeted Kina10m for the project in 2002.

Tuna exports grow rapidly PNG is estimated to have a sustainable annual tuna catch of about 330,000 tonnes, among the region’s best. The fisheries industry’s contribution to GDP is small, but growing fast. Tuna exports have grown from 236 tonnes of fresh chilled products in 1996 to 1,189 tonnes in 2000; exports of frozen tuna rose from 2,031 tonnes to 26,960 tonnes; and canned tuna from nil to 8,614 tonnes. Maps Tuna, a newly established fishing operation in Lae, has recently launched two longliner vessels. A domestically-based longline tuna ship is estimated to add Kina600,000 (US$216,000) a year to GDP. Some progress has been reported on the Wewak tuna-processing project in East Sepik province, which is 49% Taiwanese-owned. It is claimed that it will eventually offer 2,000 jobs and generate US$60m in its first year of operation rising to US$100m in the second.

Agricultural exports, by volume (‘000 tonnes unless otherwise indicated) 1999 2000 2001 4 Qtr 1 Qtr 2 Qtr 3Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtra Cocoa 4.5 14.2 9.9 9.0 4.9 10.2 10.0 8.7 Coffee 14.3 10.2 20.5 16.7 19.2 11.3 15.3 13.2 Tea 2.6 2.0 2.2 2.3 2.0 2.5 2.4 1.2 Copra 19.9 29.6 16.9 10.5 10.2 5.0 5.3 3.4 Copra oil 6.9 15.1 9.8 14.9 8.2 8.1 9.9 4.1 Palm oil 46.4 49.8 95.6 100.4 90.5 65.2 100.0 91.4 Rubber 1.1 0.6 0.9 1.4 0.8 1.3 0.9 1.0 Logs (‘000 cu metres) 288.2 312.2 322.4 352.2 411.7 338.2 346.6 236.2 a Provisional. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Most agricultural exports Most of the agricultural commodities recorded declines in export volumes in commodities decline the three quarters to September 2001 compared with the year-earlier period. Copra was down by 75% and copra oil by 44%, and coffee and cocoa export volumes were down by 16% and 13% respectively. Palm oil and rubber bucked the trend, as their export volumes increased by 4% and 10% respectively. Log export volumes were down by 7% in the third quarter compared with the year-earlier period.

World commodity price forecasts (US$/tonne unless otherwise indicated; year on year) 2000 % change 2001 % change 2002 % change 2003 % change Cocoa (US cents/lb) 40.3 –22.2 48.8 21.2 60.0 2.3 61.0 1.7 Coffee (US cents/lb; Arabica) 87.1 –16.2 61.7 –29.1 52.6 –14.7 49.5 –5.9 Tea (US$/kg) 1.9 5.8 1.6 –15.8 1.4 –11.5 1.3 –4.3 Copra 304.8 –34.0 201.5 –33.9 240.0 19.1 263.0 9.6 Coconut 450.3 –38.9 319.8 –29.0 386.8 21.0 421.0 8.9 Sugar (US cents/lb) 8.2 30.8 8.6 5.2 8.6 –0.8 8.9 3.6 Crude palm oil 310.3 –28.8 283.0 –8.8 380.3 34.4 407.5 7.2 Palm kernel oil 443.5 –36.1 303.3 –31.6 387.8 27.9 407.3 5.0 Rubber 832.5 3.0 771.0 –7.4 816.3 5.9 1,327.5 62.6 Crude oil (US$/barrel; Brent) 28.48 59.5 24.28 –14.8 18.26 –24.8 20.19 10.6 Gold (US$/troy oz) 279.3 0.2 268.8 –3.7 255.0 –5.1 250.0 –2.0 Copper (US cents/lb) 81.3 14.2 71.1 –11.2 60.8 0.9 71.8 14.4 Source: EIU, World Commodity Forecasts.

Infrastructure

Infrastructure sector is The infrastructure sector is to get the biggest slice of the 2002 development favoured in the budget budget—it gets 44% of the budget, which is Kina1.16bn (US$4.17m). AusAID, the Australian Government's overseas aid agency, has begun a Kina6m upgrade of the Kainantu-Kassam pass on the Highlands highway following its rural bridge-replacement and upgrading project. The agency had previously declined to underwrite the national government’s proposed topping-up of funds for

roads (already pledged by provincial governments and members of parliament from their district support grants). Tenders have been called to repair other sections of the highway as part of a project worth Kina9.5m, to be funded jointly by the mining industry and the government.

There is a shortage of road The government cannot find the Kina100m per year that it needs to maintain improvement funding the country’s roads, according to the government’s National Research Institute; moreover, it is also unable to find the funding that would enable it to activate donor-funded projects. Disbursements during 2000 and 2001 to the department of transport and works for road maintenance totalled Kina30m, which was small proportion of the required Kina260m. An Asian Development Bank loan of US$115m for upgrading and rehabilitating 1,700km of Highlands feeder roads (conditional on the PNG government contributing some Kina26m per year for six years), has remained undrawn since October 1999. The main Highlands highway upgrade is planned to start in 2003 with the aid of World Bank loans, and will require a government contribution of Kina40m a year.

Financial and other services

ANZ takes over Bank of The Australia and New Zealand (ANZ) Banking Group acquired, for A$100m, Hawaii operations in PNG the Bank of Hawaii’s operations in Papua New Guinea (two branches), Vanuatu (two branches) and Fiji (three branches) at end-November 2001, just three days after taking a majority stake in the Bank of Kiribati. Its PNG subsidiary was an unsuccessful bidder for a 51% stake in the Papua New Guinea Banking Corporation, but was beaten by its competitor, the Bank of South Pacific.

Foreign trade and payments

Trade surplus offsets The balance of payments recorded a surplus of Kina257m (US$92.4m) in the invisibles deficit third quarter of 2001, virtually of it all in the current account. This pattern is quite different from a year ago where the capital-account deficit completely offset the current-account surplus. The trade balances in the third quarters of 2000 and 2001 were comparable, but in 2001 the invisibles deficit was 33% higher than in the previous year as a result of increased insurance, consultancy fees, interest and dividend payments. Merchandise exports were Kina1.61bn in the third quarter of 2001, an increase of 16% on the year-earlier period; and merchandise imports were up by 24% to Kina814m.

Mineral and oil exports Mineral and oil exports, 82% of total merchandise exports in the third quarter receipts are up by over 20% of 2001, were 21% higher in the third quarter of 2001 than in the year-earlier period, but agricultural and forestry exports were down by 7% and 12% respectively. Fish exports, just 1.3% share of exports, jumped from Kina9.6m to Kina20.5m between the third quarters of 2000 and 2001. Copper, accounting for 13% of total exports, was the next best performer, increasing 82% in the quarter from a low third quarter in 2000. Gold exports increased by 30%, but oil exports, accounting for 35% of total exports, grew by just 2%. Log exports,

which have just a 4% share in exports shrank by a massive 37%. The main agricultural exports were lower in the third quarter of 2001 compared with the year-earlier period, except for cocoa (accounting for 14% of agricultural exports), which increased its exports by 40%. The 22% depreciation of the kina against the US dollar between the third quarters of 2000 and 2001 boosted growth in export values between the two quarters (PNG’s exports are all dollar-denominated).

Balance of payments (Kina m) 3 Qtr 3 Qtra 1997 1998 1999 2000 2000 2001 Merchandise exports 3,079 3,707 5,006 5,813 1,393 1,611 Merchandise imports –2,129 –2,231 –2,760 –2,779 –659 –814 Trade balance 950 1,476 2,246 3,034 734 797 Invisible credits 619 699 691 760 185 227 Invisible debits –1,823 –2,238 –2,620 –2,809 –597 –772 Net transfers 87 187 50 –12 2 4 Current–account balance –167 124 367 973 324 256 Official capital flows –89 –92 119 –3 –47 7 Private capital flows 134 –189 –305 –502 –239 –4 Non-official monetary sector transactions –61 31 –6 –54 –58 17 Change in offshore account balances 46 –114 22 –91 17 –55 Capital–account balance 30 –364 –170 –650 –327 –35 Net errors & omissions 14 –23 –29 36 29 36 Overall balance –123 –276b 160b 359 26 257 International reserve levelc 667 391 551 910 652 1,349 a Provisional. b Revalued to reflect exchange-rate gains/losses on the BPNG’s foreign assets and liabilities. c End-period. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

International reserves are International reserves at the end of September 2001 were Kina1.35bn robust (US$350m), twice the level recorded last year. This was sufficient to cover 6.7 months of non-mineral imports compared with seven months at the end of the June and four months in September 2000. Extraordinary foreign loans and IMF stand-by funds supporting the government’s economic reform programmes boosted reserves in the first half of 2001.

Key commodity exports Prices received for most of PNG’s export commodities fell in the third quarter. suffer from low prices Oil prices were 18% lower over the year in the third quarter of 2001 than in the year-earlier period and gold prices were down by 2.2%. Cocoa, tea and rubber prices were stronger in 2001 than a year earlier, but coffee and palm-oil prices were weaker. Copra and copra-oil prices staged a recovery in the third quarter, recording increases over the year-earlier period of 21%; but for the three quarters to September prices were lower by 21% and 30% respectively.

Mining capital expenditure In the first half of 2001 the value of merchandise imports increased by 2.2% lifts the import bill compared with the first half of 2000. Increases in capital imports by the mining and petroleum sectors offset a decline in general imports. Every mine except Misima, which has stopped mining and is processing stockpiled ore,

increased capital expenditure, inducing a 15.7% increase in imports. Construction of the Moran oil field lifted imports in the oil sector by Kina24m (US$8.63m) to Kina41m. General imports declined by 4.9%, reflecting lower aggregate demand because of the higher price of imports induced by currency depreciation. Against the Australian dollar, in which over half of total imports is denominated, the kina lost 8% of its purchasing power in the first half of 2001 compared with the year-earlier period.

Exports (Kina m) Year Year Year Year 3 Qtr 3 Qtra 1997 1998 1999 2000 2000 2001 Agricultural 777.2 1,020.2 1,165.0 955.5 221.8 206.6 Forest products 433.6 173.2 265.9 308.8 73.5 64.5 of which: logs 409.3 154.2 255.6 283.5 65.3 41.1 Marine products 9.6 42.2 30.4 33.7 9.6 20.5 Minerals (includes silver) 1,838.9 2,452.1 3,524.0 4,494.6 1,083.0 1,314.0 of which: gold 718.7 1,227.8 1,546.1 1,950.8 413.4 539.4 copper 259.8 395.7 574.3 595.4 113.8 207.0 crude oil 852.2 813.1 1,382.4 1,921.7 550.8 561.5 Total 3,059.3 3,687.7 4,985.3 5,792.6 1,387.9 1,605.6 a Provisional. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The central bank helps to Over the third quarter of 2001 the kina bought on average about 8-9% less of prop up the kina the currencies of its main trading partners—Australia, Japan and the US— compared with the average exchange rates in the previous quarter. Compared with the same quarter a year earlier, the decline was about 13% against the Australian dollar and yen, and 22% against the US dollar. The central bank spent more than Kina20m in late November to support the currency. Any resilience that the currency has shown in the last few months can be directly attributed to the timely intervention by the central bank in the currency market.

Exchange rates (kina per unit of foreign currency; annual averages) Dec 12th 1996 1997 1998 1999 2000 2001 A$ 1.036 1.068 1.297 1.643 1.598 2.000 US$ 1.324 1.435 2.059 2.550 2.760 3.846 0.012 0.012 0.016 0.022 0.026 0.031 Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; Bloomberg.

The currency depreciation The level of public debt rose between the third quarters of 2000 and 2001 by pushes up public debt 37% to Kina7bn. External debt increased by Kina1.49bn, or 44%, as a consequence of currency depreciation. Domestic debt was Kina2.12bn at the end of September 2001, 25% more than the year-earlier period, as the government was forced to borrow domestically to replace shortfalls in drawdowns of external concessional borrowings and privatisation proceeds.

The composition of domestic debt is changing. Tap-issue holdings of treasury bills accounted for 40% of the increase in domestic debt between the third quarters of 2000 and 2001, superannuation funds and insurance companies accounted for 37%, and commercial banks also for 37%. The central bank’s holding of government debt fell by Kina67m. The government drew down Kina272m of external loans and repaid Kina310m over the year to September 2001, but Kina1.53bn of exchange losses caused the debt level to rise. The government paid foreign interest equivalent to Kina133.9m in the three quarters to September 2001, higher by 40% than a year earlier, owing to currency depreciation. It paid Kina58m worth of foreign interest in the third quarter.

Public debt outstanding (Kina m, end-period) Sepa 1996 1997 1998 1999 2000 2001 Domestic 1,969.5 2,251.7 2,473.0 2,021.3 1,783.3 2,124.0 Treasury bills 1,615.3 1,931.6 2,186.9 1,775.2 1,577.2 1,856.5 Inscribed stock 354.2 320.1 286.1 246.1 206.1 217.4 External 1,811.3 2166.3 2,704.6 3,812.8 3,838.3 4,888.5 International agencies 1,579.2 1,997.4 2,567.5 3,650.4 3,683.5 4,733.3 Commercial loans 219.6 157.1 124.1 144.6 137.5 137.3 Other loans 12.5 11.8 13.1 17.9 17.3 17.9 Total public debt 3,780.8 4,418.0 5,177.6 5,834.2 5,621.6 7,012.5

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