Papua New Guinea
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Country Report July 2003 Papua New Guinea Papua New Guinea at a glance: 2003-04 OVERVIEW Papua New Guinea (PNG) will benefit from a sustained period of relative political stability, as the prime minister, Sir Michael Somare, is assured of a full five-year term, barring extraordinary circumstances. However, there is little prospect that his government will prove any more capable than its pre- decessors of overcoming PNG’s immense social and economic problems. The government’s finances are in disarray and it is in dire need of international financial support. Sir Michael will therefore be under pressure to implement domestically unpopular economic reforms. The economy will remain depressed in 2003, but there will be some positive developments in agriculture and mining that will contribute to economic growth in 2004. Key changes from last month Political outlook • Sir Michael maintains that his leadership is not under threat and that he will lead the governing coalition until the next general election in 2007. However, he plans to make controversial amendments to the constitution to protect further his tenure of office. Economic policy outlook • The government is struggling with a shortage of funds and has resorted to borrowing from domestic sources, which has pushed up Treasury bill rates to more than 20%, compared with around 10% in early 2002. However, a mini-budget is unlikely to be introduced. Economic forecast • According to preliminary data from the central bank, consumer prices increased by more than 20.7% year on year in the first quarter of 2003. The central bank has raised its benchmark interest rate in an effort to ease inflationary pressures. Year-on-year inflation is therefore forecast to rise to an average of 18.4% in 2003, before easing slightly to around 14.6% in 2004. July 2003 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Papua New Guinea 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2003-04 7 Political outlook 8 Economic policy outlook 9 Economic forecast 12 The political scene 16 Economic policy 20 The domestic economy 20 Economic trends 21 Oil and gas 23 Mining 24 Agriculture, fisheries and forestry 26 Infrastructure 26 Financial and other services 27 Foreign trade and payments List of tables 9 International assumptions summary 11 Forecast summary 17 Central government finances 20 Money supply 21 Quarterly inflation 24 Mineral exports by volume 26 Agricultural exports by volume 27 Exports 28 World commodity price forecasts 28 Balance of payments 29 Exchange rates 30 Public debt outstanding Country Report July 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 2 Papua New Guinea List of figures 12 Gross domestic product 12 Consumer price inflation 20 Interest rates 24 Mineral exports 29 Exchange rate 29 Foreign-exchange reserves 30 Public debt outstanding Country Report July 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Papua New Guinea 3 Summary July 2003 Outlook for 2003-04 Papua New Guinea (PNG) will benefit from a sustained period of relative political stability, as the prime minister, Sir Michael Somare, is ensured of a full five-year term, barring extraordinary circumstances. However, there is little prospect of his government being any more capable than its predecessors in overcoming PNG’s immense social and economic problems. The government’s finances are in disarray and it is in dire need of international financial support. Sir Michael will therefore be under pressure to implement domestically unpopular economic reforms. The economy will remain depressed in 2003, but there will be some positive developments in agriculture and mining that will contribute to economic growth in 2004. The political scene Sir Michael has moved to prevent a no-confidence vote. His predecessor, Sir Mekere Morauta, has questioned his motives. Constitutional amendments have been proposed to prepare for the 2007 election. Parliament is suffering a cash crisis and has yet to reach its full complement of sitting ministers. Some efforts have been made to counter corruption. The second draft of the Bougainville constitution has been circulated for comment, and Bougainville peacekeepers have been replaced by a civilian transition team. Delegations from Indonesia and Australia have helped to strengthen ties with PNG. Economic policy The government is suffering from a cash-flow crisis, despite recording a rare budget surplus in the first quarter of 2003. A mini-budget is unlikely to be introduced. The government’s revised mining policy has reaped some rewards, and similar wide-ranging measures may be offered in the agricultural sector. Changes in fisheries policy, however, may put future investment at risk. The government’s revised privatisation policy has been publicly outlined, but the poor state of state assets has hindered sell-off plans. The Bank of Papua New Guinea (the central bank) has tightened its monetary policy stance by raising the kina facility rate to 16%. The domestic economy Real GDP remains weak, and consumer price inflation has accelerated. However, private-sector employment has grown. Oil exports have picked up strongly. The future of the PNG-Queensland gas pipeline project has brightened. Mining policy changes have boosted activity, and gold and copper exports have risen. Ramu Sugar has begun a large palm oil development. Tuna fisheries have driven growth in the fisheries sector. Log exports have increased rapidly. Foreign trade and payments The value of exports (in kina terms) expanded by 44% year on year on the first quarter, supported by rising prices. The current account has recorded a robust surplus, but the level of international reserves has declined. The kina has strengthened against the US dollar, but not against the Australian dollar. External debt has fallen. Editors: Danny Richards (editor); Graham Richardson (consulting editor) Editorial closing date: July 14th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report July 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Papua New Guinea 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 (currently Sir Silas Atopare) 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 magistrates’ courts leading to a Supreme Court at the apex National elections June-July