Papua New Guinea 1999-2000

COUNTRY PROFILE

Papua New Guinea

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ISSN 0269-8099

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

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

Comparative economic indicators, 1998

Gross domestic product $ bn Gross domestic product per head $

Australia 363.6 Australia 19,394

New Zealand 52.7 New Zealand 13,915

Papua New Guinea Tonga (a) (b)

Fiji Fiji

Solomon Islands (a) Vanuatu (c)

Tonga (b) (c) Samoa (c)

Vanuatu (a) Solomon Islands (c)

Samoa (a) Papua New Guinea

0 500 1,000 1,500 2,000 2,500 3,000 012345

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

Australia Papua New Guinea

Vanuatu (a) Solomon Islands (a)

Papua New Guinea Samoa (a)

Samoa (a) Fiji

Tonga (a) (b) Vanuatu (a)

New Zealand Tonga (a)

Solomon Islands (a) New Zealand

Fiji Australia

-4-20246 02468101214

(a) 1997. (b) Fiscal year beginning July 1st. (a) 1997. Sources: EIU estimates; national sources. Sources: EIU estimates; national sources.

EIU Country Profile 1999-2000 © The Economist Intelligence Unit Limited 1999 1

July 22nd 1999 Contents

Papua New Guinea

3 Basic data

4 Political background 4 Historical background 7 Constitution and institutions 9 Political forces 10 International relations and defence

12 Resources and infrastructure 12 Population 13 Education 13 Health 14 Natural resources and the environment 15 Transport 16 Communications 16 Energy provision

17 The economy 17 Economic structure 18 Economic policy 23 Economic performance 26 Regional trends

27 Economic sectors 27 Agriculture, forestry and fishing 29 Mining and semi-processing 33 Manufacturing 33 Construction 34 Financial services 35 Other services

36 The external sector 36 Trade in goods 38 Invisibles and the current account 39 Capital flows and foreign debt 40 Foreign reserves and the exchange rate

42 Appendices 42 Sources of information 43 Reference tables 43 Population 43 Labour force by sector 44 Indices of formal employment in the private sector by industry 44 Central government finances 45 Central government revenue 45 Central government expenditure 46 Money supply 46 Domestic credit

46 Interest rates 47 Gross domestic product 47 Gross domestic product by sector 48 Consumer prices 49 Agricultural production volumes 50 Commercial production and value of major forestry, agriculture and marine resources 50 Commercial production and value of major minerals and petroleum 51 Commercial banks, assets 51 Commercial banks, advances outstanding by borrower 52 Commercial banks’ liquid asset holdings 52 Tourist arrivals 52 Exports 53 Foreign trade 53 Main imports 53 Main trading partners 54 Balance of payments, IMF estimates 55 Balance of payments, national estimates 55 Public debt outstanding 56 External debt, World Bank estimates 57 External debt, national estimates 58 Net official development assistance 58 International liquidity 59 Exchange rates

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Papua New Guinea

Basic data

Land area 462,840 sq km

Population 3.61m (provisional at mid-1990 census); 4.21m (mid-1997 estimate)

Major islands New Britain, New Ireland, Manus, Bougainville, Buka

Main towns Population in ‘000 (1990 census)

Port Moresby (capital) 193 Lae 78 Madang 27 Wewak 23 Goroka 18 Rabaul 17 Mount Hagen 17

Climate Tropical

Weather in Port Moresby Hottest month, December, 24-32°C (average daily minimum and maximum); (altitude 38 metres) coldest month, August, 23-28°C; driest month, August, 18 mm average rainfall; wettest month, February, 193 mm average rainfall

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

Measures Metric system

Currency 1 kina=100 toea. Average exchange rate 1998: Kina2.079:US$1; end-1998 rate: Kina2.051:US$1; July 5th 1999 rate: Kina2.564:US$1.

Time 10 hours ahead of GMT

Public holidays January 1st (New Year’s Day); Easter; Queen’s Official Birthday; July 23rd (Remembrance Day); September 16th (Independence and Constitution Day); December 25th (Christmas); December 26th (Boxing Day)

Political background

Papua New Guinea (PNG) is a pluralist democracy with an electoral system modelled on that of the UK. It is a member of the Commonwealth and the constitutional head of state is the British monarch. The Queen is represented by the governor-general, who is elected by PNG’s unicameral parliament. Executive power is exercised by the head of state and the National Executive Council (NEC, the cabinet), chaired by the prime minister. The party political system is extremely weak: parties have few ideological precepts or organisational structures, with parliamentary groupings tending to form instead around dominant personalities. Governments since independence, therefore, have tended to be composed of fragile and diverse coalitions, reliant on significant numbers of independent MPs. No prime minister has ever survived a full five-year term in office.

Historical background

Colonisation and self-rule After being divided between various European powers during the 19th century, give way to independence Australia assumed responsibility for the administration of British New Guinea (the southern part of eastern New Guinea, later renamed Papua) in 1906 and appropriated the German New Guinea territories (the north-eastern part of eastern New Guinea) in 1914. Australia administered the former German territories under a League of Nations mandate until 1942, when the Japanese occupied all of New Guinea and significant parts of eastern Papua. Australia regained control of the New Guinea territory under a UN trusteeship arrangement in 1945. In 1949 the administration of the Papua and New Guinea territories was unified, although the western part of the main island (which had been administered by the Netherlands) was forcibly annexed by Indonesia in 1962, later becoming the Indonesian province of Irian Jaya.

The indigenous movement for independence was largely driven by a tiny band of civil servants, intellectuals and a few local leaders, and led by the more economically advanced island regions, particularly Bougainville and the Gazelle peninsular. PNG became internally self-governing in December 1973 and fully independent on September 16th 1975.

Votes of no confidence Michael Somare, who headed the last pre-independence government, begin to characterise the remained prime minister following the 1977 general election, although he political system— subsequently lost a vote of no confidence in March 1980. He was replaced as prime minister by the New Ireland-based MP, Julius Chan, the leader of the People’s Progress Party (PPP). Mr Somare regained the premiership at the 1982 general election when his Pangu Pati party won 41 seats in the 102-member parliament.In the July 1987 general election Paias Wingti, the member for the Western Highlands seat and leader of the People’s Democratic Movement (PDM), was re-elected prime minister (he had defeated Mr Somare in a no- confidence vote in 1985). Initially, Mr Wingti commanded a very small and vulnerable majority, entirely reliant on the support of independents, but his position as prime minister was consolidated by opposition defections.

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However, in June 1988 Mr Wingti’s government was itself defeated in a no- confidence motion.

—leading to political Rabbie Namaliu, a well-respected politician who had replaced Mr Somare as instability— leader of Pangu Pati, became prime minister following the fall of the Wingti government. Mr Namaliu’s position was soon threatened by discontent in the armed forces and a rebellion on the island of Bougainville (see box). However, Mr Namaliu managed to survive until the 1992 election. In both July and November 1989 the opposition abandoned votes of no confidence, the first time because of internal divisions within the opposition and the second time because of government efforts to consolidate support. It was also suspected that Mr Wingti, the main opposition leader, had no wish to assume the leadership of the country at such a difficult time.

Bougainville

The island of Bougainville, which forms part of the North with the assassination of Mr Miriung on October 12th 1996 in Solomons Province (NSP), lies to the south-east of the New Buka. Mr Miriung’s death was widely condemned throughout the Guinea Islands, adjacent to the Solomon Islands. From late region as representing a severe setback for the peace 1988 onwards dissident landowners on Bougainville started process.Nevertheless, in July 1997, prompted by behind-the-scenes violent protests, demanding a greater share of the earnings of prodding by the New Zealand and Australian governments, and the giant Panguna copper mine in the centre of the island. helped by a change of government in PNG, representatives of the After a series of escalating attacks against its staff, the Panguna BTG, the pro-BRA Bougainville Interim Government (BIG) and the mine was closed in May 1989. Some 2,000 security personnel BRA met in New Zealand to discuss peace. This led to a further were despatched to Bougainville in June 1989, but the round of talks in October 1997 that produced the “Burnham resulting conflict hardened the attitude of the rebel Truce”, which is essentially a temporary ceasefire pending talks Bougainville Revolutionary Army (BRA), led by Francis Ona between the leaders of the different sides, and invited a neutral and Samuel Kauona, which began to demand independence peacekeeping group on to Bougainville. More talks followed, and for NSP. Years of violence ensued, with atrocities perpetrated on April 30th 1998 a “permanent and irrevocable” ceasefire was by both the PNG Defence Force (PNGDF), the BRA and militia signed by all parties in Arawa, the provincial capital. groups armed and loosely organised by the government. The PNGDF regained control of much of the island. However, an Although the ceasefire has held, and the peace process remains absolute military solution always seemed unlikely given the alive, it has come close to unravelling a number of times. The most harsh tropical terrain, which is well suited to guerrilla warfare. serious threat occurred in early 1999 after the national government failed to pass legislation authorising creation of the Bougainville Relations between the opposing sides have fluctuated Reconcilation Government (BRG). This new organisation was to considerably over recent years, with a number of peace replace the BTG, whose mandate expired on December 31st 1998. initiatives having been proposed and then thwarted. In March Island leaders went ahead and formed the BRG anyway, and 1995 a breakaway BRA-faction led by Theodore Miriung, elections took place in May, with Joseph Kabui elected head of the who claimed to represent half of the estimated 5,000 active self-styled Bougainville People’s Congress. Nonetheless, it is not yet BRA members, signed an agreement with the government to clear whether the legitimacy of the new entities has been establish the Bougainville Transitional Government (BTG) for recognised by all the factions on the island. New Zealand and NSP, with Mr Miriung as its elected leader. The transitional Australia have remained active as brokers in the peace process; a administration functions like any other provincial government new agreement among the parties, reaffirming the principles of and comprises an assembly of leaders nominated by the local earlier pacts, was signed in New Zealand in early 1999. councils of chiefs. The assembly’s main task is to review the Disarmament of factions on the island, however, remains a sensitive constitution. Relations between the opposing sides plummeted issue.

In November 1990, fearing yet another motion of no confidence, Mr Namaliu rushed the budget through, gagged all debate and adjourned parliament until

July 16th 1991. When parliament reconvened, the government managed to push through a bill extending the grace period between no-confidence motions from six to 18 months. The law, which came into force after the June 1992 election, was intended to promote political stability and therefore increase investor confidence.

—which is exacerbated by As with most previous elections, the June 1992 poll was characterised by a high the weakness of turnover of incumbents: support for the outgoing coalition partners was incumbents slashed (Mr Namaliu retained his seat only by a small majority) and Mr Wingti was elected prime minister by the narrowest of margins, forming a coalition with a former prime minister, Sir Julius Chan. The new government quickly embarked on an expansionary fiscal programme, which caused the budget deficit to rise to unprecedented levels.

In an attempt to prevent a vote of no confidence—expected as soon as the statutory 18-month grace period had elapsed—Mr Wingti resigned 15 months into his term and called a snap parliamentary ballot. Parliament, which was not even in full attendance at the time, re-elected him minutes later. The leader of the opposition Pangu Pati at the time, Chris Haiveta, launched a legal challenge and in August 1994 the Supreme Court upheld the challenge. Mr Wingti was forced to step down amid a deepening financial crisis.

In typical PNG fashion, the Wingti-Chan government was overturned only for a Chan-Haiveta government to emerge, with Sir Julius’s PPP heading a coalition with the Pangu Pati and the League for National Advancement (LNA). The Chan-Haiveta government was faced with a worsening financial situation (largely attributable to the fiscal mismanagement of the Wingti-Chan government, in which Mr Chan had been finance minister for much of the time). There were also allegations of high-level corruption and political scandals, the most damaging being the Sandline affair, which eventually forced Sir Julius to step down. (See box: The Sandline affair.)

There is little change to the In the June 1997 election the electorate rejected many traditional political political environment— stalwarts: former premiers Sir Julius Chan, Mr Wingti and John Giheno—who had acted as premier when Sir Julius stood down—all lost their seats, although Sir Julius only lost by 110 votes and protested the result in the courts. In post- election horsetrading, Bill Skate, the leader of the People’s National Congress (PNC), which gained only six seats, and the former governor of the National Capital District (NCD), was elected prime minister. His coalition initially consisted of four other political parties (including the PPP and the Pangu Pati, both of which Mr Skate had previously described as corrupt) and a large number of the 36 independents.

Mr Skate’s government proved no more stable than previous administrations. When a corruption scandal engulfed the government at the end of 1997, Mr Skate responded by sacking two senior politicians, Andrew Baing and Mr Haiveta, from the cabinet, and removed the Pangu Pati from the coalition government. Allegations of sleaze and corruption continued to plague the Skate administration. The prime minister attempted to ride out these allegations, forming a new party, PNG First, to consolidate his support in

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parliament and proposing changes to the constitution that would make MPs less willing to remove a government between elections. However, Mr Skate’s proposed constitutional reforms failed to be passed by parliament. Mr Skate’s 18-month grace period was due to expire in January 1999 but in December 1998, after rushing the 1999 budget through parliament, Mr Skate adjourned the legislature for seven months.

—and with the economy The country’s worsening economic condition in 1998-99 significantly eroded deteriorating, Mr Skate is what was left of Mr Skate’s political support. On July 7th 1999, one week before forced to resign- his government was to face a vote of no confidence in parliament, Mr Skate resigned as prime minister. In the days before his resignation, 16 members of Mr Skate’s own party abandoned him, as did a major coalition partner, the PDM. Defecting MPs were particularly criticial of Mr Skate’s policies and management methods.

—and a new government is On July 14th Sir Mekere Morauta, a former central bank governor and newly elected chosen head of the PDM, was elected prime minister by parliament on a 99-5 vote. His selection ended days of horse-trading by the various parties. John Pundari, the speaker of parliament, who had created a new party a month earlier, appeared all but certain to become prime minister a few days before the vote. Mr Pundari had originally allied himself with the PDM and had supported Sir Mekere for prime minister. When Mr Skate promised Mr Pundari the prime minister’s post, however, Mr Pundari switched camps and allied himself with the Skate group. Only hours before the vote, Mr Pundari switched sides again, and rejoined Sir Mekere’s PDM. Mr Pundari subsequently was named deputy prime minister. The change in government seemed likely to stabilise PNG politics for a while, as the new prime minister will enjoy the 18- month “honeymoon” from no-confidence votes.

Constitution and institutions

The constitution was adopted at independence in September 1975. PNG is a member of the Commonwealth and the British sovereign is the head of state, represented by a governor-general, currently Sir Silas Atopare, who is nominated by the PNG parliament and holds office for six years. Given the number of parties in PNG’s parliament and the fluidity of party allegiances, constitutional changes, which require at least an absolute two-thirds majority in parliament (and sometimes a three-quarters majority), occur rarely.

The parliament The 109-member parliament is based on the Westminster system and normally serves for a five-year term. Elections are held every five years and have been reasonably well run, with administrations being replaced relatively peacefully. MPs are elected by universal adult suffrage. Each elector has two votes: one to elect a member in each of the 89 constituencies, the other to choose the MP who will act as governor in each of the 19 provinces and in the National Capital District. Parliament decides on the prime minister and parliamentary speaker. Consequently, governments can, and frequently have, changed during the life of a parliament without direct recourse to the people. MPs know that elections result in the removal of many incumbents, and this is a powerful

deterrent against a vote for a dissolution of parliament. The prime minister chooses MPs to sit on the National Executive Council (the cabinet).

Local government Pre-independence, the colonial administration was heavily concentrated in the national capital, Port Moresby. In 1977 the central government, in part prompted by threats from Bougainville to seek independence from PNG, passed an Organic Law to create provincial governments. However, this legislation did not end all disagreements. In 1983 the national government approved a constitutional amendment that increased the authority of central government to counter perceived abuses of power in provincial governments. In 1984 the administration in Enga became the first to be suspended for financial mismanagement, and it was followed by several others.

Disputes between the two levels of governments over the distribution of powers, responsibilities and funding led to the establishment of a Parliamentary Select Committee, and eventually resulted in a new Organic Law on Provincial Governments and Local Level Governments, passed in 1995. The new law provides for an expansion of provincial and local government administrations at the expense of the central government bureaucracy. A wide range of powers over raising of revenue, delivery of services and project implementation have been devolved to the provincial and local governments. The law also provides for four types of financial transfers from the national to local governments and gives provincial governments limited revenue-raising rights.

The new law is still in its infancy, and the provisions have yet to be fully implemented. Disputes between the local and national governments therefore remain. This was illustrated by provincial hostility towards the efforts of the central authorities in Port Moresby to introduce a national value-added tax (VAT). The VAT, which replaced local sales taxes, went into effect on July 1st 1999, as planned, although there continued to be some confusion over its precise terms.

The judiciary The Supreme Court of Papua New Guinea, headed by the chief justice, is the highest judicial authority in the country, dealing with appeals from the National Court and adjudicating on all constitutional matters. Below the National Court, which has unlimited jurisdiction in both civil and criminal matters, are district, local and village-level courts, as well as specialised agencies for matters relating to children, customary land disputes and civil cases relating to the mining sector. Although the legal system is influenced by that of the UK, it has also adopted many traditional local values, particularly with respect to communally held land rights, and legal cases can be made on the basis of respect for local custom. The judicial system is comparatively free from political interference and the courts have shown a willingness to resist political pressure when making decisions.

Key ministries As natural resources are the basis of PNG’s economy, the ministries with responsibilities in this area (particularly mining and petroleum, and forestry) are particularly important. Following several years of chronic mismanagement the agriculture ministry has become largely moribund, with most of its

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functions hived off to provincial governments, commodity industry corporations and the newly created treasury department.

Political forces

Politics PNG-style One of the main problems facing administrators in the colonial era was the absence of a cohesive, centralised political system. The traditional political units in PNG were predominantly small, clan-based entities separated by difficult terrain and by a multitude of languages and shifting customs. Since independence regional loyalties have remained strong, and this has interfered with efforts to establish a national identity. Local differences have also contributed to the weakness of the party system. There are large numbers of independent MPs and small parties with weak ideological ties and negligible organisational structures. Speculation over rifts in coalition parties or within parties is a common theme in the local media.

General election results (no. of seats gained by nominated candidates)

Partya 1992 1997 Pangu Pati (PP) 22 12 People’s Democratic Movement (PDM) 15 10 People’s Action Party (PAP) 13 5 People’s Progress Party (PPP) 10 17 People’s National Congress (PNC) – 7 Melanesian Alliance (MA) 9 4 League for National Advancement 5 – National Alliance Party 2 8 Other minor parties – 10 Independents 32 36 Total 108b 109

a Owing to frequent changes in party membership, figures are indicative only. b After the death of a candidate, the voting in one constituency was postponed.

Source: National press.

The large number of candidates (over 2,000 at the last election) vying for just 109 seats further confuses the situation. With such fierce competition the turnover rate at each election is extremely high: around 50% of incumbents usually fail to gain re-election at the turn of each electoral cycle. This system has resulted in a series of weak, fluid coalition governments and has often been blamed for the emergence of an opportunistic style of politics, prone to corruption, short-termism and gerrymandering. It is not unusual for opposition MPs to be tempted to the government benches with offers of ministerial portfolios and other sinecures. Despite being elected on a platform to clean up politics, Mr Skate’s government has been rocked by a series of scandals. He has denied the accusations and proposed the establishment of an Independent Commission Against Corruption to clean up politics. However, there seems to be little high-level enthusiasm for such a body, and corruption

is expected to remain a part of the political scene in PNG for the foreseeable future. In early 1999 the speaker of parliament said PNG officials were often referred to as “Mr 10%” among Asian leaders because of their frequent requests for bribes.

International relations and defence

Relations with Australia Strong diplomatic, economic and financial ties exist with Australia, which remain most important— provides substantial development support and other aid flows in times of crisis (such as during the severe drought in 1997/98 and in the wake of the hugely destructive tidal waves in July 1998; see Capital flows and foreign debt). In recent years PNG has sought to put its relationship with Australia on a more formal footing less dominated by the colonial past. In December 1987 the two countries signed a Joint Declaration of Principles to formalise trade, aid and defence relations. The 3,800 members of the Papua New Guinea Defence Force (PNGDF) are still predominantly trained by Australia, although the size of the Australian advisory group has been progressively reduced since independence.

—but diplomatic In an unusual turn of events, the Skate-led PNG government announced in recognition of Taiwan has early July 1999 that it had signed a communiqué with Taiwan extending become an issue diplomatic recognition to the island nation. At China’s insistence, most countries do not formally recognise Taiwan, which China considers a renegade province. In return for opening official ties, PNG was seeking as much as $2.3bn in grants, loans and other financial aid from Taiwan, mainly to close gaps in its budget, replenish foreign reserves and reduce external debt. Shortly after becoming prime minister, however, Sir Mekere renounced the Taiwan aid- for-recognition agreement and said PNG would retain its traditional ties with China.

PNG is a member of many PNG has signed various agreements with Indonesia, such as the Status of Forces regional organisations— Agreement, which mainly govern security issues concerning the border that the two countries share. In early 1994 PNG became the first Pacific island state to join the Asia Pacific Economic Co-operation (APEC) forum. It is also an active member of the South Pacific Forum. In 1978 PNG became a signatory of the Lomé Convention trade agreement between the EU and African, Caribbean and Pacific (ACP) countries. Commercial and aid ties with Europe and Japan have been of growing importance. PNG has observer status in the Association of South-East Asian Nations (ASEAN) and the possibility of seeking full membership is on the political agenda.

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The Sandline affair

The Sandline affair, the most serious threat to PNG’s political Sandline contract. Although Brigadier Singirok accepted his stability since independence, came to an inglorious end on April dismissal and called on the armed forces to support Colonel 30th 1999. On that date, the government of PNG reluctantly Aikung, the military kept 50 of the mercenaries in custody, and agreed to pay Sandline, a private military company, $13.3m— handed in a petition to cabinet repeating Brigadier Singirok’s plus return $12m in equipment— to settle a two-year old demands. After three days of widespread rioting and looting in dispute over the hiring of mercenaries by a previous the capital, Port Moresby, Sir Julius finally began to back down, government. The Sandline affair has proved costly to PNG in and on March 20th announced the suspension of the contract almost every way: it brought down a government, badly and the establishment of a commission of inquiry to investigate tarnished the country’s reputation internationally, sorely tested the incident. More social and political turmoil followed in the next its democratic institutions and cost the nation much needed few days, including the resignation of four of Sir Julius’s ministers. financial resources. On March 25th soldiers and civilians blockaded the parliament, trapping MPs inside, which finally forced the prime minister to The Sandline affair first came to light in 1997. In its attempt resign the following day. to end the rebellion on the island of Bougainville, the government of Sir Julius Chan resorted to an unusual method. Sir Julius’s decision to stand down ended the immediate crisis and At the end of February of that year, prompted by press reports, his government was subsequently replaced by the Skate Sir Julius revealed that the government had secretly hired a administration after the general election. Despite being cleared by group of foreign mercenaries, at a cost of US$36m, from two subsequent inquiries, Sir Julius remains discredited by the Sandline International, a subsidiary of a UK-registered company, whole affair and is unlikely to return to the political stage for some Executive Outcomes. The prime minister initially claimed that time. the mercenaries would merely train members of the Papua New Guinea Defence Force (PNGDF). However, it later The Sandline affair has continued to play a part in PNG politics. became clear that Sandline itself would take a direct role in The Chan government paid Sandline $18m when the contract fighting the rebels. was first let, and promised a second payment of the same amount. The Skate government, however, vowed never to pay The hiring of the mercenaries created a crisis within the PNGDF. the money, insisting the Sandline contract had been illegal. On March 17th the commander of the PNGDF, Brigadier- Sandline began pressing PNG for payment through a variety of General Jerry Singirok, announced on national radio and channels. An international arbitrator, who accepted the case at television that the armed forces were refusing to co-operate the request of the parties, ruled in favour of Sandline in late 1998. with the government’s mercenaries plan. Brigadier Singirok PNG appealed the case to an Australian court, but was again said that the PNGDF had confined the mercenaries to their unsuccessful. Sandline then began legal action to seize PNG’s barracks, and issued a statement calling on Sir Julius to resign assets overseas, including subsidy payments from European as prime minister. The prime minister responded by sacking governments and the assets of some of PNG’s embassies. In late Brigadier Singirok, replacing him with Colonel Alfred Aikung April the government agreed to settle with Sandline, in part to (who was himself replaced shortly afterwards by Colonel Jack end negative publicity ahead of a planned government bond Tuat), and pledging to follow through with the offering.

—such as the Melanesian In March 1988 PNG, along with Vanuatu and the Solomon Islands, set up the Spearhead Group— Melanesian Spearhead Group (MSG) to further the interests of Melanesians in the Pacific. (In addition to the three founding countries, the MSG includes Fiji and the New Caledonia independence coalition, the Kanak Socialist National Liberation Front.) The Melanesian Free-Trade Agreement, between the three founding countries, came into effect in late 1994. Under the original agreement no duties are levied on trade in tea from PNG, canned tuna from the Solomon Islands and beef from Vanuatu. In 1995 the three countries agreed to increase the number of goods traded freely to about 30, including fresh vegetables, coffee, animal feed and bread.

—which puts the country The functioning of the MSG has been hampered by tense relations between in close contact with the PNG and the Solomon Islands over incidents including border incursions Solomon Islands linked with the Bougainville secessionist movement. Bougainville is close to the Shortland Islands, the most north-westerly part of the Solomon Islands, and family and community ties transcend the border. Relations between PNG and the Solomon Islands were, however, improving even before the current ceasefire was signed. In September 1995 the two countries signed a framework treaty to guide future relations between them, and the respective prime ministers, Mr Skate from PNG and Bartholomew Ulufa’alu from the Solomon Islands, undertook a joint visit to Bougainville during Christmas 1997.

The armed forces Expenditure on defence declined in relative terms between 1985 and 1994, from 4.6% of total government spending to 3.3%. In 1996 military spending amounted to 1.5% of GDP. Until recently, the PNGDF had never intervened directly in government affairs. However, increasing frustration over the political management of the Bougainville crisis, budgetary cuts and political scandals led to the military becoming increasingly assertive. This culminated in the Sandline affair, when the army was instrumental in forcing the resignation of the then prime minister, Sir Julius Chan. (See box: The Sandline affair). It is now no longer inconceivable for the military to intervene in PNG’s political affairs.

Resources and infrastructure

Population

The population growth The last national census in Papua New Guinea took place in 1990 and gave a rate has been stable preliminary population figure of 3.6m; the IMF estimated the population at 4.21m in mid-1997. The population growth rate has been stable—except for 1996-97—at around 2% per year over the last decade. The majority of the population are Melanesian, although there are significant numbers of Polynesians and Micronesians as well as a small minority of Australians and ethnic Chinese.

Population of main urban centres, 1995

City Province Population Port Moresby National Capital District 170,000 Lae Morobe 85,000 Madang Madang 25,000 Goroka Eastern Highlands 25,000 Mount Hagen Western Highlands 40,000 Rabaul East New Britain 15,000 Source: Lonely Planet Publications, Papua New Guinea: a travel survival kit.

The population density is low, at around 9.5 persons per sq km, with the highest concentration in the Highlands region. In 1995 around 40% of the

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population was estimated to be under 15 years old, with less than 3% over 65 years of age. An estimated 84% of the population continues to live in rural areas, although the urban population is estimated to have risen from around 10% in 1970 to 16% in 1995 and is growing at an annual rate of around 4%. (For historical data on population growth, see Reference table 1.)

Education

Education levels are low— The language distribution in PNG is one of the most complex in the world, with over 800 languages in use. Although English is the official language of government, business and education, Tok Pisin (Pidgin English) is the country’s lingua franca, while Hiri Motu is widely used in the Papua region. Although most Papua New Guineans are multilingual and the adult literacy rate has improved from 47% in 1970 to 72.2% in 1995, the plethora of isolated villages, combined with a shortage of skilled teachers and poor infrastructure, has hampered the objective of successive governments of providing a basic education to all children.

—although it is a priority Education is provided by the government, voluntary organisations (particularly area for the government churches) and the private sector, with high-cost international schools in the main urban centres for expatriates and the local urban elite. Up until the financial crisis in 1994, government budgetary allocations for education had been increasing, culminating in the abolition of all fees for basic and secondary education in 1993. The financial crisis in 1994 precipitated a reduction in real resources allocated to the sector and the limited reintroduction of user charges. In theory education remains a priority for the government, illustrated by the importance attached to this area in the government’s Medium-Term Development Strategy (see Economic policy), adopted in 1996. One of the aims of policy towards education, according to this document, is to provide nine years of universal primary education by 2004. There is room for PNG to improve the education levels of the population: according to the UN, in 1996 the gross enrolment ratio at primary level was 80%, but only 14% at secondary level.

Health

Social indicators do not paint a very good picture of PNG. Overall, the nutritional status of the population is poor: according to the UN, in 1990-97 around 35% of children under the age of five were underweight. Life expectancy at birth in PNG was only 58 years in 1997, and the infant mortality rate that year was 79 per 1,000 births. Data from the World Health Organisation shows that only 31% of Papua New Guineans had access to safe water in 1995. Other statistics further illustrate the poor level of development in PNG: in 1993 PNG had only 18 doctors per 1,000 people, putting it on a par with countries such as Kenya and Nigeria.

Nevertheless, chronic and severe malnutrition are not prevalent. Only around 4% of the population is without access to health services. The overwhelming majority of the population continues to have access to commonly held land

and the wantok system (a clan-based social support mechanism) serves to redistribute wealth, dampen income inequality and protect almost everyone from outright destitution, although this is less true in urban areas where traditional social relations have often broken down.The PNG Institute of Medical Research (IMR) estimates that more than 15,000 Papua New Guineans have HIV and that it is spreading rapidly. Almost three-quarters of new HIV cases detected in 1998 were in the capital, Port Moresby.

The Department of Health runs the hospitals and dispensaries, co-ordinating much of the activity in this sector. However, various church groups, non- governmental organisations and provincial governments also play an important part in health-service delivery. Charges for healthcare are generally related to ability to pay, and most people are treated free or for a very small fee. A social security scheme covering employees in most private-sector firms and most government employees, was set up in 1981.

Health statistics, 1994–96

Life Infant Immunisation expectancy mortality Crude Crude rate at birth (per 1000 birth death (per 1,000 (years) births) ratea rateb children) Selected South Pacific countries Papua New Guinea 58 62 32 10 76 Fiji 7218244.596 Micronesia 6631377.852 Solomon Islands 63 39 37 4.4 77 Selected South-east Asian countries Indonesia 6549238.0n/a Thailand 69 34 17 7.0 n/a Malaysia 72 11 27 5.0 n/a a Children born per 1,000 people per year. b Deaths per 1,000 people per year.

Source: Australian Agency for International Development, Papua New Guinea: Coping with Shocks and Achieving Broad-based Economic Development

Natural resources and the environment

The rural terrain hampers PNG’s total land area is 462,840 sq km, with the eastern part of the main island development of New Guinea comprising most of this; a handful of other relatively large islands and hundreds of smaller ones make up the rest of the country. Located near the equator, PNG has a generally hot and humid climate—although frosts do occur in some parts of the Highlands region—with only slight seasonal temperature variations. The wet season is from December to April.

PNG’s terrain is rugged, with the jagged mountainous interior, which rises to 5,000 metres in the New Guinea mainland, giving way to coastal lowlands and rolling foothills. The difficult terrain makes the building and maintenance of physical infrastructure very costly, hindering the development of interior regions. The terrain also means that only 30% of the total land area is suitable for cultivation. Forests and woodland cover more than 80% of PNG’s land area. Volcanic and seismic activity is common, particularly in the island regions.

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Transport

Within Papua New Guinea the road infrastructure is poorly developed and badly maintained; over 85% of the roads are unsealed. Most roads are concentrated around the main regional centres, including Port Moresby and Lae. Given that most new roads have been urban-based, many villages within PNG are likely to remain isolated for years to come. Papua New Guinea is one of the few countries in the world where the capital city is not accesssible to the rest of the country by road. This is specifically true for the highlands, where the bulk of PNG’s population lives. But given the cost of building and maintaining such a road over unstable mountainous terrain, the economic gains are not clearcut.

PNG has only around 20,000 km of non-urban roads. The national government is wholly responsible for around 9,000 km of these; the rest are owned by provincial authorities and the private sector, particularly mining and logging companies.

The transport infrastructure has deteriorated rapidly in recent years. While there has been no shortage of aid funding to build new roads, provision for maintenance in government planning has generally been anaemic. A recent study from the central government estimated that about Kina150m ($72m) per year needed to be spent on PNG’s non-urban roads for basic maintenance. In contrast the government has spent an average of less than Kina20m per year during the 1990s. It has been estimated that the poor condition of PNG’s roads adds Kina200m per year to the operating costs of road users. Maintenance of existing infrastructure was consequently one of the objectives of the Medium- Term Development Strategy (see Economic policy).

Considering the number of islands in PNG and the poor road infrastructure, river and coastal shipping remains of vital importance. PNG has 17 main ports, which are under the control of the soon-to-be-privatised PNG Harbours Board; around 300 smaller ones are owned by a variety of provincial governments and NGOs. Major investment to improve and expand PNG’s ports has taken place, largely financed with foreign aid.

PNG’s topography means that civil aviation is an important form of transport. The main international airport, in Port Moresby, recently received a Kina130m facelift. A comprehensive network of small, domestic airports also exists. The national carrier, Air Nuigini, also flagged for privatisation, has recently run into financial difficulties; as a result, some services were curtailed. Following complaints from customers, however, Air Niugini was forced to reintroduce its direct service from Cairns, Australia to Mount Hagen and to launch a new Cairns-Lae service.

The Office of Civil Aviation is tasked with running 22 major airports and 25 smaller airstrips. Provincial governments are responsible for a further 160 airstrips. Many other airstrips are run and managed by NGOs, especially churches.

Communications

By developing country standards PNG’s telecommunication services are effective and modern. The domestic operator is the state-run Post and Telecommunications Corporation; it is profitable mainly because of the high cost of international calls. However, with only about two phone lines per 1,000 people, there is limited coverage in rural areas. A private mobile phone network was introduced in Port Moresby and Lae in 1996, but penetration remains extremely low.

Radio services, which are particularly important in a country where the literacy level is low, are run by the National Broadcasting Commission. The local television station, EMTV, is the main terrestrial channel and is privately owned. Australian channels and cable services are also available. In 1996 there were 91 radios and 24 televisions per 1,000 people in PNG; the aggregate levels for all low and middle income countries were 187 and 190 respectively.

The mass media include two national daily newspapers, the Post Courier and The National. There is also a mass circulation weekend paper, The Saturday Independent, and many other weekly and monthly publications published in English, Pidgin and other languages. Mass media remain relatively free from political influence or censorship, with a liberal press code adopted from Australia. There are few reporting restrictions although, occasionally, foreign press representatives have been expelled, allegedly for violations of national security. The most sensitive issues, over which legal sanctions have been applied to the press, are the Bougainville crisis and the border dispute with Indonesia.

Energy provision

PNG, despite having abundant natural resources, has a poorly developed and unreliable energy-generation network. The electricity system is operated by the government owned Electricity Commission (Elcom). The distribution system is restricted to the major cities, and power cuts are common. Most businesses have back-up generators; those that need reliable electrical supplies often disengage entirely from the network and rely on their own generation system. The Ministry of Energy Development has been formulating plans for rural electrification for some years, but lack of government funding has severely hampered its plans.

Electricity generation is mainly from major hydroelectricity plants, which provide more than one-third of national electricity supplies. The major hydroelectric schemes are on the Laloki and Ramu rivers. The Sirinimu dam on the Laloki supplies Port Moresby, while the Yonki dam on the Ramu provides electricity for Lae, Madang and major centres in the Highlands. The potential for hydro-electric power generation is vast but, as is the case with mining ventures, land access issues are a major constraint. The first privately built and operated power station was opened in Port Moresby in April 1999. A South Korean consortium, Hanjung Power Ltd, constructed the $52.5m plant.

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Primary energy balance, 1998 (m tonnes oil equivalent)

Hydro-elec- Oil Gas Coal tricity Otherc Total Primary production 2.7 0.10 0.00 0.17 1.31 4.28 Imports 0.70 0.00 0.00 0.00 0.00 0.70 Exports –2.6 0.00 0.00 0.00 0.00 –2.60 Primary supply 0.80 0.10 0.00 0.17a 1.31 2.38 Losses & transfers –0.20 –0.10 0.00 –0.19 0.00 –0.49 Transformation output 0.00 0.00 0.00 0.10b 0.00 0.10 Final consumption 0.60 0.00 0.00 0.08b 1.31 1.99

a Input basis. b Output basis. c Mainly fuelwood.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1998

Real GDP growth (%) 2.5a Consumer price inflation (av; %) 13.6b Current-account balance (US$ m) –67a Foreign debt (Kina m) 2,686c Exchange rate (av;kina:US$) 2.079b Population (m) 4.29a

a EIU estimates. b Actual. c Public sector debt only.

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

PNG is endowed with large expanses of fertile agricultural land, extensive forestry and fisheries resources, substantial gold, copper and other mineral resource deposits and significant reserves of oil and natural gas. Although successive governments have sought to foster balanced growth, the economy remains highly stratified between the traditional and modern sectors. While the capital-intensive oil, mining and forestry sectors have dominated the post- independence economy, over 75% of the labour force continues to work in the semi-subsistence agricultural sector.

Minerals projects dominate Since the closure of the Panguna mine on Bougainville in 1989, the Ok Tedi GDP— mine in the Western Highlands has been the sole copper exporter. Gold is produced by four major mines: Ok Tedi, Porgera, Misima and Lihir. PNG’s main oilfield is at Kutubu, and in 1998 oil output was boosted by the beginning of production at the Gobe oil project, which is expected to produce 50,000 barrels/day of oil. In 1998 the government estimated that the mining and petroleum sectors directly accounted for around 23% of GDP (down from 26%

in 1995), although a substantial proportion of the formal manufacturing, construction, transport, electricity and commercial sectors’ activity is dependent on the fortunes of the minerals sector.

—but subsistence remains Most people living in rural areas are engaged in semi-subsistence agriculture important in rural areas based on a multitude of farming systems; they have successfully integrated a number of cash crops, such as cocoa, coconut, coffee and oil palm, into the subsistence way of life. This has facilitated a broadening of the cash economy and the country’s export base. While production of coffee, the most important agricultural export crop, is concentrated in the cooler Highland regions, other cash crops are cultivated in the coastal and island areas. Forests and woodland are estimated to cover around 80% of land area. Major commercial logging operations have been concentrated in the island regions and the coastal provinces around Lae and Madang, where access and land-exploitation rights have been easier to obtain.

Economic policy

The government followed a Until 1989, in keeping with a desire for economic stability, successive “hard kina” policy— governments followed a “hard kina” strategy, whereby the kina exchange rate was fixed to a basket of other currencies. This was important in keeping inflation low, as a large proportion of the items included in the consumer price index (CPI) are imported. Both monetary and economic policies between 1976 and 1989 generally supported the “hard kina”, although there were sharp devaluations in 1983 and 1989.

—which was supported by An important part of the tied exchange-rate policy was the linking of wage other economic policies increases with inflation. In this situation, PNG could only maintain international competitiveness through adjustments to labour productivity. By the early 1990s it was clear that the domestic economy was not producing the necessary improvements in productivity. A further problem was the profligacy of the government in the early 1990s: the budget deficit increased to 5.8% of GDP in 1992 and was little changed at 5.5% of GDP in 1993. The decline in reserves that this caused made it impossible for the Bank of Papua New Guinea (the central bank) to maintain the fixed exchange rate, and in 1994 the kina was floated.

The government adopts a By the end of 1994 reserves totalled just Kina112.2m (US$96m), equivalent, new economic approach according to the bank, to just one month of import cover. Faced with this in 1994 situation, the government adopted a structural adjustment programme (SAP), supported by funding from the World Bank, the IMF, the Australian Agency for International Development (AusAID), the Japanese Export-Import Bank, the Asian Development Bank (ADB) and the EU. The SAP sought to achieve stability in the fiscal and monetary systems and to improve the competitiveness of the domestic economy. Economic policy since 1995 has therefore been set broadly within the framework of the SAP, although relations with the multilateral institutions that provided the initial funding have been uneasy, especially since mid-1998.

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Successive governments have adopted a “tight” monetary policy, defined as using high interest rates in an attempt to shore up the value of the kina. By this the central bank aims to decrease the chances of cost-push inflation and restore business confidence in what was once regarded as a stable currency

The politicisation of policy Government economic policy has been criticised for various reasons, most has been criticised— recently by the IMF and the ADB, for being politicised. This problem has been particularly apparent during the government of Bill Skate. In 1998 the Skate administration changed the governor of the central bank twice in just over three months, and relations with the World Bank deteriorated after the government decided to employ a former bank employee, Pirouz Hamidian- Rad, as economic adviser (in contravention of World Bank policy). The ADB also criticised the lack of accountability in the government system, saying: “Effective medium-term fiscal planning and fiscal responsibility legislation are lacking, policy reversals are common, and large gaps between announced policies and actual implementation are frequent.”

Central government finances, 1998 (Kina m unless otherwise indicated)

Total revenue & grants 1,991.2 Tax 1,598.2 Non-tax 279.5 of which: foreign grants 113.5 Total expenditure & lending 2,128.6 Recurrent expenditure 1,950.7 Development expenditure & transfers to provincial & local governments 177.9 Budget balance -137.4 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

—as has the inefficiency of The expenditure decisions of the government have also attracted criticism. (For government spending— details of the government’s finances, see Reference tables 4-6.) Official investment has tended to be dominated by large industrial and infrastructure projects that did little to address the compelling structural weaknesses in the country’s economic base. Successive governments have paid lip-service to the pressing needs of promoting agriculture, small-scale industry and downstream processing, but directed the bulk of their investment funds to building unproductive roads (such as a motorway through Port Moresby), other prestige projects (for example, a new airport, which also added to the pressures on recurrent expenditure) and establishing import-substituting industries (for example, cement and tinned fish). Meanwhile, in the provinces, the more pressing infrastructure needs, such as roads vital to commerce, have been ignored.

—with little emphasis being One of the aims of the SAP was to rationalise the public sector and improve the attached to development delivery of public services. There is certainly room for the size of the public spending service to be cut: since 1992 wages and salaries have accounted for around 40% of total government spending. Under Mr Skate the government has been attempting to slim down the bureaucracy, announcing in July 1998 a halt to

public-sector recruitment and in the 1999 budget the retrenchment or redeployment of more than 7,000 civil servants over four years. Apart from wages, other types of recurrent expenditure also constrain the government’s budget: interest payments on domestic and external debt accounted for an estimated 13.4% of total spending in 1998.

The government has not allowed these commitments to totally crowd out development expenditure. Figures for 1992-97 indicate that national development spending (excluding projects financed by provincial governments) on average amounted to around 12% of total spending, and development spending as a proportion of total spending has increased in recent years. However, if the government could engineer a restructuring of its finances, development spending could be greater still.By June 1999 the government had still failed to secure funding for expenditure gaps in the 1998 budget, (which had been financed by temporary, though technically illegal, bridging loans from the central bank), and 1999 budgets. The government has been exploring several options for external funding: a $250m sovereign bond issue, a commercial loan from a European banking consortium and the default recourse of seeking help from the World Bank and IMF. Financial aid from Taiwan, in exchange for diplomatic recognition from PNG, was also being discussed.

Restructuring the system of On the revenue side, the government tried for several years to implement a revenue generation has value-added tax (VAT). Opposition from political and business leaders stalled proved difficult the plan, but legislation was finally cleared by parliament in late 1998, and the tax took effect in July 1999. The introduction of VAT will provide a more regular income stream to the government. Provincial governments are to receive a share of the VAT based on previous receipts from their sales and services taxes.

Little encouragement has Government policy in PNG has not been known for actively encouraging the been given to the private development of the private sector. This has begun to change in recent years, as sector governments, prodded by multilateral institutions and membership of the Asia Pacific Economic Co-operation (APEC) forum, have begun to abandon some of PNG’s more protective tariffs and intrusive restrictions on business practice. However, there remains much that the government could do to remove structural impediments to the development of the private sector, such as poor infrastructure, law and order problems, and a high-cost, low-skilled workforce.

Conflicting interests affect Government policy towards other sectors of the economy has also not been the minerals sector— altogether encouraging. In the mining sector, governments have attempted to walk a fine line between creating a financial environment that encourages private-sector investment from outside the country while at the same time ensuring that the state receives a “fair” take of the revenue resulting from minerals projects (through taxation, royalties, and government equity stakes in all major ventures). Unfortunately, governments have not always managed to balance these competing interests very well, and inconsistencies in policy, especially the tendency for governments to increase financial demands on the industry, have led to disagreements between the industry and politicians (See Mining).Similar issues affect the forestry sector, where multilateral

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organisations have been pressuring the government, with some success, to prevent the unsustainable harvest of timber. There has, however, been some reluctance on the part of the authorities to see a substantial contraction of the industry: in 1998 the government gave in to some of the demands of logging companies, which, in the face of the collapse of the industry resulting from the economic downturn in Asia, had been asking for tax concessions from the authorities (see Agriculture, forestry and fishing).

—and agriculture has been Government investment and assistance to the agricultural sector has fallen off neglected during the 1990s, although an agricultural price-support programme has been implemented. The Department of Agriculture and Livestock is now chronically underfunded, affecting government-supported services in rural areas. Fisheries have also been neglected in the past, with the bulk of the catch in PNG waters being taken by offshore operations, which provide little benefit to the domestic economy. There have been recent attempts to improve fisheries management in PNG, with the government announcing reforms in 1998 in an attempt to secure better returns on the country’s stock of marine resources (see Agriculture, forestry and fishing).

The government has failed In PNG around 90% of land suitable for cultivation is covered by customary to clarify land usage rights law. This system of traditionally owned land hampers private-sector development. Land that is not owned outright by a business venture cannot be offered as collateral against loans. Compensation for use of traditionally owned land can be a significant cost to large businesses operating in PNG. Furthermore, a great deal of time is usually needed to identify the rightful owners of land. The most controversial component of the SAP was a land- registration programme intended to record the correct traditional owners of land throughout the country. This was widely perceived in PNG as an attempt to remove land from the people, and created widespread social discontent. The programme was eventually dropped.

Although multilateral Relations with the two most important multilateral institutions, the World relations have at times Bank and IMF, have at times been difficult. Although the government has been difficult— reopened a dialogue with both organisations no more funds are likely in the immediate future. These institutions together with the ADB have been queuing up to voice their opposition to the government’s economic policies. The IMF in early 1999 warned the government that the economy is on a knife’s edge. It advised the government to raise taxes to balance its budget. Further talks with the World Bank are planned for later this year. A US$120m loan from the World Bank, to be included in the government’s 1998 budget, was halted following the government’s refusal to implement the World Bank’s reform agenda. The relationship was further strained by the appointment of former World Bank employee Mr Hamidian-Rad as chief economic advisor to the PNG government.

—policy will continue to be Despite such disagreements and the apparent willingness of the present influenced by them— government, under the guidance of Mr Hamidian-Rad, to “go it alone”, if necessary, without using IMF/World Bank funding, medium-term economic policy is likely to remain dominated by the rigours of attempting to meet

targets set by multilateral institutions. Membership of the World Trade Organisation (WTO) and the APEC forum will also be significant in guiding government policy, particularly towards tariff reform.

Recent economic policy changes and initiatives

1992 budget: The government adopts an expansionary adjustment loan is agreed with the World Bank that marks the supply-side fiscal policy, cutting tax rates and raising PNG government’s formal acceptance of the structural expenditure, in the face of a new mineral-led boom. Monetary adjustment programme. policy accommodates the rapid expansion in domestic government financing and liquidity. The government’s budget September-October 1996: The government sells 49% of its deficit rises to 5.8% of GDP in 1993. holdings in some of the largest gold mining and petroleum projects in PNG, under the auspices of a newly created company, 1994 budget: The government continues to pursue an Orogen Minerals. expansionary supply-side fiscal policy. 1998 budget: The government announces a 44.1% increase in March 1994: The government introduces a mini-budget in development expenditure, although this is largely cosmetic. Taxes an attempt to arrest the rapidly deteriorating fiscal situation. on the minerals sector are also increased. Tax raising and expenditure control measures are announced in order to rein in the budget deficit to a targeted 4% of GDP. July 1998: The government, guided by its new economic adviser, the former World Bank employee Pirouz Hamidian-Rad, September 12th 1994: Following the rapid decline in announces new economic policies, in part to halt the rapid fall in foreign reserves the kina is devalued by 12%. the kina since October 1997.

October 1st 1994: In the face of continuing pressure on November 1998: A “radical” 1999 budget is introduced, foreign-exchange reserves the new government abandons the proposing a 60% increase in development expenditure and a long-standing “hard kina” policy (where the exchange rate of 12% decline in recurrent expenditure, funded mainly through the kina had been fixed to a basket of international currencies) retrenchment of civil servants and the currency is floated. June 1999: The government introduces new policies to arrest November 1994: The new government introduces a supply the free fall of the kina, including reduced budgetary spending bill (the delayed budget is later passed in March 1995), with and enhanced collection of taxes and import duties. the aims of keeping the budget deficit down to 1% of GDP and doubling development expenditure to 5% of GDP. Taxes The government also reduces from six months to three months and government fees and charges are raised. the period within which companies operating in PNG must repatriate dividends, taxes and other forms of payment held July 1995: A stand-by arrangement of SDR71.48m overseas in foreign reserves and owed to the government and (US$47.12m) is agreed with the IMF and a US$50m structural landowners.

—and the Medium-Term A further influence on economic policy will be the Medium-Term Development Strategy— Development Strategy (MTDS), adopted in 1996. The policy was set out with reference to the SAP and aimed to redefine the functions and role of government, outline the responsibilities of the private sector, and develop more effective local-level government. The MTDS was an attempt to improve the quality of government expenditure, by prioritising four areas—primary and preventative healthcare, primary education, infrastructure, and private-sector development—and setting out in advance the resources each area could expect to receive during 1997-99. Although it is not clear how closely the ideals of the MTDS are being adhered to, the strategy will continue to influence government policy at least until 2000.

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In the shorter term, economic policy will attempt to alleviate the effects of —as well as by other external shocks on the economy. PNG is particularly vulnerable to climatic outside forces phenomena, such as the severe drought which affected the country in the second half of 1997 and into 1998. This did more than reduce output of agricultural commodities; the low water levels also halted production at two of PNG’s most important mines, Porgera and Ok Tedi, and contributed to the 4.6% contraction in the economy. PNG, with a commodity-based economy, is also vulnerable to adverse changes in world commodity prices, although these will be partly offset by the declining value of the kina.

Economic performance

Economic performance has Despite PNG’s impressive stock of productive natural resources, economic been variable— performance since independence has been disappointing. (For detailed data on GDP, see Reference tables 10 and 11.) This has been blamed on a poorly developed infrastructure (particularly with respect to transportation); the limited supply and high cost of skilled labour; official corruption and social disorder; an uneven distribution of income; and susceptibility to natural disasters.

Furthermore, overall GDP growth has been heavily dependent on the fortunes of the minerals sector. Changes in production at the major mines can lead to swings in GDP that are not paralleled by the health of other areas of the economy. According to official estimates of 1998 GDP, released along with the 1999 budget, the economy was estimated to have grown by 2.5%, driven by growth of 60% in the mining and quarrying sector, as production picked up following the severe drought of 1997. However, the agriculture, forestry and fisheries sector, which accounted for 28.2% of GDP in 1997, and on which most people in PNG depend for their livelihood, was estimated to have contracted by 6.4%.

Gross domestic product (% real change)

Annual average 1998a 1994-98a GDP 2.5 0.5 Regional comparisons of GDP Fiji 1.0 1.6 Samoa 2.5 2.6 Solomon Islands –1.0 2.7

a EIU estimates.

Sources: IMF, Papua New Guinea , Recent Economic Developments; Ministry of Treasury and Planning, Economic and Development Policies; Asian Development Bank, Asian Development Outlook; National sources.

—being highly dependent During the early 1980s the pace of economic growth was determined by falling on the fortunes of the agricultural export prices and declining copper and gold output from the minerals sector— Panguna mine on Bougainville. The opening of the Ok Tedi mine in 1984 led to a sharp improvement in PNG’s economy, which was boosted further by a modest upturn in agriculture. The closure of the Panguna mine in 1989 after

the start of the violent independence movement on Bougainville resulted in successive declines in real GDP of 1.4% in 1989 and 3% in 1990. During 1991- 93 the economy rebounded strongly, with real GDP growth rates averaging over 12.6% per year. This was largely the result of the rapid growth in the minerals sector, with the start of production at the Kutubu oilfield in 1992. Increased activity in the logging industry also boosted overall growth: the volume of logs exported increased by over 48% in 1993, from 1.6m cu metres in 1992 to 2.4m cu metres, as the government relaxed its regulations controlling the industry.

Growth in gross domestic product by sector (% change, year on year)

1995 1996 1997 1998a Mining –2.9 –24.7 –14.7 59.6 Petroleum –14.8 6.3 –28.8 8.4 Agriculture 2.1 6.1 –4.2 –6.4 Real GDP –3.6 3.5 –4.6 2.5

a Government estimates.

Source: Estimate by the Ministry of Treasury and Planning, Economic and Development Policies (1998), Volume 1.

—and vulnerable to natural The economy continued to grow strongly in 1993, based primarily on disasters increased mineral and forestry production. Output of oil and gold then began to tail off, which, combined with a tightening of fiscal and monetary policy in response to the financial crisis in 1994, led to a sharp decline in the overall rate of growth. In 1995 the low level of confidence in the economy and lack of new minerals projects meant that private investment remained subdued and domestic, private and government consumption probably contracted. In 1996 GDP grew by 3.5%, boosted by the start of construction at the Lihir gold mine (which produced its first gold in May 1997) and substantial increases in the production of coffee, cocoa, copra and palm oil. In 1997 the apparent economic recovery was stalled by drought induced by El Niño, which damaged crops and affected production at PNG’s two largest mines, Porgera and Ok Tedi, and caused the economy to contract by 4.6%. In 1998 the economy is estimated to have grown by 2.5% as exports began to recover from the drought.

PNG’s investment rate According to the UN, the aggregate investment rate for all developing is low countries in 1995 was 28%; for PNG it was only 17%. The overall investment rate has generally only risen above 20% of GDP during the construction phases of major mining projects (when the investment is capital-intensive and mainly funded from outside PNG). Private non-mining investment has generally remained below 10% of GDP, being stifled by over-regulation, poor security, and lack of investor confidence. Private-sector investment has been further discouraged by the low levels of complementary public infrastructure investment. According to PNG’s Investment Promotion Authority (IPA), lack of overseas investor confidence resulted in a decline in foreign investment from Kina470m in 1997 to Kina145m in 1998.

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Real private and government investment (% of GDP)

1989 1990 1991 1992 1993 1994 1995 1996 1997 Private fixed investment 21 20 23 17 12 13 13 24 31 Mining investment 12 11 16 11 5 5 5 15 22 Non-mining investment10976788910 Government fixed investment555563446 Total262528221816172837 Sources: Australian Agency for International Development, Papua New Guinea: Coping with Shocks and Achieving Broad-based Economic Development; EIU calculations.

Unemployment is also high When high levels of economic growth in the overall economy have been achieved, this has not generated significant levels of domestic employment. Despite the planned retrenchment of up to 7,000 civil servants, the public service remains the single largest employer, directly employing over 55,000 people. The 1990 census put the unemployment rate for men at about 27% and that for women at about 30%. With the next official census not due until 2000, the only other reliable source of employment data is the central bank’s employment index. This suggests that only 14,000 formal jobs were created between 1980 and 1990. However this may be underestimating the true level of job creation, as firms with fewer than 20 employees are not included. Other central government sources estimate that PNG’s actual paid employment base could be 40%, or 100,000 jobs, larger than the central bank’s estimate of 250,000-350,000. This would help to explain why receipts from personal income tax doubled between 1990 and 1997, despite a decline in the number of expatriate taxpayers. (For information on the labour force by sector, see Reference tables 2 and 3.) Inflation is vulnerable to Until 1994 the “hard kina” fixed exchange-rate regime helped to contain moves in the exchange rate inflationary pressures, with inflation, as measured by the consumer price index, averaging 4.8% per year in 1985-94. This policy was finally abandoned in 1994, when the kina was allowed to float. Since then PNG’s domestic rate of inflation, as measured by the urban based consumer price index, has been heavily dependent on changes in the exchange rate. The depreciation that followed the abandonment of the “hard kina” policy—the kina fell by 16.8% against the US dollar between the end of 1993 and the end of 1994—led to an inflation rate of 17.3% in 1995 and 11.6% in 1996. Although price rises moderated in 1997, a further sharp fall in the kina from October 1997 drove inflation up once more. The average rate of inflation in1998 was 13.6% (21.3% in the last quarter). This was the highest annual inflation rate for any 12- month period since 1995 when the price index rose by 17.2%. Although the rise in inflation was blamed on a leap in betelnut prices, an important underlying factor was the depreciating kina, which pushed up the landed costs of imported goods and services. A small open economy such as PNG’s, with a limited industrial base, is highly dependent upon imports for capital equipment and raw materials. Exchange-rate fluctuations can have a profound

effect on the domestic cost structure. (For historical data on inflation, see Reference table 12.)

Inflation (% change)

Annual average Regional comparisons of consumer prices 1998 1994–98 PNG 13.6 9.7 Australia 0.8 2.0 New Zealand 1.2 2.0 Malaysia 5.3 4.1 Indonesia 57.6 16.6 Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; Fiji Bureau of Statistics, Statistical News; IMF, International Financial Statistics.

Regional trends

Uneven resource Successive national governments have made efforts to narrow differences in endowments widen strong income, employment and social indicators among the 19 provinces and the regional identities National Capital District. The 1995 Organic Law (see Constitution and institutions) introduced a more equitable system of transfers from national government to the provinces, with payments made according to a formula, although regions with smaller populations are eligible for other revenue transfers. Provincial governments also have some independent revenue-raising powers.

Population and income by region

% of population, Income per head, 1983 1990 (Kina) Papua 22 n/a of which: National Capital District 5 2,115 Gulf 2 198 Highlandsa 29 283 Eastern Highlands 8 290 North Coast Regions 29 384 Islandsb 12 611 of which: New Britain 9 694

a Excluding Eastern Highlands. b Excluding North Solomon’s Province.

Sources: Australian Agency for International Development, Papua New Guinea: Improving the Investment Climate; EIU calculations.

Despite such efforts, regional disparities remain, partly reflecting the concentration of government in Port Moresby, the uneven development of export crops and the unavoidable localisation of mineral activities. Large mineral and forestry projects normally provide complementary services to the local community in the form of roads, health centres and schools, as well as providing employment opportunities and substantial compensation packages

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to local communities for land-exploitation rights. Regional rivalries and the problem of securing land have also hindered economic migration except to the major urban centres, where unemployment and crime rates are high.

Economic sectors

Agriculture, forestry and fishing

Agriculture and livestock Agriculture is important in PNG, both for subsistence and for the export of cash crops (the export of agricultural commodities accounted for 40% of total export receipts in 1997), and remains the principal source of livelihood for about 85% of the population. Cash crops are cultivated on large estates as well as in smallholdings. Rubber is grown mainly on large holdings in the southern coastal region, and there are large palm-oil plantations. Tea is grown almost entirely on estates in the Highlands. Since independence smallholder production has boomed whereas the output of large holdings has fallen, partly because of the restrictions imposed by the system of communally held land. Smallholders have traditionally accounted for most of the output of the three main agricultural export commodities—coffee, cocoa and copra. Both palm oil and rubber are also produced on a small scale. The principal crops for domestic consumption include sweet potato, banana, taro, yam, sugarcane, maize and groundnut. (For agricultural production volumes, see Reference table 13.) In addition to a number of commercial piggeries and chicken farms most smallholders rear some livestock.

There is little processing of agricultural output in PNG. Most items are simply sorted, graded and packed for export, although there is some local processing of palm oil and copra. The agricultural sector is Although the yields of exportable cash crops are similar to those of other vulnerable to the climate— exporting countries, high labour, transport and processing costs push up the overall cost of production to levels generally higher than elsewhere. The poor state of PNG’s agricultural infrastructure deters production and results in the wastage of crops, with agricultural produce rotting rather than being transported to market. The health of the agricultural sector is also heavily dependent on both climatic conditions and agricultural commodity prices. The severe drought in PNG during 1997 and early 1998 contributed to a 4.2% real contraction in the agriculture, forestry and fisheries sector in 1997 and a further estimated 6.4% contraction in 1998 (the downturn was worsened by the collapse of the logging industry, as both demand and world prices fell sharply). The relatively high prices for many of PNG’s agricultural products, in part due to the decline in the value of the kina, has resulted in an increase in the value of agricultural commodity exports (see Reference table 14).

Agricultural exports (Kina m)

1994 1995 1996 1997 1998 Cocoa 29.0 47.7 66.2 73.3 81.2 Coffee 204.8 214.5 190.3 325.9 304.4 Tea 4.2 5.4 12.7 10.4 18.9 Copra 14.7 27.4 49.0 47.2 38.8 Copra oil 20.1 29.7 51.4 51.1 69.7 Palm oil 77.5 142.2 182.4 207.1 271.8 Rubber 2.9 4.0 4.1 6.5 7.3 Total incl others 374.6 502.4 578.6 777.2 846.5 Logs 483.1 436.7 464.8 409.3 153.4 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

—and government policy In the 1990s government efforts to encourage growth in the agricultural sector focused on subsidising the export of tree crops and offering trade protection for most foodstuffs, rather than offering incentives to increase investment. Such a policy, although highly popular, failed to address the structural constraints that limit agricultural development. These include a small domestic market, limited marketing infrastructure and road linkages, a rugged environment, and lawlessness. Since then the government, pressed by multilateral and regional institutions, has tried to promote the more sustainable harvest of PNG’s forestry resources and has begun to lower some tariff barriers.

Forestry Over 70% of PNG’s land area is covered with forests, and the logging industry has until recently been an important part of PNG’s economy. For some time, however, the industry has been criticised for its unsustainability. In early 1989 bans on the export of several types of wood were introduced as part of a plan to end log exports within two years. Further attempts to control the logging industry were made in 1992 and 1993. These measures met with little success. Although in 1990 the volume of log exports declined, in 1992-94 log exports reached record levels. The achievement of sustainable rates of logging then became part of PNG’s structural adjustment programme (SAP), led by the World Bank. The government’s official policy remains for a phasing-out of log exports by 2000.

Although progress towards sustainability has been made, this target is unlikely to be achieved. The government’s reform efforts face significant obstacles. One is the continued importance of the industry to PNG’s economy: during much of the 1990s the industry employed 10,000-12,000 people and paid about Kina40m-50m (US$17.4m-21.8m) per year to landowners and Kina140m-150m in log export taxes to the government. There is also no obvious replacement for the export of logs. The high-cost structure in PNG and relatively favourable international prices for unprocessed logs have frustrated efforts to produce more processed timber for export. This has made the government vulnerable to intense lobbying by the industry. This was highlighted by the government yielding to industry pressure by the Forestry Industry Association (FIA) following the severe downturn suffered by the industry in 1997 and 1998 (export earnings from logs fell 63.8% in the first quarter of 1998 year on year,

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from Kina102.1m to just Kina37m), when it granted a reduction in the export tax for some types of log. The sector is expected to stage a modest recovery in 1999. Export volumes have increased and prices have risen from the lows recorded in March 1998. The government, again as a result of pressure from the FIA, announced in the 1999 budget new tax breaks for the forestry industry as well as pledging to fast-track new timber projects.

Fishing PNG’s fisheries resources are extensive. The country has some 8,300 km of coastline and over 600 islands and large rivers, so fishing has always been an important feature of life. Altogether, PNG’s exclusive economic zone covers an area of 2.4m sq km. The largest fish resource is tuna, but Spanish mackerel, barramundi, crayfish and prawns are also available in large quantities. Fresh- water fishing and fish farming have been pursued to a small extent.

These resources are, however, largely undeveloped: the proportion of marine product exports to total exports (by value) declined from 0.8% in 1991 to 0.3% in 1997. This is partly because in the past licences were granted to foreign vessels to fish for tuna in PNG’s exclusive waters. Such boats now account for around 90% of the fish caught off PNG. It was estimated that in 1995 foreign vessels caught tuna worth around Kina360m ($281.3m) in PNG waters, from which the government received Kina20m in licence fees, although this would have declined in recent years. A handful of fish-processing factories have also been established, with the most recent one planned for Port Moresby, the southern region’s first cannery.

The 1998 Fisheries Management Act, if implemented, should help to develop a domestic tuna industry. The plan aims to encourage about 80 foreign long-line vessels and 30 purse seiners to base their operations in PNG. Some measures were taken in the 1999 budget to make it more attractive for companies to enter the industry, such as the removal of a tax on imported or leased boats that stay in PNG for more than 12 months. This will allow domestic companies to lease boats from overseas operators.

Mining and semi-processing

The minerals sector is PNG has significant minerals resources, and the country has become crucial to PNG’s economy increasingly reliant on mineral exploitation for investment, government revenue and foreign exchange. The contribution of mining, quarrying and petroleum to GDP rose from 17.2% in 1987 to 29.9% in 1995 (it has since fallen back to 19.8%, partly because of declining reserves at the main Kutubu oil project, but also because of the drought in 1997 which temporarily cut output at PNG’s two largest mines). Between 1994 and 1996, foreign entities invested more than Kina500m in equity in minerals projects in PNG, accounting for 93% of new inward investment during those three years. (See Reference table 15 for information on the values and volumes of minerals exports.)

The privatisation programme

In addition to owning utilities, the government has historically Oil and Hargy Oil Palms. In 1996 Air Niugini and the Post and had interests in the mining, agricultural, forestry, fisheries, Telecommunications Authority were corporatised, with the view transportation and finance sectors. Despite the apparent to eventual privatisation. In the same year the government floated commitment of successive governments to privatisation and 49% of its stake in the Mineral Resources Development increased commercialisation of state enterprises, little tangible Corporation (MRDC) on the Australian Stock Exchange, under the progress was made until the World Bank/IMF supported name Orogen Minerals. The MRDC was the holding company for structural adjustment programme at the beginning of 1995. the state’s assets in oil and mining projects, such as the Kutubu, This led to the revitalisation of the Papua New Guinea Holdings Gobe, Lihir, Porgera and Misima projects. In 1998 the Corporation, originally established in 1992 to develop and government sold the Motor Vehicle Insurance Trust, the Nuigini implement a privatisation programme. Insurance Corporation and the Rural Development Bank to the Papua New Guinea Banking Corporation (PNGBC). The selling-off of state holdings was also a likely consequence of the redefinition of the functions and role of government, as In 1999 the government extended its list of assets earmarked for set out in the Medium-Term Development Strategy (MTDS). privatisation to include: its interest in Halla Cement; a further 5% of its stake in Porgera to Orogen Minerals; and its share in Pacific During 1995 the government sold both Roadco, a private Rim Plantations to a UK company, Commonwealth Development road built for the Ok Tedi mine, for Kina84m ($65.6m), and Corporation. The government has also announced plans to its preference shares in the Ramu sugar company. Further privatise the PNG Harbours board and Air Niugini, but no progress was made in 1996, with the sale of New Guinea timetable has yet been drawn up. Forest Products and the partial sales of West New Britain Palm

Despite the closure of the giant Panguna copper mine in 1989, the 1990s witnessed a boom in the mining and petroleum sector as the Misima, Porgera and Lihir gold mines began production in 1990, 1989 and 1997 respectively, and the Kutubu and Gobe oil projects commenced production in 1992 and 1998. New projects are likely to be developed over the next few years, such as at the Kina1.8bn Ramu nickel/cobalt deposit in Madang, which, on the basis of preliminary results from a feasibility study, and using current world market prices, has been estimated to contain $13bn of nickel and cobalt.

The government has stakes The government is an active participant in the minerals sector. It has in mining projects— historically taken an equity share of each new project, and will continue to do so, as it has the option to take a 30% stake in new minerals projects, and a 22.5% stake in major petroleum projects (the partially floated Orogen Minerals has the right to purchase the majority of these shares). Given the importance of the minerals sector to the economy, the government has often been heavy handed in its policy formulation, such as with the fly-in, fly-out tax, which directly affects the enclave-based minerals sector and its largely expatriate workforce. More recently the imposition of a 4% mining levy was swiftly repealed under pressure from the minerals industry. Constant changes in the tax regime on mining activities have also been blamed for the decline in the level of oil exploration in the country, which fell from an annual average of $30m to $7m between 1988 and 1998, according to industry figures.

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Current and future mining projects

Output Value Start Mine life Commodity per year (Kina m/yeara) date (years) Currently producing mines Ok Tedi Copper (tonnes) 200,000 500 1984 25 Gold (oz) 365,000 220 Misima Gold (oz) 200,000 180 1988 14 Porgera Gold (oz) 800,000 480 1989 18 Tolukuma Gold (oz) 60,000 36 1995 5 Lihir Gold (oz) 600,000 360 1997 40 Alluvial gold Gold (oz) 60–100,000 36–60 1880 Future projects Hidden Valley Gold (oz) 200,000 120 2000 10–15 Nena Frieda Copper (tonnes) 220,000 550 2003 12 Gold (oz) 365,000 220 Ramu Nickel (tonnes) 33,000 220 2001 10–12 Cobalt (tonnes) 2,800 50 Wafi Copper (tonnes) 100,000 250 2004 20 Gold (oz) 200,000 120 Simberi Gold (oz) 30,000 18 b 5 Woodlark Gold (oz) 50,000 30 b 7 Mt Sinivit Gold (oz) 10,000 6 b 4 Laloki Copper (tonnes) 4,000 10 b 4 Gold (oz) 15,000 9 Other Bougainville Copper (tonnes) 160,000 400 1992 12 Gold (oz) 350,000 210 a Assuming gold price of Kina600/oz, and copper price of Kina2,500/tonne. b These would be small mines, and development seems unlikely at current low mineral prices.

Sources: Papua New Guinea Department of Mineral Resources; Australian Agency for International Development.

—and landowners are also Other important players in the mining sector are landowner groups. This is important because of the uncertainties surrounding the claims of customary landowners to a share in profits produced by minerals projects. Along with the government, landowners usually receive equity stakes in new projects. Companies developing new mining sites are also usually required to provide more direct benefits for local residents, in the form of roads and community projects. Gold PNG has two major gold mines. The Porgera mine in the Enga Highlands is the more established of the two. The Lihir gold mine, located on an island off New Ireland, produced its first gold in May 1997. The project was originally scheduled to have begun in 1992. However, years of wrangling between landowners and the developers caused delays. Furthermore, despite having spent $120m on exploration at the site, the major partner, the Anglo- Australian Company Rio Tinto, decided to delay construction until it found a new partner to share the development costs. Lihir Gold announced a loss of $10m in 1998 compared with a profit of $11.8m in 1997 as a result of production problems and the falling price of gold, which cut over 10% off the value of the mine’s reserves.

The PNG-Australia gas pipeline project

Natural gas reserves may offer the greatest potential for PNG’s economy in future years. Chevron has been leading a consortium of companies (Merlin Petroleum, a unit of Mitsubishi; Oil Search, a PNG-based company; Orogen Minerals, an oil and gold producer; and Petroleum Resources Kutubu, a subsidiary of a PNG-government owned enterprise) to construct a $2.5bn gas pipeline between PNG and Queensland, Australia.

The pipeline project, which would extend for 2,655 km, consists of three parts: a pipeline from the Kutubu oil and gas fields in the Southern Highlands province of PNG to the Gulf of Papua, near Kikori; a coastal gas processing facility in the gulf that will produce natural gas for piping to Australia and liquified petroleum gas (LPG) for PNG and export markets; and a pipeline across the Torres Strait seabed, continuing inland down Cape York to supply gas to Cairns, Townsville and Gladstone.

The pipeline, which would be the longest in the southern Hemisphere, should provide substantial economic benefits to PNG both during the construction and production phases. Construction costs for the PNG onshore portion of the project are estimated by the project partners at $555m; the cost of establishing PNG’s offshore facilities are estimated at a further $545m. Once in place, Chevron estimates gas production could generate some Kina300m in annual revenue for the PNG government. Gas reserves in the available fields are estimated at over 6trn cu ft, with Chevron projecting sales of 280m cubic feet a day early in the next decade, rising to 400m cu ft/d by 2010 and 800m cu ft/d by 2030.

Although the project has been in the planning stages for well over a year, it is not guaranteed to go forward. The pipeline partners have yet to sign firm contracts with gas customers in Queensland, including Comalco, an aluminium producer that is considering construction of a new refinery in Queensland. Until large launch customers are firmly in place—negotiations were continuing in July 1999—the project remains at some risk.

Progress has been made on other fronts in the past year, however. A major hurdle was cleared in April 1999 when the partners reached agreement with Exxon to include the US company’s PNG reserves in the project, ensuring that the project will have gas supplies to last at least 30 years. Delays in signing customers, however, will probably push the start of the construction phase of the project back to early 2000, with completion—and transport of the first gas supplies—not likely before mid-2002.

Copper PNG’s main operating copper mine is at Ok Tedi, in Western Province, and is run by the Australian firm BHP. Development of the mine took almost eight years and cost $1.4bn. Ok Tedi also produces gold. Production at another important copper mine, Panguna, on the island of Bougainville, was halted by the secessionist troubles in 1989 (see box: Bougainville). The current ceasefire on the island offers the potential for production to restart. However, as the mine was the catalyst for the troubles beginning in the first place, there is a danger that reopening the mine would re-ignite buried hostilities. There is also the huge investment, estimated at between $420m and $640m, needed to rehabilitate the mine. Not surprisingly the mine’s owners are now reported to be considering abandoning the mine altogether for more profitable ventures.

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In December 1990 the government gave the final go-ahead for a joint-venture Oil company, Chevron Niugini, to develop the Kutubu oilfield, at an estimated cost of $1bn. The development came on stream in mid-1992 and gave a significant boost to PNG’s export sector. A 275-km pipeline was also constructed to transport Kutubu crude oil to a terminal in the Gulf of Papua and the operators built a small oil refinery on the field.

Development at a second field, the Gobe oil project, by a consortium comprising Chevron, Ampolex, BHP, Oil Search and Orogen Minerals, began in 1997 and production began in March 1998. The project is expected to produce 50,000 barrels/day of oil, well below the output of Kutubu at its peak, although it is thought to have large gas reserves. Oil is also now being produced at the Moran field in the Southern Highlands, although full production is likely to be delayed until the year 2000. The site is estimated to have reserves of 99m barrels of oil.

Gas A 1997 report by an Australian company, Worley, estimated PNG’s gas reserves to be at least seven times greater than the proven oil reserves at Kutubu and other oilfields in the country. There have been two major gas discoveries in the Gulf of Papua. The Hides onshore gas and condensate field was discovered in late 1987 and has possible gas reserves of 2.2trn cu ft. There have been further discoveries of gas/condensate in Elvala and P’nyang in the Papuan basin and in Angore, which is only 19 km from the Hides discovery. There are also gas reserves at Kutubu and other oil projects in PNG.

Manufacturing

The manufacturing sector The manufacturing sector’s share of GDP has changed little since is small independence, remaining at about 9%. Growth has been constrained by the small and fragmented market, high wage and transport costs, skills shortages, the limited availability of land, which is overwhelmingly communally held, political instability and, until recently, the high exchange rate. This is despite the tariff protection that has traditionally been granted to most manufacturing industries, and the existence of some quantitative restrictions on imports, although since joining the Asia-Pacific Economic Co-operation (APEC) forum most of these have now been lowered or removed.

There are two broad categories of manufacturing in PNG: the processing of agricultural products for export, such as sawmills, and the manufacture or assembly of products on a small scale for the domestic market, such as beer, tobacco, biscuits and glass bottles.

Construction

Construction activity is Construction industries contribute about 5% of GDP (although this figure is variable approximate, owing to the difficulties in evaluating the value of free and low- paid inputs in rural projects). The construction industry in PNG as a whole is dependent on projects in the minerals sector. Public infrastructure projects,

such as roads, ports and airports, are also important, and major aid projects funded by multilateral and bilateral agencies have focused on these sectors.

The number of new buildings under construction has fluctuated widely from year to year. Demand for housing has been constrained to some extent by the shortage of available land and the reluctance of banks to grant long-term credit. However, even so, construction has lagged behind demand for low- and medium-cost housing, partly as a result of overconcentration on high-cost units at a time when the rate of migration to the urban areas has been high. A few large office developments in Port Moresby in the early 1990s gave a boost to the industry as a whole.

As part of the 1995 structural adjustment arrangements, all restrictions on foreign investment in the construction sector were removed. The restrictions had been in place for about five years and had failed to stimulate the local industry at a cost to the wider economy.

Financial services

Lending to the non-mining The financial services sector in PNG, although relatively sophisticated, is small private sector is limited and mainly urban-based. Despite the positive rates of economic growth, banking sector credit to the private sector remained relatively stagnant between the early 1990s and 1997. The credit policies of the formal financial sector are cautious, favouring large clients (many of whom are subsidiaries of foreign firms) and short-term financing, particularly in the form of government securities (at the end of September 1998 short-term government securities constituted 56.6% of the commercial banks’ asset base). Bank lending is further hindered by the difficulties of land registration, low population density (which increases transaction costs) and security concerns. Many commercial banks were encumbered with substantial bad loans following the poor performance of the plantation sector in the 1980s and the Bougainville crisis, which began in 1989. (For data on money supply, domestic credit and interest rates, see Reference tables 7-9.). In contrast to most private-sector businesses, PNG’s banking sector posted record profits in 1998, the result of historically high interest rates, a growing loan portfolio and strong foreign- exchange earnings.

The central bank is the Bank of Papua New Guinea (BPNG), which was founded in 1973. The central bank has gradually liberalised foreign-exchange regulations and moved towards open market operations for the implementation of monetary policy. The bank has been relatively autonomous, although in 1998 there were fears that it was becoming more politicised, prompted by the government’s decision to change the governor of the bank twice in just over three months.

There is a range of The most important commercial banks are the state-owned Papua New Guinea financial institutions— Banking Corporation (PNGBC), the Westpac Banking Corporation (PNG), and the Australia New Zealand Banking Group (PNG). PNGBC has by far the largest branch network, covering all the urban centres, whereas the operations of most other banks are confined to the wealthier provincial capitals. (For information

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on the assets and advances of commercial banks, see Reference tables 16-18.) There are also merchant banks and a number of finance companies, which had combined assets of Kina339.3m ($163.2m) at the end of September 1998. Savings and loan societies are important for small savers and borrowers; their funds totalled Kina102.2m at the end of June 1998. The Investment Corporation of PNG, which aims to increase the participation of PNG citizens in business—both in existing foreign-owned enterprises and in new businesses—is the most important wholly government-owned financing organisation. There are also two pension funds, the Public Officers’ Superannuation Fund (POSF) and its private-sector equivalent, the National Provident Fund (NPF).

During 1998 there was some consolidation of the financial sector in PNG, with the merger of the government-owned Motor Vehicle Insurance Trust, the Nuigini Insurance Corporation and the Rural Development Bank (called the Agriculture Bank until January 1st 1993) with the PNGBC. At the beginning of July 1998 the PNGBC, through the Niugini Insurance Corporation, reached an agreement with the Australian-based company MMI Insurance to begin a new joint-venture insurance company in PNG, to be called Pacific MMI. Further changes are likely in the future.

—and a new stock The long-awaited Port Moresby Stock Exchange opened for public trading in exchange opens late June 1999 with one listed company—the diversified PNG retailer Steamships Trading. A second company, Oil Search, the largest holder of oil and gas reserves in PNG, listed soon after. A number of other firms, including Lihir Gold and Orogen Minerals, were expected to list in the following months. As many as 50 companies could be trading on the Port Moresby exchange within a year, according to its executive director John Hooton. Many of these companies, including Oil Search and Lihir, already trade actively on the Australian Stock Exchange.

Other services

Tourism PNG’s tourism industry has great potential, particularly in niche markets such as adventure, “eco-tourism” and diving. However, potential visitors have been deterred by the high cost of visiting the country and, more importantly, by PNG’s serious law-and-order problems. In 1995 it was estimated that there were 42,328 tourist arrivals, although this increased to over 61,000 in 1996 and more than 66,000 in 1997, in part because of cost savings resulting from the depreciation of the kina. The largest source of visitors to PNG is Australia.

The Tourist Promotion Authority estimates that only 10,000 visitors are forecast to pass through PNG in 1999, of which only one-third will be tourists. Most tourists now arrive on cruise ships; 18 ships are expected in 1999 compared with 15 in 1998.

The tourism sector is dominated by a few large, mostly expatriate-owned operators who have developed impressive facilities in different parts of the country. Small-scale indigenous activity is limited and often extremely expensive for the standard of service provided, although the fall in value of the

kina should help rectify this. (For historical information on tourism, see Reference table 19.)

The external sector

Trade in goods

Foreign trade, 1998 (Kina m)

Merchandise exports fob 3,531a Merchandise imports cif –2,134 Trade balance 1,397 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Mineral exports help The merchandise trade balance has been in surplus since 1990, largely owing to maintain a positive trade the rapid expansion in mining, petroleum and forestry exports in the early balance— 1990s. Agricultural commodities (excluding logs) constituted around 25.4% of total exports in 1997. PNG’s mineral exports are more important: in 1997 crude oil, gold and copper accounted for 60.1% of total exports. However, the kina value of mineral exports declined by 18.1% between 1996 and 1997, from Kina2.24bn ($1.7bn) to Kina1.84bn, because of production problems caused by the weather, and weak world prices. This contributed to a squeezing of the merchandise trade surplus, which fell by 29%, from Kina1.34bn to Kina950m. In 1998 exports began to recover as the effects of the drought started to fade: through the first nine months of the year, the merchandise trade surplus was Kina950m. (For historical data on merchandise trade, imports and exports see Reference tables 20-22.)

To a large extent PNG has little influence over the demand for, and prices of, its exports. Its commodity exports are generally used as inputs in the production process elsewhere, and so demand is dependent on the strength of markets in these other countries. PNG also has to accept world prices for its products. The poor performance of PNG’s minerals sector in 1997 was partly the result of low world prices. Devaluations can also boost PNG’s export sector, as the dollar value of exports is increased. The increase in the kina value of agricultural exports in 1997, which rose by 34.3% year on year, was partly the result of the 23.1% depreciation of the kina during the year. This trend has continued throughout 1998 and 1999 and has helped offset the effects of the drought.

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Main exports, 1998 (Kina m)

Kina m % of total Crude oil 813.1 23.2 Gold 1,227.8 35.0 Forest products 170.9 4.9 Coffee 304.4 8.7 Copper 395.7 11.3 Palm oil 271.8 7.7 Cocoa 81.2 2.3 Copra oil 69.7 2.0 Copra 38.8 1.1 Total incl others 3,511.0 100.0 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

—although exports are Climatic conditions are also important to PNG’s export sector. Favourable dependent on world weather conditions combined with high world commodity prices in 1995 and prices— 1996 were behind improvements in export earnings from agricultural products. The drought in PNG in 1997 and early 1998, caused by the El Niño weather pattern, hit the agricultural sector hard, with PNG’s Cocoa Board noting that cocoa trees would not recover from the drought until June 1998. The events of 1997 also showed that it is not only agricultural commodities that are affected by the weather. The drought caused a temporary halting of output from both the Ok Tedi and Porgera mines, as both need water either for transportation or for the production process. In 1997 the volume of copper exported consequently fell by almost 40%.

Mineral project imports Although the value of merchandise imports can be expected to fluctuate with have pushed up import rapid movements in the terms of trade, total import growth in recent years has values been closely related to the construction phases of major mining and petroleum projects and changes in the exchange rate. Imports surged by 27% in dollar terms in 1991 as a result of the construction of the Kutubu pipeline, but fell in 1992 and 1993 before rising again in 1994. In 1997 the kina value of imports increased by 6.7%, from Kina2bn ($1.5bn) in 1996 to Kina2.2bn. Mining sector imports fell by almost 25%, mainly owing to the completion of the construction of the Lihir gold mine, but imports associated with the oil industry increased by 220.3%, from Kina34m to Kina108.9m, reflecting materials needed by the Gobe oil project. The value of general imports rose by around 10%, driven largely by the sharp weakening of the kina, which drove up the prices of imported goods. Higher capital expenditure by PNG’s mines were the main reason for the increase in imports during the first nine months of 1998. Most trade is done with Much of PNG’s merchandise trade is conducted with Australia, the former Australia colonial power. In 1997, 31.9% of PNG’s exports were sold to Australia, which also supplied 51% of PNG’s imports. The next most important trading partner is Japan. The UK has become an increasingly important market for PNG in recent years. In 1992 only 3.3% of PNG’s exports were sold to the UK, but this

had risen to 6.3% by 1997. (More comprehensive direction of trade statistics are given in Reference table 23.)

Main trading partners, 1997

Exports to: % of total Imports from: % of total Australia 31.9 Australia 51.0 Japan 20.6 Japan 20.6 Germany 8.8 Singapore 11.5 South Korea 6.4 US 6.7 UK 6.3 New Zealand 4.3 China 3.2 Malaysia 2.3 Source: IMF, Direction of Trade Statistics Quarterly.

Invisibles and the current account

Current account According to central bank figures, whereas the trade account has been in surplus since 1990, there has been a consistent—and growing—deficit on the invisibles account. Invisibles outflows have expanded as payments on interest, profit and dividends have increased (which is related to the overseas investments in PNG’s mining sector). This has been only slightly offset by the consistent surplus on transfers, which is partly related to aid flows, mainly from Australia.

Current account, 1998 (Kina m)

Merchandise exports fob 3,531 Merchandise imports fob –2,134 Trade balance 1,397 Invisibles: credit 695 Invisibles: debit –2,139 Invisibles balance –1,444 Net transfers 190 Current-account balance 143 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

The current account has In 1992 strong growth in merchandise exports and a fall in import payments been in surplus for much of offset the large increase in the invisibles deficit to produce the first current- the 1990s account surplus for 14 years. Based on balance-of-payments figures from the central bank, the current-account surplus averaged around 9.1% of GDP in 1992-96. In 1993 the surplus rose to an unprecedented Kina632m ($646.2m) and, after falling back in 1994, rose again in 1995 to Kina859m. In 1996 the rapid rise in merchandise imports associated with the Lihir mining project and static export earnings squeezed the current-account surplus back down to Kina411m. In 1997 the current account recorded a deficit of $116m, or around 2.4% of GDP, mainly because of the fall in the size of the trade surplus owing to the effect of the drought on exports. The current account returned to surplus in 1998, at a level of $68.8m. (See Reference tables 24 and 25 for

EIU Country Profile 1999-2000 © The Economist Intelligence Unit Limited 1999 Papua New Guinea 39

historical data on the balance of payments.)In 1992 strong growth in merchandise exports and a fall in import payments offset the large increase in the invisibles deficit to produce the first current-account surplus for 14 years. Based on balance-of-payments figures from the central bank, the current- account surplus averaged around 9.1% of GDP in 1992-96. In 1993 the surplus rose to an unprecedented Kina632m ($646.2m) and, after falling back in 1994, rose again in 1995 to Kina859m. In 1996 the rapid rise in merchandise imports associated with the Lihir mining project and static export earnings squeezed the current-account surplus back down to Kina411m. In 1997 the current account recorded a deficit of $116m, or around 2.4% of GDP, mainly because of the fall in the size of the trade surplus owing to the effect of the drought on exports. The current account returned to surplus in 1998, at a level of $68.8m. (See Reference tables 24 and 25 for historical data on the balance of payments.)

Capital flows and foreign debt

Capital account The capital account was in surplus during the second half of the 1980s and into the early 1990s. The major items were direct investment and long-term capital inflows related to the mining sector and large-scale expenditure at Ok Tedi and Bougainville. Despite the discouraging effects of the closure of the Panguna mine following the troubles on Bougainville in 1989, inward investment remained buoyant, particularly in 1991, as funds flowed into the gold-mining projects at Porgera and Misima and oil production at Kutubu.

The minerals sector In 1992-95 the capital account recorded large deficits, mainly because of loan generates significant repayments on petroleum and mining projects falling due. The 1995 deficit of capital flows Kina556m also reflected an increase in short-term financial assets held offshore by the mining and petroleum companies, although this was partly offset by the drawdown of funds under the structural adjustment programme led by the World Bank. In 1996 a surplus of Kina58m was recorded on the capital account, as some of the funds held offshore re-entered the country. In 1997 another surplus was recorded, as there was a net inflow of private capital for the first time since 1991. The surplus did, however, fall by 48% compared with that of 1996, to Kina30m, because of outflows related to repayments of public- sector external loans, and lower inflows of funds from mineral companies’ offshore accounts. By contrast the capital account recorded a deficit of Kina370m in 1998, driven by higher net private capital outflows that reflected short-term loan repayments by the mineral companies.

Aid Aid flows are important in PNG (see Reference table 29). This was clearly illustrated by the three tidal waves that struck a stretch of PNG’s north-western coastline in July 1998, killing more than 2,000 people. The natural disaster stretched PNG’s limited resources. Pledges of financial support were quickly forthcoming from Australia, Japan, New Zealand and the US, and military personnel from several countries took an active role in the disaster-relief operation. Since then, however, there have been accusations that some of this aid was misappropriated by national and local officials.

Australian aid is particularly important to PNG, and not only to help the Australia is the most smaller country deal with natural disasters. Before independence the share of important donor Australian aid in total government revenue was close to 60%, but after a series of five-year agreements and unilateral decisions by the Australian government the flow of aid has gradually been reduced. The share of Australian aid in total budget revenue declined from 34% in 1980 to 14% in 1993. In early 1993 the Australian and PNG governments agreed to form a new aid relationship under which cash support from Australia will be phased out by 2000 to be replaced by sectoral project aid. This approach was reaffirmed in a new agreement reached early in 1999. Australia has made no secret of its lack of confidence in the PNG government’s ability to handle aid effectively.

Even with this change, Australia will continue to provide large amounts of aid. In the 1998-99 financial year PNG will receive A$298.5m ($176.1m), around 20% of the Australian development programme’s total budget (only A$71m of this aid will be in the form of direct budget support). Japan has been an important donor nation in recent years, giving $96.2m in net official development assistance in 1996. Aid from international development agencies varies considerably from one year to another depending on the projects that they are financing and the progress of these projects, but the chief sources of these funds have been the Asian Development Bank, the EU and the World Bank’s concessional affiliate, the International Development Association (IDA).

External debt ($ m; debt stocks as at year-end)

1997 % of total Long-term debt 2,070.8 91.1 Public & publicly guaranteed 1,310.8 57.6 Private non-guaranteed 760.1 33.4 Short-term debt 154 6.8 Use of IMF credit 47.7 2.1 Total external debt 2,272.5 100.0 Source: World Bank, Global Development Finance.

Debt PNG has had success in bringing its external liabilities under control in recent years. According to the World Bank, gross external liabilities stood at $2.3bn at the end of 1997, down from $3.8bn in 1992 and $2.5bn in 1995. The reduction has been mainly the result of a fall in the absolute level of external debt held by the private sector. The long-term external liabilities of the private sector more than halved between 1992 and 1996, falling from $1.7bn to $752m. In recent years the government has also been making determined attempts to reduce its holdings of debt owed to commercial creditors overseas. According to central bank figures, the government’s stock of debt owed to such creditors fell by 28% between 1996 and 1997. The proportion of short-term borrowing to total debt has swung wildly in this decade: according to the World Bank, it more than doubled in 1992 (to over 10%), fell to 1.4% in 1996, then surged back to 6.7% in 1997. (See Reference tables 26-28 for historical data on debt.)

Foreign reserves and the exchange rate

Reserves According to central bank figures, foreign-exchange reserves fell from a peak of Kina377.9m ($396.5m) in 1990, to just Kina112.2m at the end of 1994, providing just one month of import cover. The sharp decline in reserves motivated the authorities to float the kina, and seek support from the World Bank and IMF. With the help of funding from multilateral institutions and boosted by current-account surpluses, reserves increased, reaching Kina793.3m by the end of January 1997, or 4.8 months of import cover. Since then reserves have once again fallen to dangerously low levels as a result of the drought- related current-account deficit in 1997 and reduced investment flows. By the end of 1998 reserves were down to Kina221m, sufficient for 1.4 months of import cover. Reserves continued to fall through the first half of 1999. (For historical data on international liquidity, see Reference table 30.)

Exchange rate The value of PNG’s currency, the kina, has fluctuated greatly in recent years. There have been a series of devaluations since the government began to move away from the “hard kina” policy in 1989. The currency was finally floated in 1994, and between the end of 1993 and the end of 1994 the kina fell by 16.8% against the US dollar, from Kina0.981:$1 to Kina1.179:$1. The currency is now vulnerable to changes in PNG’s external trade position. This was illustrated by the poor export performance caused by the El Niño-induced drought of 1997 and the poor world commodity prices in 1997-99. Between the middle of October 1997 and June 11th 1999, the currency fell from Kina1.41:$1 to Kina3.45:$1—a fall of 59% (see Reference table 31).

Exchange rates, 1998 (Kina per unit of currency; end-period)

A$ 1.302 US$ 2.096 £ 3.487 DM 1.253 ¥ 0.018 SDR 2.843 Sources: IMF, International Financial Statistics; EIU calculations.

Appendices

Sources of information

National statistical sources Bank of Papua New Guinea, Annual Report, Port Moresby

Bank of Papua New Guinea, Quarterly Economic Bulletin, Port Moresby

Department of Mining and Petroleum, Quarterly Bulletin

Economic Policy Unit, Ministry for Treasury and Planning, Monthly Economic Monitor, Port Moresby

Ministry for Treasury and Planning, Medium-Term Development Strategy 1997- 2002, 1997

Ministry for Treasury and Planning, Economic & Development Policies, Volume 1, 1998 budget papers; Volume 1, 1999 budget papers

National Statistics Office, Abstract of Statistics

International sources Asian Development Bank (ADB), Key Indicators of Developing Asian and Pacific Countries, 1996

Asian Development Bank, Asian Development Outlook, 1999

Australian Agency for International Development, Papua New Guinea: Improving the Investment Climate, International Development Issues no. 46, Canberra, 1995

Australian Agency for International Development (AusAID), Economic Survey of Papua New Guinea, 1997

Australian Agency for International Development (AusAID), Papua New Guinea: Coping with Shocks and Achieving Broad-based Economic Development, 1998

Energy Data Associates, 1 Regent Street, London SW1Y 4NR

Europa, The Far East and Australia, 1999

UN Food and Agriculture Organisation, Statistics Database

IMF, International Financial Statistics (monthly)

IMF, Direction of Trade Statistics (quarterly and annual)

IMF, Papua New Guinea—Statistical Appendix. Staff Report No. 97/3, February 1997

IMF, Papua New Guinea: Recent Economic Developments. IMF Staff Country Report No. 98/18, March 1998

OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual)

UN Development Programme, Human Development Report

World Bank, Global Development Finance, 1997 (annual)

World Bank, World Development Report

Select bibliography Sean Dorney, Papua New Guinea: People, politics and history since 1975, Random House, Australia, 1990

Ila Temu (ed), Papua New Guinea: A 20/20 Vision. National Centre for Development Studies and National Research Institute, Australia, 1997

Isabella Tree, Islands in the clouds, travels in the highlands of New Guinea, Lonely Planet Publications, 1996

Asia Pacific Review 1997

Tony Wheeler and John Murray, Papua New Guinea: a travel survival kit, Lonely Planet Publications, Australia, 1996

Dr Campbell-Jons and Meg Sheffield, Destination Papua New Guinea, Destination Papua New Guinea, Port Moresby, 1995

Reference tables

Reference table 1 Population (m; % change year on year in brackets)

1993 1994 1995 1996 1997 Total 3.92 4.00 4.07 4.40 4.21 (1.8) (2.0) (1.8) (8.1) (-4.3) Source: IMF, International Financial Statistics.

Reference table 2 Labour force by sector (% of total)

1960 1990 Agriculture 90 79 Industry 4 7 Services 6 14 Total 100 100 Source: UN Development Programme, Human Development Report 1997.

Reference table 3 Indices of formal employment in the private sector by industry (Jun 1989=100 unless otherwise indicated; period averages)

1994 1995 1996 1997 1998a Retail trade 88.4 92.6 94.8 103.9 111.0 Wholesale trade 90.6 82.3 82.1 82.5 83.9 Manufacturing 120.1 110.2 114.7 119.2 119.1 Building & construction 77.8 69.6 89.4 85.8 70.1 Transport 95.2 89.6 96.5 99.4 94.7 Agriculture, forestry & fishing 101.1 87.4 90.8 83.5 71.7 Financial & business 102.3 111.0 116.1 127.3 137.6 Mining 104.9 112.2 116.2 116.7 135.8 Total excl mining 98.1 93.5 100.5 100.4 94.9 % change, year on year 7.3 –4.7 7.5 –0.1 -5.5

a As of September

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

Reference table 4 Central government finances (Kina m unless otherwise indicated)

1993 1994 1995 1996 1997 Total revenue 1,316 1,446 1,722 1,898 2,202 Tax 978 1,124 1,207 1,526 1,675 Non-tax 332 322 514 371 527 of which: foreign budgetary grantsa 182 163 237 170 133 Total expenditureb 1,605 1,572 1,755 1,860 2,192 Recurrent expenditure 1,217 1,255 1,517 1,608 1,820 Development expenditure & transfers to provincial & local governments 388 317 238 252 372 Budget balance -289 -127 –34 37 10 % of GDP -5.8 –2.4 –0.5 0.5 0.1

a Excludes project grants. b The classification between development and recurrent expenditure used here differs from that provided by the PNG authorities in an attempt to provide a consistent time series.

Sources: Australian Agency for International Development, Economic Survey of Papua New Guinea; Economic Policy Unit, Ministry for Treasury and Planning, Economic and Development Policies (Vol. 1, 1999 budget submission).

Reference table 5 Central government revenue (Kina m)

1993 1994 1995 1996 1997 Tax revenue 978 1,124 1,207 1,526 1,674 Taxes on income & profit (excl mining) 323 330 385 469 555 Individuals 189 194 258 317 368 Companies 110 109 99 118 150 Dividend withholding tax 24 27 28 34 34 Excise duties 93 104 103 115 149 Taxes on international trade 272 384 427 498 522 Other taxes (direct & indirect) 31 34 36 39 63 MRSF taxes 260 272 257 405 390 Non-tax revenue 150 159 278 201 215 Total internal revenue 1,127 1,282 1,485 1,727 1,889 Foreign grants 182 163 237 170 312 Budgetary support n/a n/a 184 165 133 Project & programme grants n/a n/a 53 6 179 Total revenue & grants 1,309 1,446 1,722 1,898 2,202 Sources: Australian Agency for International Development, Economic Survey of Papua New Guinea; Economic Policy Unit, Ministry of Treasury and Planning, Economic and Development Policies (Vol. 1, 1999 budget submission).

Reference table 6 Central government expenditure (Kina m)

1993 1994 1995 1996 1997 Recurrent expenditure 1,217 1,255 1,524 1,417 1,593 National & statutory 739 829 909 825 938 National 607 677 781 720 820 Salaries & wages 270 310 334 346 368 Goods & services 337 367 447 374 453 Statutory authorities 132 152 127 112 120 Net lending to CSAs 0 0 -3 –6 –3 Provincial departments 157 152 335 335 361 Salaries & wages 125 135 256 258 288 Goods & services 32 17 79 77 73 Other (mainly miscellaneous non-departmental) 163 89 0 0 0 Interest payments 158 185 273 257 298 Domestic n/a n/a 179 175 206 External n/a n/a 94 83 91 Transfers to provincial & local governmentsa 189 199 18 190 224 Development expenditureb 199 118 231 253 372 Total expenditure 1,605 1,572 1,755 1,860 2,192

a Classified as provincial government development expenditure in 1995 and 1996 and conditional grants in 1997. b Excludes provincial development expenditure.

Sources: Australian Agency for International Development, Economic Survey of Papua New Guinea; Economic Policy Unit, Ministry of Treasury and Planning, Economic and Development Policies (Vol. 1, 1999 budget submission).

Reference table 7 Money supply (Kina m unless otherwise indicated; year-end)

1994 1995 1996 1997 1998 Currency in circulation 166.2 180.5 208.1 225.0 276.9 Demand deposits 405.1 465.3 656.8 694.5 744.4 M1a 571.3 645.9 864.9 919.5 1,021.3 M1 growth (%) 8.3 13.1 33.9 6.3 11.0 M3b 1,860.1 2,068.0 2,736.8 3,101.1 3,222.8 M3 growth (%) 2.6 11.2 32.3 13.3 3.9

a Notes and coins in circulation and demand deposits. b M1 plus savings deposits, term deposits, other items (net), and deposits of Comm. Funds with the Bank of Papua New Guinea.

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

Reference table 8 Domestic credit (Kina m, end-year)

1994 1995 1996 1997 1998 Central government excl Mineral Resources Stabilisation Fund 678.5 876.6 1,216.3 1,536.5 1,648.3 Mineral Resources Stabilisation Fund –190.4 –302.0 –531.4 –696.4 -677.3 Official entities 380.6 330.8 316.9 299 208.0 Private sector 855.2 846.8 780.4 1,063.9 1,375.8 Non-monetary financial institutions 26.8 24.3 109.1 117.2 166.8 Total domestic credit 1,750.70 1,776.50 1,891.30 2,320.4 2,721.7 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 9 Interest rates (%; end-period)

1994 1995 1996 1997 1998 Deposits: weighted average 4.5 9.4 4.0 5.1 8.7 Advances: weighted average 10 15.4 10.2 10.6 20.2 182-day Treasury bills 10.75 21.48 9.19 14.5 23.94 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 10 Gross domestic product (market prices)

1994a 1995a 1996a 1997a 1998 Total (Kina m) At current prices 5,295 6,308 6,914 6,824 7,780 At constant (1983) prices 3,531 3,403 3,521 3,361 3,444 Real change (%) 5.2b –3.6b 3.5b –4.6b 2.5 Per head At current prices ($) 1,309 1,211 1,191 1,127 874 At constant (1983) prices (kina) 883 836 800 798 802 Real change (%) 3.2 –5.3 –4.3 –0.3 0.5

a EIU estimates, based on real growth rates, estimates of growth rates in expenditure components of GDP and inflation rates. b Actual.

Sources: IMF, International Financial Statistics; Papua New Guinea—Statistical Appendix; Papua New Guinea: Recent Economic Developments; Ministry of Treasury and Planning, Economic and Development Policies; EIU estimates.

Reference table 11 Gross domestic product by sector (Kina m; current market prices)

1993 1994 1995 1996 1997 Agriculture 1,335 1,532 1,693 1,832 1,872 Mining & quarrying 635 737 1,086 836 665 Petroleum 746 629 708 916 728 Manufacturing 411 454 497 603 648 Electricity & other utilities 66 73 80 90 92 Construction 190 237 196 384 361 Commerce 417 477 521 607 669 Transport & storage 261 285 318 350 377 Finance & real estate 46 51 57 70 77 Community & social services (incl defence) 711 807 859 884 963 Import duties 198 247 294 341 372 GDP 5,016 5,531 6,308 6,914 6,824 of which: non-mining & petroleum GDP 3,636 4,164 4,515 5,162 5,430 Sources: IMF, Papua New Guinea—Statistical Appendix; Papua New Guinea: Recent Economic Developments; Ministry of Treasury and Planning, Economic and Development Policies.

Reference table 12 Consumer prices

Weights 1994 1995 1996 1997 1998 Index, 1977=100 Food 230.9 240.9 284.3 323.3 344.2 390.2 Drink, tobacco & betel nut 286.2 334.7 374.1 401.5 428.9 515.6 Clothing & footwear 183.4 191.8 209.2 232.8 252.8 286.1 Rents, council charges, fuel & power 187.1 194.7 204.2 210.5 217.4 216.5 Household equipment 211.2 218.6 249.2 281.8 293.7 337.1 Transport & communications 335.8 383.2 485.4 539.7 495.4 576.1 Other 201.5 179.3 230.1 286.6 327.0 303.6 All groups 246.3 265.9 311.9 348.1 361.9 411.0 % change, year on year Food 3.3 1.9 18.0 13.7 6.5 13.4 Drink, tobacco & betel nut 5.2 4.2 11.8 7.3 6.8 20.2 Clothing & footwear 6.0 1.9 9.1 11.3 8.6 13.2 Rents, public charges, fuel & power 1.7 0.6 4.9 3.1 3.3 -0.4 Household equipment 6.0 2.0 14.0 13.1 4.2 14.8 Transport & communications 6.0 9.6 26.7 11.2 –8.2 16.3 Other 2.2 –12.6 28.3 24.6 14.1 -7.2 All groups 4.3 2.9 17.3 11.6 4.0 13.6 Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin.; IMF, Papua New Guinea, Recent Economic Developments.

Reference table 13 Agricultural production volumes

1993 1994 1995 1996 1997 Livestock (‘000 head) Pigs 1,022 1,030 1,050 1,060 1,060 Cattle 105 105 110 105 105 Chickens 3.2 3.3 3.3 3.3 3.3 Horses 1.6 1.7 1.7 1.6 1.6 Goats 2.3 2.4 2.4 2.3 2.3 Crop production (m tonnes) Green coffee 63,540 67,136 59,589 70,000 66,440 Coconuts 857,000 680,000 704,000 705,000 705,000 Palm kernels 61,000 66,000 60,000 62,000 65,000 Palm oil 222,800 224,800 223,200 230,000 237, 500 Potatoes 400 350 400 400 400 Sweet potatoes 480,000 450,000 460,000 430,000 430,000 Cassava 112,000 114,000 114,000 115,000 115,000 Taro 218,000 220,000 225,000 225,000 225,000 Yams 220,000 218,000 218,000 220,000 220,000 Tomatoes 350 375 380 380 380 Pumpkins, squash & gourds 100 110 110 115 115 Beans, greens 80 90 90 95 95 Green corn (maize) 188,200 190,000 190,000 185,000 185,000 Rice 630 650 650 650 650 Maize 1,700 1,800 1,800 1,800 1,800 Sorghum 800 750 750 750 750 Sugar cane 340,000 300,000 400,000 420,000 420,000 Bananas 640,000 640,000 650,000 665,000 665,000 Pineapples 13,000 14,000 14,000 14,500 14,500 Cocoa beans 35,735 31,275 29,000 36,000 38,000 Tea 8,700 8,500 8,500 8,700 8,700 Natural rubber 4,848 5,023 6,510 7,100 7,500 Source: UN Food and Agriculture Organisation (FAO), Statistics Database.

Reference table 14 Commercial production and value of major forestry, agriculture and marine resourcesa

1994 1995 1996 1997 1998 Logs ‘000 cu metres 2,943.9 2,512.5 2,607.4 2,375.9 1,061.5 Kina m 483.1 436.7 464.8 409.3 153.4 Coffee ‘000 tonnes 64.7 55.1 62.3 59.2 52.2 Kina m 204.8 214.5 190.3 325.9 304.4 Palm oil ‘000 tonnes 230.8 186.6 267.0 274.9 212.9 Kina m 77.5 142.2 182.4 207.1 271.8 Cocoa ‘000 tonnes 26.0 30.6 41.0 38.6 25.9 Kina m 29.0 47.7 66.2 73.3 81.2 Copra oil ‘000 tonnes 34.7 33.1 49.6 48.6 53.2 Kina m 20.1 29.7 51.4 51.1 69.7 Copra ‘000 tonnes 50.3 64.2 99.2 90.3 58.1 Kina m 14.7 27.4 49.0 47.2 38.8 Marine products ‘000 tonnes 4.7 5.7 2.8 2.2 10.0 Kina m 10.3 12.3 10.4 9.6 41.5 Tea ‘000 tonnes 3.4 4.2 9.3 6.5 6.6 Kina m 4.2 5.4 12.7 10.4 18.9 Rubber ‘000 tonnes 3.4 2.7 2.8 4.4 4.9 Kina m 2.9 4.0 4.1 6.5 7.3

a Export data.

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

Reference table 15 Commercial production and value of major minerals and petroleuma

1994 1995 1996 1997 1998 Gold tonnes 55.8 55.2 46.9 44.3 58.2 Kina m 702.3 840.1 773.6 718.7 1,227.8 Copper ‘000 tonnes 207.2 215.7 127.7 77.8 109.5 Kina m 367.4 754.5 387.0 259.8 395.7 Crude oil ‘000 barrels 43,456 36,990 39,308 27,972 28,033 Kina m 702.7 827.7 1,073.9 852.2 813.1

a Export data.

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

Reference table 16 Commercial banks, assets (Kina m; year-end)

1994 1995 1996 1997 1998 Cash & deposits with Bank of PNG 53.5 69.9 124.7 77.1 107.2 Claims on non-monetary financial institutions 26.5 24.0 108.7 116.8 166.4 Claims on the government 446.2 727.6 1,105.1 1,107.8 888.6 Short-term 407.6 715.2 1,099.6 1,024.6 805.8 Long-term 19.3 0.4 0.4 8.5 - Loans 19.3 12.0 5.1 74.7 82.8 Claims on the private sector & official entities 1,235.6 1,177.2 1,097.0 1,362.7 1,583.7 Kina lending 1,174.2 1,125.2 1,083.8 1,341.0 1,531.0 Foreign-currency lending 58.5 51.2 12.4 20.9 51.9 Other 2.9 0.8 0.8 0.8 0.8 Fixed assets 83.5 83.4 85.0 100.2 105.6 Foreign assets 204.0 133.7 160.4 205.6 285.8 Other assets 61.8 60.6 67.3 93.0 230.5 Total assets 2,111.2 2,276.4 2,748.4 3,063.1 3,367.8 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 17

Commercial banks, advances outstanding by borrower (Kina m; end-period)

1994 1995 1996 1997 1998 Agriculture, forestry & fisheries 321.1 284.6 280.7 289.8 232.2 Manufacturing 67.2 83.1 66.2 87.5 76.8 Transport & communications 100.6 74.1 68.0 134.8 141.4 Finance 26.5 24.0 108.7 116.8 166.4 Commerce 240.1 230.7 226.0 233.2 371.4 Building & construction 42.0 42.7 26.7 45.4 60.7 Mining & quarrying 18.9 57.5 27.1 63.3 70.2 Other business 303.3 291.7 279.8 367.7 468.9 Personal loans 136.6 111.2 120.8 139.8 194.0 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 18 Commercial banks’ liquid asset holdings (Kina m unless otherwise indicated; end-period)

1994 1995 1996 1997 1998 Notes & coins 43.2 42.5 45.6 50.9 47.5 Deposits with central bank 10.2 27.4 79.1 26.2 59.8 Treasury bills 355.8 659.5 1,025.6 941.8 743.8 Other short-term stocks 51.9 55.7 74.0 82.8 62.0 Total liquid assets 461.1 785.1 1,224.3 1,101.7 913.0 Liquid assets ratioa (%) 31.7 44.1 54.8 43.6 34.4 Liquid assets requirement (%) 26.0 32.0 27.0 20.0 0.0b

a As a percentage of total deposits and other prescribed liabilities. b From August 17th 1998 the minimum liquid assets ratio (MLAR) was reduced to 0% and an interest-free cash reserve requirement (CRR) was introduced. This resulted in a substantial increase in deposits with the Bank of PNG in August 1998.

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

Reference table 19 Tourist arrivals

1993 1994 1995 1996 1997 Total 33,552 38,739 42,328 61,385 66,102 Source: Europa, The Far East and Australia 1999.

Reference table 20 Exports (Kina m; % change year on year in brackets)

1994 1995 1996 1997 1998 Agricultural 374.6 502.4 578.6 777.2 846.5 (38.7) (34.1) (15.2) (34.3) (8.9) Forest products 494.4 449.7 480.3 433.6 170.9 (20.5) (–9.0) (6.8) (–9.7) (-60.5) of which: logs 483.1 436.7 464.8 409.3 153.4 (20.7) (–9.6) (6.4) (–11.9) (-62.5) Marine products 10.3 12.3 10.4 9.6 41.5 (32.1) (19.4) (–15.4) (–7.7) (332.2) Minerals 1,783 2,435 2,245 1,839 2,452.1 (0.8) (36.6) (–7.8) (–18.1) (33.3) of which: gold 702.3 840.1 773.6 718.7 1,227.8 (3.0) (19.6) (–7.9) (–7.1) (70.8) copper 367.4 754.5 387.0 259.8 395.7 (43.3) (105.4) (–48.7) (–32.9) (52.3) crude oil 702.7 827.7 1,073.9 852.2 813.1 (–14.1) (17.8) (29.7) (–20.6) (-4.6) Total 2,662 3,400 3,314 3,060 3,511 (5.3) (27.7) (–2.5) (–7.7) (14.6) Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 21 Foreign trade (Kina m)

1994 1995 1996 1997 1998 Merchandise exports fob 2,682 3,420 3,334 3,079 3,531 Merchandise imports –1,336 –1,620 –1,996 –2,129 -2,134 Trade balance 1,346 1,800 1,338 950 1,397 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 22 Main imports (Kina m; fob)

1986 1987 1988 1989 1990a Total imports 902.4 1,012.9 1,133.5 1,260.1 1,092.0 of which: food & live animals 162.7 171.5 181.8 190.9 195.0 mineral fuels & lubricants 100.3 119.9 106.8 71.5 39.0 chemicals 81.7 84.6 84.4 78.6 82.0 manufactured goods 149.7 181.6 206.7 253.3 223.0 machinery & transport equipment 309.5 339.6 424.6 525.0 423.0 miscellaneous manufactures 76.1 87.6 99.1 109.8 96.0

a Latest available data.

Source: National Statistics Office, Abstract of Statistics.

Reference table 23 Main trading partners (US$ m)

1993 1994 1995 1996 1997 Exports to: Australia 904 822 867 930 706 Japan 606 661 664 551 456 Germany 139 194 298 208 195 UK 73 79 140 152 139 South Korea 0 0 204 138 141 China 95 125 71 90 70 Imports from: Australia 611 694 673 945 885 Singapore 155 170 172 155 195 Japan 189 179 121 154 156 US 51 65 51 69 117 New Zealand 63 58 50 65 75 Malaysia 51 33 37 43 39 Source: IMF, Direction of Trade Statistics Yearbook.

Reference table 24 Balance of payments, IMF estimates (US$ m)

1993 1994 1995 1996 1997 Goods: exports fob 2,604 2,651 2,670 2,530 2,160 Goods: imports fob –1,135 –1,325 –1,262 –1,513 -1,483 Trade balance 1,470 1,326 1,408 1,017 677 Services: credit 307 235 321 432 397 Services: debit –805 –603 –642 –779 -924 Income: credit 31 22 23 32 35 Income: debit –400 –423 –510 –461 -345 Current transfers: credit 49 59 67 252 70 Current transfers: debit –178 –209 –174 –304 -103 Current-account balance 474 402 492 189 -192 Direct investment abroad 0 0 0 0 0 Direct investment in Papua New Guinea –62 –57 455 111 29 Portfolio investment assets -687 -839 –1,115 –1,065 -1,914 Portfolio investment liabilities 636 837 1,066 1,134 1,889 Other investment assets 17 59 –284 180 30 Other investment liabilities –745 –723 –567 –315 -25 Financial balance –716 –609 –445 46 8 Capital account nie credit 20 20 16 15 13.9 Capital account nie debit –20 –20 –16 –15 -13.9 Capital-account nie balance 0 0 0 0 0 Errors & omissions –11 37 –87 –33 7 Overall balance –253 –170 -40 203 -177 Source: IMF, International Financial Statistics.

Reference table 25 Balance of payments, national estimates (Kina m)

1994 1995 1996 1997 1998 Goods: exports 2,682 3,420 3,334 3,079 3,531 Goods: imports –1,336 –1,620 –1,996 –2,129 -2,134 Trade balance 1,346 1,800 1,338 950 1,397 Invisibles: credit 262 443 611 619 695 Invisibles: debit –1,043 –1,477 –1,633 –1,823 -2,139 Invisibles balance –781 –1,034 –1,022 –1,204 -1,444 Net private transfers –150 –138 –69 –46 29 Official transfers 161 231 164 133 161 Transfers balance 11 93 95 87 190 Current-account balance 576 859 411 –167 143 Official capital flows –107 –25 14 –89 -101 Private capital flows –557 –193 –147 134 -182 Non-official monetary sector transactions –33 35 –46 –61 31 Changes in offshore account 70 –373 237 46 -118 Capital-account balance –627 –556 58 30 -370 Revaluations 8 0 0 0 0 Errors & omissions 17 –59 –37 14 -37 Overall balance –26 244 432 –123 -264 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 26 Public debt outstanding (Kina m; debt stocks as at year-end)

1994 1995 1996 1997 1998 Domestic debt 1,424.3 1,605.7 1,969.5 2,251.7 2,473.0 Treasury bills 1,008.1 1,217.5 1,615.3 1,931.6 2,186.9 Inscribed stock 416.2 388.2 354.2 320.1 286.1 External debt 1,536.9 1,718.5 1,811.3 2,166.3 2,686.0 Commercial loans 242.8 227.9 219.6 157.1 124.1 International agencies 1,278.6 1,475.8 1,579.2 1,997.4 2,548.8 Other 15.5 14.7 12.5 11.8 13.1 Total 2,961.2 3,324.2 3,780.8 4,418.0 5,159.0 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 27 External debt, World Bank estimates (US$ m unless otherwise indicated; debt stocks as at year-end)

1993 1994 1995 1996 1997 Total external debt 3,269 2,792 2,513 2,354 2,273 Long-term debt 2,960 2,678 2,386 2,269 2,071 Public & publicly guaranteed 1,616 1,732 1,668 1,517 1,311 Private non-guaranteed 1,344 946 718 752 760 Short-term debt 264 99 78 34 154 of which: interest arrears on long-term debt 0 0 0 0 0 Use of IMF credit 44 16 50 51 48 Public & publicly guaranteed long-term debt 1,616 1,732 1,668 1,517 1,311 Official creditors 1,305 1,398 1,442 1,352 1,215 Multilateral 851 919 938 859 801 Bilateral 454 479 504 493 414 Private creditors 311 334 226 165 96 of which: banks 161 207 156 123 64 bonds 31 30 0 0 0 Total debt service 812 854 604 378 368 Principal 669 709 493 286 289 Interest 143 145 111 92 79 of which: short-term debt 22 11 5 1 0 Ratios (%) Total external debt/GNP 68.9 54.7 52.3 48.1 56.3 Debt-service ratioa 28.9 30.8 20.8 12.7 14.4 Short-term debt/total external debt 8.1 3.5 3.1 1.4 6.8 Concessional long-term debt/ total long-term debt 24.6 29.7 33.5 35.1 36.1 Variable interest long-term debt/ total long-term debt 56.1 52.2 48.0 48.0 49.2

Note. Long-term debt is defined as having original maturity of more than one year. a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Reference table 28 External debt, national estimates (US$ m; end-period)

1994 1995 1996 1997 1998 External debt Government 1,220.0 1,249.0 1,259.0 1,230 1,307 Concessional 1,016.0 1,056.0 1,080.0 1,184 1,236 Non-concessional 204.0 192.0 178.0 46 71 Central bank 82.0 113.0 116.0 116 46 IMF 16.0 50.0 53.0 48 44 Other 66.0 63.0 63.0 68 2.0 Private sector 980.0 712.0 521.0 763 625 Mineral 414.0 100.0 17.0 291 251 Non-mineral 566.0 612.0 504.0 472 374 Total 2,281.0 2,073.0 1,896.0 2,109 1,978 Debt-service Government 210.0 240.9 151.9 163.7 143.6 Principal 151.0 169.0 104.2 118.4 96.0 Interest 59.0 71.9 47.7 45.3 47.6 Concessional 88.4 114.2 107.5 113.6 126.8 Principal 56.4 59.3 66.1 73.4 83.1 Interest 32.0 54.9 41.4 40.2 43.7 Commercial 121.6 126.7 44.4 50.1 16.8 Principal 94.6 109.7 38.1 45.0 12.9 Interest 27.0 17.0 6.3 5.1 3.9 Private sector 714.5 522.2 368.9 311.0 369.6 Principal 602.3 492.7 243.5 247.3 291.4 Interest 112.2 29.5 125.4 63.7 78.2 Mineral sector 611.1 465.5 206.9 223.9 211.6 Principal 541.5 448.6 142.6 182.7 156.6 Interest 69.6 16.9 64.3 41.2 55.0 Non-mineral sector 103.4 56.7 162.0 87.1 158.0 Principal 60.8 44.1 100.9 64.6 134.8 Interest 42.6 12.6 61.1 22.5 23.2 IMF 33.5 16.5 2.8 2.0 6.9 Repurchases 31.3 15.9 0.0 0.0 4.1 Charges 2.2 0.6 2.8 2.0 2.8 Total 958.0 779.6 523.6 476.7 520.1 Principal 784.6 677.6 347.7 365.7 391.5 Interest 173.4 102.0 175.9 111.0 128.6 Source: IMF, Papua New Guinea, Statistical Appendix.

Reference table 29 Net official development assistance (US$ m)

1993 1994 1995 1996 1997 Bilateral 265.7 276.0 300.5 350.3 291.4 of which: Australia 221.8 234.6 238.6 243.6 228.3 Japan 27.4 21.8 46.1 96.2 49.2 Germany 9.7 9.8 6.8 1.5 4.5 Multilateral 37.5 50.3 72.8 32.6 57.1 of which: Asian Development Bank 24.1 25.2 12.9 3.2 7.8 EU 4.5 18.4 49.4 21.3 42.8 UN Development Programme 5.5 4.7 5.5 3.0 3.6 Total incl net flows from Arab countries 309.3 325.8 372.9 382.5 348.6 Source: OECD, Geographical Distribution of Financial Flows to Aid Recipients.

Reference table 30 International liquidity (US$ m unless otherwise indicated; end-period)

1994 1995 1996 1997 1998 Foreign exchange 95.9 260.6 583.8 362.5 192.8 SDRs 0.1 0.7 0.1 0.1 0.5 Reserve position in the IMF 0.1 0.1 0.1 0.1 0.7 Total reserves excl gold 96.1 261.4 583.9 362.7 192.9 Gold (national valuation) 11.09 2.40 28.30 28.30 28.30 Total reserves incl gold 107.2 263.8 612.2 391.0 221.2 Memorandum items Commercial banks’ foreign assets 201.8 104.4 121.6 143.0 137.3 Commercial banks’ foreign liabilities 85.1 39.3 23.6 9.7 55.0 Commercial banks’ net foreign assets 116.7 65.1 98 133.3 82.3 Import cover Months of total imports 1.0 2.6 4.8 3.8 2.3 Months of non-mining imports 1.2 3.4 6.3 4.8 2.9 Sources: IMF, International Financial Statistics; Bank of Papua New Guinea, Quarterly Economic Bulletin.

Reference table 31 Exchange rates (Kina per currency unit; end-period)

1994 1995 1996 1997 1998 A$ 0.9152 0.9946 1.0725 1.1431 1.302 US$ 1.1786 1.3551 1.3468 1.7513 2.096 £ 1.8376 2.0661 2.2769 2.9036 3.487 DM 0.7588 0.9282 0.8666 0.9790 1.253 ¥ 0.0118 0.0130 0.0116 0.0135 0.018 SDR 1.7519 1.9857 1.9331 2.3708 2.843 Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Editor: Leo Abruzzese All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023