Papua New Guinea

Country Profile 2006

Papua New Guinea

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

The full publishing schedule for Country Profiles is now available on our website at www.eiu.com/schedule

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2006 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-8099

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

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

200 ISLANDS SOLOMON Kieta July 2006 Main road International boundary Main airport Capital Major town Other town 0 km 1000 miles 200 100 300 400 Buka I. Mamagota Rossel I. Nissan I. Torokina Tagula I. Feni I. Bougainville I. Boang I. Malendok I. Taron . Guasopa s I

Bwagaoia a Lihir I. m SOLOMON SEA i s Tagula Woodlark I. i Misima Is. M I. Simberi I. Tabar I. Pal Malmal Rabaul Namatanai Konogogo New Britain Losuia CORAL SEA Bwasiaiai Kavieng Tutubea Alotau New Ireland Samarai Viviganl e Djaul I. b Talasea m i K Kimbe Kimbe Nai Saint Matthias Group o

g Garove I. la Meteran e Tufi p Mundua I. i l h c u

r p A i Mussau I. Sipul S Sipul k

c Kandrian r Unea I. a Narage I. m

s Popondetta

B Nauna I. Ioma Rambutyo I. Cape Rodney BISMARCK SEA Tong I. Pak I. Tolokiwa I. Siassi Lae Tapini Kwikila GUINEA Lorengau Long I. M'buke I. o PAPUA NEW u l t o Admiralty Islands l n Kabuli u a Bagabog I. Bulolo B Bulolo n i Karkar I. a Kainantu K Kainantu

Manus Is. Madang

a a

l Bereina

a a

l l PORT MORESBY

i i

a a

V V

. .

R R

i i

r Kaniet I. r a a u u P P Western I. a Manam I. Kerema Hermit I. n u k r e o u g Sae I. . Bam I. r

. R a o m

o i H

Goroka G r

a a

t P

Heina I. u

Baimuru B Baimuru n T u Gulf of Papua

. o g

Mushu I. R Mount Hagen M Mount Hagen m a . a i Awin I. r

e b K R r

e i r o k W Wabag Webag o i Ninigo Group i k K Kikori K Pelleluhu I. i o d n Kairiru I.

i k

n l

a .

R R e

. a

w i

r Daru Balino B R Balino

Mendi Mendi M e

e e

Manu I. p

m i

r o o K K r r o o

s Wewak W s

a a .

a a

b R g oi m w a Wa a L Aua I. h C

. d L. Chambri L L. Chambri a a i AUSTRALIA Aitape m o e i n Wuvulu I. i g a h a Torres Strait w u a K e

g i v K r .

A p L L. Kaim L. Kaim

o z . n

. L L. Kwinia L. Kwinia o i a R S L L. Avu L. Avu

Morehead M Morehead

K .

d y m

L. Szaga L a y n

o e a M f r o k k a r e Vanimo e a a l b u m v Lake L Lake Kopiago L Lake Kopiago Imonda Imonda I e u Murray M Murray m T Telefomin Telefomin b u iumba i

v mbuve m

a A

. INDONESIA D

L L. Ambuve L. A . L. Dav L L. Daviumba © The Economist Intelligence Unit Limited 2006

Comparative economic indicators, 2005

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

Australia 708.4 Australia 34.8

New Zealand 108.5 New Zealand 26.4

Papua New Guinea Fiji(a)

Fiji(a) Samoa(a)

Samoa(a) Tonga(a)

Vanuatu(a) Vanuatu(a)

Solomon Islands(a) Papua New Guinea

Tonga(a) Solomon Islands(a)

0.0 1.0 2.0 3.0 4.0 5.0 6.0 0.0 1.0 2.0 3.0 4.0 5.0 (a) 2004. (a) 2004. Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

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

Solomon Islands(a) Samoa(a)

Vanuatu(a) Tonga(a)

Fiji(a) Solomon Islands(a)

Samoa(a) Fiji(a)

Papua New Guinea New Zealand

Australia Australia

New Zealand Vanuatu(a)

Tonga(a) Papua New Guinea

0.0 1.0 2.0 3.0 4.0 5.0 6.0 0.0 5.0 10.0 15.0 20.0 (a) 2004. (a) 2004. Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 1

Contents

Papua New Guinea

3 Basic data

4 Politics 4 Political background 6 Recent political developments 8 Constitution, institutions and administration 10 Political forces 11 International relations and defence

13 Resources and infrastructure 13 Population 14 Education 14 Health 15 Natural resources and the environment 15 Transport, communications and the Internet 17 Energy provision

17 The economy 17 Economic structure 18 Economic policy 22 Economic performance 24 Regional trends

24 Economic sectors 24 Agriculture 25 Mining and semi-processing 28 Manufacturing 29 Construction 29 Financial services 30 Other services

31 The external sector 31 Tra d e i n go od s 32 Invisibles and the current account 33 Capital flows and foreign debt 34 Foreign reserves and the exchange rate

35 Regional overview 35 Membership of organisations

39 Appendices 39 Sources of information 40 Reference tables 40 Population 40 Formal employment in the private sector by industry 40 Central government finances 41 Central government revenue

41 Central government expenditure 41 Public debt outstanding 42 Gross domestic product 42 Gross domestic product by sector 42 Gross domestic product by expenditure 43 Money supply 43 Consumer prices 43 Commercial production and value of forestry, agriculture and marine resources 44 Commercial production and value of major minerals and petroleum 44 Foreign trade 45 Main exports 45 Main trading partners 46 Balance of payments, national series 46 Net official development assistance 47 External debt 47 International liquidity 48 Exchange rates

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 3

Papua New Guinea

Basic data

Land area 462,840 sq km

Population 5.77m (2004, IMF mid-year estimate)

Major islands New Britain, New Ireland, Manus, Bougainville Population in ‘000 (2000 census) Port Moresby (capital) 254 Lae 79 Madang 29 Wewa k 2 0 Goroka 20 Rabaul 24 Mount Hagen 28

Climate Tropical

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

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

Measures Metric system

Currency 1 kina=100 toea. Average exchange rate in 2005: Kina3.10:US$1; Kina2.37:A$1. Exchange rate on July 14th 2006: Kina3.15:US$1; Kina2.37:A$1

Time 10 hours ahead of GMT

Public holidays January 1st (New Year’s Day); April 14th (Good Friday); April 17th (Easter Monday); April 25th (National Day); June 12th (Queen’s Official Birthday); September 16th (Independence and Constitution Day); December 25th (Christmas Day); December 26th (Boxing Day)

Politics

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

Political background

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

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

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 5

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

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

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

Recent political developments

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

Sir Michael returns to power PNG’s seventh parliament elected Sir Michael Somare, widely known as “the for the third time Chief”, as prime minister on August 5th 2002 after a chaotic national election. Sir Michael’s current party, National Alliance (NA), won the most number of seats in the election, 19 of 103 declared (the electoral commissioner declared that the elections had failed in six electorates in Southern Highlands province), and in early August the governor-general, Sir Silas Atopare, invited Sir Michael to form a new government. A supplementary election for the six outstanding seats was held in April-May 2003 under heavy security. The 2002 election was the first to be held under the Organic Law on the Integrity of Political Parties and Candidates, which was introduced by Sir Mekere and enacted in 2001. The main aim of this law is to stabilise government by strengthening the party system and limiting the influence of independent MPs. The conditions imposed on MPs by the law include the restriction that they must vote along party lines on the appointment of a prime minister, the budget, any constitutional change and on no-confidence motions. During late 2003 and early 2004 Sir Michael failed in his attempt to push through a bill that would double the grace period relating to no-confidence votes from 18 months to three years (his coalition partners had failed to back a proposal to remove the no-confidence provision from the constitution completely). Although Sir Michael introduced the bill with the intention of further stabilising the political scene, those opposed to the bill were concerned that the extension of the grace period to three years would prevent the country from taking action to oust possible “rogue” leaders in the future.

Sir Michael nears the end of a The political environment throughout 2004 was fraught, with Sir Michael facing full term in office continued agitation from the opposition for a vote of no confidence in his administration. However, Sir Michael was successful in his efforts to avoid facing such a vote. This was largely the result of adept political manoeuvring, primarily through a series of timely parliamentary adjournments. The government also successfully thwarted the opposition’s attempts to call for a motion of no confidence by claiming that proper procedures were not followed. Alleviating some of the pressure on Sir Michael’s tenure, changes in political alignments in early 2005 were to his advantage, lessening support for efforts to

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 7

oust him and improving his chances of remaining in office for a full five- year term. Although Sir Michael has largely managed to avoid disrupting the stability of his governing coalition, unity with the NA was damaged in early 2006. During the party!s congress in April, Sir Michael faced a serious challenge to his leadership from the NA!s second most senior member, the then Treasury minister, Bart Philemon, who determined that with the next general election set for 2007, the time was right for the party to discuss changes to its leadership. In the end the party!s members in effect gave Sir Michael their backing by voting to defer the leadership issue until after the 2007 general election and agreeing that he should lead them into the election. Mr Philemon!s failure to oust Sir Michael was later compounded by the party!s decision to strip of him of his position as a party deputy leader in June. He was then sacked as Treasurer in a cabinet reshuffle in early July. Important recent events

June-July 2002 The sixth general election since independence is marred by an inaccurate common roll, voting irregularities and violence (including deaths). However, on August 5th parliament votes in Sir Michael Somare as prime minister. April-May 2003 Elections in the five constituencies in the Southern Highlands province and in the provincial seat, which had failed, owing to violence, in the 2002 general election, take place peacefully under tight security. September 2003 On its first reading members of parliament vote by a majority of one in favour of a bill to double the grace period relating to no-confidence motions to three years. However, the bill fails to pass the required second vote. May 2004 Sir Michael drops his proposal to double the no-confidence grace period, and makes major changes to the composition of his ruling coalition and his cabinet by incor- porating the opposition PNG Party, led by Sir Mekere Morauta, into the government. June 2004 Papua New Guinea and Australia enter into a controversial four-year Kina2bn (US$625m) Enhanced Co-operation Programme (ECP) involving 300 Australian personnel, including not only police but also treasury, justice, customs and border control specialists. The ECP is later ruled unconstitutional and comes to an abrupt end in May 2005. May-June 2005 UN-sponsored elections take place on Bougainville, and the Bougainville Autonomous Government is sworn into office. November 2005 Security concerns on Bougainville heighten, as it becomes apparent that former soldiers from Fiji are hired to conduct covert military training on the island.

April 2006 The Treasury minister, Bart Philemon, fails in his bid to oust Sir Michael as leader of the National Alliance (NA), and in a cabinet reshuffle in July he is sacked as Treasurer. July 2006 The so-called ECP Mark II comes into operation, with the deployment of ten Australian federal police officers. Constitution, institutions and administration

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

Disputes arise between central In 1977, prompted by threats from Bougainville to seek independence, PNG

and local governments created 19 provincial governments and a National Capital District. In 1984 the administration in the province of Enga became the first to be suspended for financial mismanagement, and was followed by several others. Disputes between the two levels of governments over the distribution of power, respon- sibilities and funding led to the 1995 Organic Law on Provincial Governments and Local Level Governments. This law replaces elected provincial legislatures with assemblies comprising members of the national parliament and representatives of local government. It devolves a wide range of powers such as raising revenue, delivering services and project implementation to provincial and local governments. It also requires four types of financial transfers from the national government. However, the law is proving difficult to implement. East New Britain province is seeking a measure of financial and political autonomy. The Somare administration, along with the recently resigned Bougainville governor, John Momis, who introduced provincial government in 1977, seems set to take the process further. According to Sir Michael, the establishment of autonomous government for Bougainville has widened the opportunities for PNG to mobilise the people in developing the country. Bougainville

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

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 9

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

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

Political forces

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

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

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 11

Main political figures

Sir Michael Somare The prime minister, Sir Michael Somare, widely known as “the Chief”, was voted into office for the third time on August 5th 2002. In 1972 he had become chief minister of Papua New Guinea (PNG) in the run-up to self-government. Following the granting of independence in 1975, he won two elections in 1977 and 1982. Sir Michael leads the National Alliance (NA), which won 19 of 103 declared seats in the 2002 election. Sir Michael is the first prime minister to head a government operating under new political integrity laws, which are designed to provide a more stable political environment, but have not yet proved effective. Owing to his success in the current parliament in fending off vigorous attempts to petition for a vote of no confidence, he is likely to serve out a full term, becoming the first prime minister ever to so. Sir Mekere Morauta Sir Mekere Morauta, a former finance secretary and governor of the Bank of Papua New Guinea (the central bank), relinquished the post of leader of the parliamentary opposition and took his PNG Party (formerly the People’s Democratic Movement) into Sir Michael’s governing coalition and himself on to the back benches in May 2004. Sir Mekere previously served as prime minister from July 1999 to June 2002. During his time in office Sir Mekere received the strong backing of the international donor community as he attempted to push ahead with vital economic reforms. However, these reforms proved to be domestically unpopular and contributed to his failure to retain the post of prime minister in 2002. International relations and defence

Ties with Australia are firm, PNG’s diplomatic, economic and financial ties with Australia have generally but are subject to friction been strong, but disputes between the two countries are not uncommon. In a sign of strengthening relations, in December 2003 PNG and Australia agreed on a new framework for co-operation and partnership, known as the Enhanced Co-operation Programme (ECP). Under the four-year programme, Australian officials were to fill senior public-sector positions and Australian police officers were to be deployed to help to improve law and order. In early 2005 a total of 149 police and civil servants had been deployed out of the planned total of 210 police offices and 64 civil servants. However, in May 2005 the US$645m programme came to an abrupt end (except for the non-policing component). This followed the PNG’s Supreme Court ruling that the ECP was unconstitutional owing to its provision offering immunity from prosecution to Australian police and officials operating in PNG under the programme. Both sides, however, remained keen to resolve the ECP issue, and the so-called ECP Mark II commenced in July 2006. The Kina90m (US$29m) programme entails the deployment of ten Australian federal police officers occupying various advisory positions in the executive management of the police force, the Ministry of Internal Security and the Fraud and Anti-corruption Directorate. Half of the deployment will go towards establishing a transnational crime task force.

Adherence to the “One China” Within days of coming to power in 1999 Sir Mekere renounced his pre- policy has not been strong decessor’s hastily devised aid-for-recognition agreement with Taiwan and said that PNG would retain its traditional ties with China"the “One China” policy. However, in 2002 a visit to Taiwan by the then deputy prime minister, Allan Marat, and Arthur Somare, the East Sepik governor and Sir Michael’s son, soon after the formation of the government, raised questions in some quarters about PNG’s commitment to the One China policy. Sir Michael’s subsequent directive to his foreign affairs minister to issue consular corps plates for Taiwan’s 13-year-old trade mission, protested against by China, was defended by his government as being wholly apolitical; the government cited precedents in other countries, and reaffirmed its adherence to the One China policy. The interest in investing in PNG’s gas and mineral development that China expressed following a state visit to the country early in 2004 by Sir Michael and a large retinue of PNG business leaders is indicative of efforts to build good relations between the two countries. Ties were strengthened by a decision in 2004 by the China Metallurgical and Construction Company to take over the long-delayed Ramu nickel-cobalt project, which is expected to begin construction by the end of 2006.

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

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

Military forces in the region Papua New Guinea Fiji Australia Indonesia Army personnel 2,500 3,200 26,035 233,000 Navy personnel 400 300 12,570 45,000 Air force personnel 200 - 13,670 24,000

Source: International Institute for Strategic Studies, The Military Balance, 2006/07.

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 13

Resources and infrastructure

Population

The population growth rate The mid-2000 census showed a population of 5.19m, reflecting average annual is high growth since 1990 of 3.5% compared with 2.3% between 1980 and 1990. Under-enumeration in the 1990 census could partly explain the sharp increase in average annual growth rates. The National Capital District grew fastest between 1980 and 1990 at 4.7% per year, but between 1990 and 2000 it grew more slowly than the national average. Areas of high average annual growth included the Western Highlands (2.7%), Enga (2.1%) and the Southern Highlands (5.4%, the highest rate recorded). According to IMF estimates, population growth has slowed, with annual average increase of 2.2% in 2000-04, pushing the population up to nearly 5.8m by mid-2004. The majority of the population are Melanesian, although there are considerable numbers of Polynesians and Micronesians as well as a small minority of Australians and ethnic Chinese.

Population density is among The population density, at around 11 persons per sq km, is among the world’s the world’s lowest lowest. The highest concentration is in the Highlands region. Around 40% of the national population is under 15 years of age and 3% is over 65. According to data from the UN Development Programme (UNDP), in 2003 the urban population stood at 13.2% of the total, up from 11.9% in 1975. Low population density (the product of a long-isolated, Neolithic history) and the favourable growing conditions of the moist tropics have together led to “subsistence affluence”. This may help to explain the slow commercialisation of agriculture, the root cause of inadequate economic and employment growth. Fewer than one in five people in the labour force work for salary or wages. Most people who receive cash incomes do so as small farmers. However, a large and growing proportion (possibly as high as 45%, mostly male) of the labour force is unemployed and depends on the private welfare (wantok) system or crime for sustenance.

Population, 2000 % annual growth Province Population 1990-2000 Western 152,067 3.2 Gulf 105,050 4.2 Central 183,153 2.6 NCD 252,469 2.6 Milne Bay 209,054 2.8 Northern 132,714 3.2 Southern Highlands 544,352 5.4 Enga 289,299 2.1 Western Highlands 439,085 2.7 Chimbu 258,776 3.4 Eastern Highlands 429,480 3.6 Morobe 536,917 3.5 Madang 362,805 3.6

Population, 2000 % annual growth Province Population 1990-2000 East Sepik 341,583 2.9 West Sepik 185,790 2.8 Manus 43,589 3.0 New Ireland 118,148 3.1 East New Britain 220,035 1.7 West New Britain 184,838 3.5 North Solomons 141,161 n/a

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

Education

Basic education is not The language distribution in Papua New Guinea (PNG) is one of the most universal complex in the world, with over 800 languages in use. Although English is the official language of government, business and education, Tok Pisin (Pidgin English) is the country’s lingua franca, while Hiri Motu is widely used in the Papua region. Although most Papua New Guineans are multilingual, the adult literacy rate has improved only slightly in the past decade or so, rising to 57.3% in 2003 from 56.6% in 1990, according to the UNDP. Not all children receive a basic education. Education is provided by the government, voluntary organisations (notably churches) and the private sector, with expensive international schools in the main urban centres serving expatriates and the local urban elite. Under the recently released national education plan for 2005-14, the government hopes to achieve nine years of universal primary education by 2015. According to the UNDP, in the 2002/03 school year the net primary enrolment rate stood at 73%, up from 66% in 1990/91, and the net secondary enrolment rate was 24%. The average number of years of schooling received by the workforce is less than one-half that in Indonesia. Better education would improve com- petitiveness, but would not resolve other underlying problems. The nation’s unemployed males lack opportunity not because they are uneducated, but because the absence of enforceable property rights in land deters private financing of customary land development. Low educational penetration needs to be seen in the light of the country’s late start in the development race. However, the education system is top-heavy: tertiary institutions consume a big share of the budget, while universal primary education is still some way off.

Health

Health indicators are poor As an indication of the poor standard of health in PNG, in 2003 infant mortality was 69 per 1,000 births compared with only 16 in Fiji and 31 in Indonesia according to the UNDP. Life expectancy at birth is relatively low, at around 55 years compared with nearly 68 years in Fiji. Data from the UNDP show that 35% of children under five years of age are underweight and that only 39% of Papua New Guineans have access to improved water sources. UNDP data suggest that the number of adults living with HIV/AIDS is higher than 30,000, and as many

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 15

as 100 new cases of HIV infection are reported each month. Chronic and severe malnutrition, however, is not prevalent. Only about 10% of the population lacks access to essential drugs. The vast majority continue to have access to communally held land, and the wantok system (a clan-based social-support mechanism) serves to redistribute wealth, dampen income inequality and protect almost everyone from outright destitution. However, this is less true in urban areas, where traditional social relations have often broken down. The Department of Health runs hospitals and dispensaries, co-ordinating much of the activity in this sector. However, various (subsidised) church groups, non- governmental organisations (NGOs) and provincial governments also play an important part in health service delivery. Charges for healthcare are related to ability to pay, and most people are treated free or for a small fee, when treatment is available.

Health statistics, 2003 Papua New Guinea Fiji Indonesia Life expectancy at birth (years) 55.3 67.8 66.8 Infant mortality (per 1,000 births) 69 16 31 Fertility ratea 4.1 2.9 2.4 Immunisation rateb 49 91 72 a Births per woman. b Percentage of children under 12 months receiving measles vaccination. Source: UN Development Programme (UNDP), Human Development Report.

Natural resources and the environment

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

Transport, communications and the Internet

Transport infrastructure is in a The road infrastructure is poorly developed and badly maintained; over 85% of

poor state roads are unsealed. Most roads are concentrated around the main regional centres, including the capital, Port Moresby, and Lae. PNG is one of the few countries in the world where the capital is not accessible from the rest of the country by road. The highlands, where the bulk of the population lives, are

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

Telecoms are efficient, but not The services provided by the state-run telecommunications company, Telikom, widely available are efficient and profitable by standards in developing countries, mainly because of the high cost of international calls. However, access is not widely available. According to the UNDP, in 2002 there were only 11 telephone mainlines per 1,000 people, and just three mobile phones per 1,000 people. Hopes of improved penetration and service standards associated with the proposed takeover of Telikom by private foreign interests (under the government’s privatisation programme) were dashed when the government decided in December 2004 not to proceed with the sell-off. However, the government is in the process of introducing competition into the telecoms services sector. Seventeen parties attended a briefing in March 2006 by the Independent Consumer and Competition Commission (ICCC) on the tender process relating to the issue of two additional mobile-phone licences. The issue is designed to introduce competition into a sector hitherto monopolised by Pacific Mobile, a subsidiary of Telikom. According to the ICCC chief executive, Thomas Abe, the tender process will take about a year. The two new operators in addition to Pacific Mobile will be expected to extend coverage nationwide over five years. Telikom claims that it is ready to compete in the expanding mobile-phone sector. (According to Telikom, mobile subscriptions have risen from zero in 1996 to 75,000 currently, and there are around 3,000 new subscribers a month.) Telikom’s chief executive, Noel Mobiha, claims that activity in the more remote parts of the country, Goroka and Mount Hagen, has increased rapidly. Internet usage is increasing, but still low, reaching around 14 users per 1,000 people in 2002, according to the UNDP. Penetration is hampered outside the main urban centres by poor access to electricity and telephone lines.

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 17

Energy provision

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

The economy

Economic structure

Main economic indicators, 2005 Real GDP growth (%) 2.9a Consumer price inflation (av; %) 1.7 Current-account balance (Kina m) 1,987 Foreign debt (US$ m) 2,149b Exchange rate (av; Kina:US$) 3.1 a Economist Intelligence Unit estimate. b End-2004. Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; IMF, International Financial Statistics.

Oil, mining and forestry Papua New Guinea (PNG) is endowed with expanses of fertile agricultural land,

dominate the economy extensive forestry and fisheries resources, and substantial gold, copper and other mineral resource deposits, as well as reserves of oil and natural gas. The legacy of long isolation and of a Neolithic history extending to recent times is a small, tribal population that is poorly educated and has subsistence attitudes to production. The public sector and the capital-intensive oil, mining and forestry sectors have dominated the post-independence economy. However, over 75% of the labour force is engaged in growing food crops for subsistence consumption or sale in nearby urban markets, and tree crops for export. Agricultural commercialisation has not kept pace with population growth, and high male unemployment co-exists with undeveloped agricultural land. The government employs two in every five formally employed persons, and it accounts for about one-third of domestic credit. The economy is open, with exports and imports combined accounting for nearly 90% of GDP.

Comparative economic indicators, 2005 Papua New Guinea Australia Indonesia New Zealand Fiji Samoa GDP (US$ bn) 5.4a 708.4 281.3 108.5 2.7b 0.4b GDP per head (US$) 915a 34,725a 1,162a 26,463a 3,210b 2,072b Consumer price inflation (av; %) 1.7 2.3 10.5 3.0 2.7 2.4 Current-account balance (US$ bn) 0.6 -42.1 2.6a -9.2a -b - Exports of goods (US$ bn) 3.3 106.5 83.3a 21.8a 0.7b - Imports of goods (US$ bn) 1.5 120.2 61.9a 24.7a 1.374.1b 0.2 Foreign trade (% of GDP) 88.9a 32.0 51.6a 42.9a 82.6b 48.2b a Economist Intelligence Unit estimates. b Data for 2004. Sources: Economist Intelligence Unit; Asian Development Bank; IMF.

Economic policy

Economic policy has largely PNG has only rarely strayed far from conventional policy: fiscal deficits have remained conventional usually remained within IMF parameters; state ownership is generally limited to infrastructure utilities; heavily protected or subsidised industrialisation as a basis for growth has been largely avoided; and the state has not become the employer of last resort. From 1990 the government submitted to the ministrations of the World Bank and the IMF, a course of action it had avoided a decade earlier by borrowing overseas commercially. Successive governments in 1990s adopted a “tight” monetary policy, defined as using high interest rates in an attempt to shore up the value of the kina. In this way, the Bank of Papua New Guinea (BPNG, the central bank) aimed to reduce the chances of cost-push inflation and restore business confidence in the kina, which was regarded as a stable currency prior to the volatility that followed the 1994 float. The 1997 election, however, brought a new government, a weakening of resolve and strained relations with the multilateral agencies. These relations were repaired only in mid-1999, when parliament chose a former central bank governor and finance secretary, Sir Mekere Morauta, as prime minister. During the Morauta government, economic policy was firmly in the multilateral mould, although Sir Mekere insisted that his reform programme was home-grown, not imposed. He placed a high priority on maintaining good relations with the multilateral institutions, knowing that without their support external funding would be impossible. However, the administration of Sir Michael Somare has had difficulty accessing some components of the con- ditional multilateral assistance the Morauta government negotiated.

The privatisation programme Soon after coming to office in 2002, the government of Sir Michael amended stalls under Sir Michael the privatisation programme that was central to Sir Mekere’s outgoing government. The sale of the monopoly telephone company, PNG Telikom, to Fijian- based interests for Kina100m (US$25m) had been announced just five days before parliament was due to convene to elect the new government. New tenders were subsequently called by the new administration. By late 2004 an agreement had been negotiated with Econet Wireless, a firm representing investors from Botswana and South Africa, but the cabinet, sensitive to broad- based parliamentary resistance, rejected it. The government claims to favour contract management over sale as the best way to remove political interference

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 19

and restore efficient operations in state-owned enterprises (SOEs). Reflecting the early work done in preparing the various SOEs for sale, some of them have returned to profitability. Moreover, the government’s cashflow crisis, partly the result of the lack of progress in selling off non-core state assets in 2003, has dissipated. In 2004 the government reduced its debt after running a budget surplus because of stronger revenue stemming from high commodity prices, with only a negligible contribution from asset sales.

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

Tax rates are competitive, but Government policy has incorporated competitive tax rates, especially in com- the tax base is limited parison with Australia, the source of most of PNG’s foreign direct investment (FDI). In recent years, prodded by multilateral institutions and membership of the Asia Pacific Economic Co-operation (APEC) forum, governments have begun to abandon some of PNG’s more protective tariffs and intrusive restrictions on business practice. However, there remains much that the government could do to remove structural impediments to the development of the private sector. These obstacles include poor infrastructure, problems with law and order, and a high-cost, low-skilled workforce. Slow commercialisation of the predominant semi-subsistence sector has limited the growth of demand for the goods and services produced by the small formal private sector. It has also restricted growth in the government’s tax base, but not in the demand for public expenditure on healthcare, education, and law and order.

The budget records surpluses In recent years, the government has maintained a tight grip on expenditure, in 2004-05 which has led to an improvement in the budget balance. In 2005 the government recorded a budget surplus of Kina47m (US$15m) after it had set aside Kina400m for the acquisition of equity in the project to pipe gas to Australia. When excluding this acquisition, the surplus of Kina447m compares favourably with the surplus of Kina200m in 2004 and average annual budget deficits of Kina270m in 1999-2003. The impressive fiscal performances in 2004 and 2005 largely reflect the rapid growth in revenue, in line with buoyant commodity prices, together with the associated drop in interest payments in line with falling interest rates. Tax receipts in 2005 were 40% higher than in 2003. Primary expenditure (excluding interest expenses and the portion financed by foreign grants) was also 40% higher in 2005 than in 2003. Therefore, although the government is living within its much enhanced means, it is nevertheless getting bigger in absolute terms.

Some sectoral policies have Government policy towards all economic sectors has generally been been effective discouraging. Agriculture and fisheries have been neglected, and the Department of Agriculture and Livestock is now badly underfunded, affecting government-supported services in rural areas. However, the government!s Nucleus Agro-enterprises Project (introduced in the 2003 budget) aims to replicate, throughout PNG and across a range of crops, the nucleus agro- industries model of agricultural development that has been successfully employed in the palm oil sector. In the mining sector, governments have attempted to create a financial environment that encourages private-sector investment from abroad, while en- suring that the state receives a “fair” take of the revenue from minerals projects (through taxation, royalties and government equity stakes in all major ventures). Unfortunately, governments have not always managed to balance these competing interests well. Inconsistencies in policy, especially the tendency for governments to increase financial demands on the mining sector, have led to disagreements between the industry and politicians. Similar issues affect the forestry sector, where multilateral organisations have been pressing the government, with some success, to prevent the unsustainable harvest of timber. In a positive move for the mining industry, in 2003 the government announced that it would phase out the mining levy gradually between 2004 and 2008. The levy is particularly galling to the industry because as a tax on production it directly reduces profitability and reserves. The move followed increases in spending on oil exploration programmes, which the government believes were a result of the reduction in the corporate tax rate from 45% to 30% in the budget for 2003 and of the removal of additional-profits tax on new petroleum developments until 2017.

Land usage rights are still Around 90% of land suitable for cultivation is covered by customary law. This problematic system of traditionally owned land hampers formal private-sector development (although it sustained rapid growth in informal coffee production during the 1960s and 1970s). Land that is not owned outright by a business cannot be offered as collateral against loans. Compensation for use of traditionally owned land can prove a substantial cost to large businesses operating in PNG. Further- more, identifying the rightful owners of land usually takes a long time. The most controversial component of the structural adjustment programme in the mid-1990s was a land registration process intended to record the correct traditional owners of land throughout the country. This was widely perceived in PNG as an attempt to remove land from the people, and created widespread discontent. The programme was eventually dropped. The World Bank in 2003 changed the land use policy it adopted in 1975: it now recognises a role for communal property rights (as exist in PNG) in growth strategies.

The central bank focuses The BPNG has gradually liberalised foreign-exchange regulations and moved on price stability towards open-market operations for the implementation of monetary policy. The BPNG has been relatively autonomous, although in 1998 the government’s decision to change the governor of the bank twice in just over three months raised fears that it was becoming more politicised. Legislation implemented in 2000 has strengthened the central bank’s autonomy. Under the Central Bank

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 21

Act (2000), the BPNG is required to target price stability as its monetary policy objective, compared with the previous broad goal of monetary stability. In its January 2006 biannual Monetary Policy Statement, the BPNG maintained the neutral monetary policy stance it adopted in 2005. This primarily reflects the fact that in 2004 it moved aggressively to cut interest rates"the BPNG cut the kina facility rate (KFR, the official interest rate used to indicate its monetary policy stance) six times in 2004, from 13% in January to 7% in October. The BPNG was able to adopt a looser monetary policy for most of 2004 owing to the lower inflation environment, the strength of the kina and the government’s prudent fiscal policy. The BPNG reduced the KFR to 6% in September 2005, and the rate remained unchanged throughout the remainder of 2005 and during the first half of 2006. Recent economic policy changes and initiatives

August 2002 Following a general election, Sir Michael Somare’s new government suspends the privatisation programme for review. November 2002 The 2003 budget aims to promote an export-led recovery. The company tax rate increases from 25% to 30%. March 2003 Parliament passes the amendment to the value-added tax (VAT) law. The constitutional amendment validates all operations under the provisions of the VAT law, and renames the tax a goods and services tax (GST). May 2003 The government suffers a cashflow crisis, owing to delays in the disbursement of funding from the Asian Development Bank (ADB) and receipts from its privatisation programme. The government turns to the domestic market for funds, thereby forcing Treasury bill rates up to 19%. November 2003 In the 2004 budget the government fails to identify the cuts in expenditure of 3-4% of GDP that were called for in the previous budget. The budget includes plans to raise US$50m in external commercial loans, and imposes a temporary 2% import levy to boost revenue. November 2004 The Somare administration hands down its third full budget, which provides for a deficit of 1% of GDP. The budget includes increased pay for public servants; a cessation of the 2% import levy collected throughout 2004; and the continuation of the phasing out of the mining levy introduced in 2000. December 2004 The cabinet rejects the agreement negotiated by its privatisation entity with investors from Botswana and South Africa for the sale of 51% of the state-owned monopoly telecom company, Telikom, and faces breach-of-contract action.

March 2005 The government releases its medium-term development strategy for 2005-10, which is long on rhetoric but short on ways and means to bring unemployed land and labour resources into production, an internal imbalance that increasingly threatens the social fabric. September 2005 The Bank of Papua New Guinea (BPNG, the central bank) again lowers the kina facility rate (KFR, the official interest rate used to indicate the central bank!s monetary policy stance) to 6%, its lowest level since its introduction in February 2001 at 15.5%. November 2005 Parliament passes the Kina4.8bn (US$1.5bn) national budget for 2006, which the government claims aims at “improving people’s lives through strong economic leadership”. The government targets a deficit of 0.6% of GDP in 2006. March 2006 The UN Committee for Development Policy recommends that PNG!s development status be downgraded from a "developing country" to a "least developed country", with concomitant access to highly concessional assistance. The recommendation was based on three criteria: gross national income; the quality of human assets; and the economy!s vulnerability to exogenous shocks. Sir Michael is quick to reject the UN agency!s recommendation, arguing that it does not reflect the country!s performance over the past four years. Economic performance

Real GDP growth continues PNG’s economic performance during the past two decades can be summarised to disappoint in terms of low, unstable GDP growth and declining real non-mining GDP per head, despite abundant natural resources. This has been blamed on a number of factors, including a poorly developed infrastructure (particularly with respect to transportation); the limited supply and high cost of skilled labour; official corruption and social disorder; an uneven distribution of income; and susceptibility to natural disasters. More fundamental reasons for poor economic performance in this young market economy are probably the culture-bound rigidities in land markets (affecting 97% of the land area) and labour markets (affecting three-quarters of the population), and an overweight public sector, coupled with the inability of conventional market-based policy to address them.

Gross domestic product (% real change) Annual average 2004 2000-04 GDP 2.9 0.6

Source: IMF, International Financial Statistics.

The economy returns to According to revised national accounts for 1994-2002, produced by the National

growth pattern in 2003 Statistics Office, the economy performed better than previous ad-hoc estimates by the Treasury or the central bank had indicated. However, some features undermine the data’s credibility. For example, one of the largest and strongest

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 23

growth components, private consumption, is computed as a residual. Even so, the economy still contracted by 2.5% in 2000 and continued to shrink (albeit only slightly) in 2001-02. Since then, the economy has recorded steady growth. According to government estimates of real GDP growth incorporated in the 2006 budget and published by the IMF, the economy grew by 2.9% per year in both 2003 and 2004. On the basis of these data, the economy was 5% larger in 2004 than in 1994, but during this ten-year period the population increased by about 30%, an indication that real GDP per head has contracted sharply.

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

Employment levels are low The vast majority of Papua New Guineans derive their incomes from self- employment as farmers in the informal sector. The 2000 census put the formal unemployment rate for men at about 23% and that for women at about 20%. These rates apply to a small proportion of the labour force"18% of men and 6% of women. Underemployment and unemployment rates overall could be as high as 45% based on an analysis of census data from 1980 to 2000. The central bank’s employment index, which excludes firms with fewer than 20 employees, showed a mere 1.9% growth in formal private employment (excluding the mining sector) between 1990 and 2001. However, since then overall employment levels have risen, with around 10% more people employed in 2005 compared with 2001. The strongest sector, the capital-intensive mining sector, which is also more reliant than the economy on expatriate labour, makes a relatively small contribution to employment growth. The largest formal employer, the public service, which directly and indirectly employs 75,000 persons, wishes to shed labour in an effort to improve its fiscal position.

Inflation has slowed Annual consumer price inflation (headline rate) accelerated from 9.3% in 2001 dramatically to 11.8% in 2002 and 14.7% in 2003, partly as a result of an increase in food prices. Underlying inflation, which excludes the prices of betelnut, fruits and vegetables, and the effects of government policy decisions on the prices of consumer goods, rose from 13.1% in 2002 to 16.5% in 2003. Although average annual inflation rose in 2003, inflation slowed markedly during the year, from 20.7% year on year in the first quarter to 8.4% in the fourth quarter. This trend of easing inflation continued in 2004 and 2005, with average annual inflation falling to 2.2% and 1.7%, respectively.

Inflation (% change) 2005 2001-05 (annual av) Consumer price inflation 1.7 7.8

Source: IMF, International Financial Statistics.

Regional trends

Regional disparities are high Successive national governments have made efforts to narrow differences in income, employment and social indicators among the 19 provinces and the National Capital District. The 1995 Organic Law (see Politics: Constitution, institutions and administration) introduced a more equitable system of transfers from national government to the provinces, with payments made according to a formula, although regions with smaller populations are eligible for other revenue transfers. Provincial governments also have some independent revenue-raising powers. Despite such efforts, regional disparities remain, partly reflecting the concentration of government in Port Moresby, the uneven development of export crops and the unavoidable localisation of mineral extraction and processing activities. Large-scale mineral and forestry projects normally provide services to the local community in the form of roads, health centres and schools, as well as providing employment opportunities and substantial compensation packages to local communities for land exploitation rights. Regional rivalries and the problem of securing land have also hindered economic migration other than to the major urban centres, where unemployment and crime rates are high.

Economic sectors

Agriculture

Agriculture is the main source The agricultural sector is important both for subsistence and for the export of of income for most people cash crops. The export of agricultural (excluding forestry) commodities, mainly coffee, cocoa, copra and copra oil, palm oil and rubber, accounted for 14% of total export revenue in 2005, and remains the principal source of livelihood for about 85% of the population. Cash crops are cultivated on large estates as well as on smallholdings. Smallholder production has not kept pace with population growth since independence. The output of large holdings has fallen, partly because of the restrictions imposed by the system of communally held land. There is little processing of agricultural output, although an increasing proportion of copra, and all palm oil, is exported as oil. The coffee and cocoa sectors have recorded fairly positive trends in export volumes in recent years. Coffee exports reached 72,100 tonnes in 2005, up from 51,600 tonnes in 2001, while cocoa exports rose from 36,500 tonnes to 44,200 tonnes during the same period. Palm oil export volumes remained fairly stable in 2001-04, averaging around 330,000 tonnes/year, before falling to 295,200 tonnes in 2005.

The logging industry faces Over 70% of the land area of Papua New Guinea (PNG) is covered with forests, problems as exports rise and the logging industry, which mainly supplies China, Japan and South Korea, is an important part of the economy. Logging export volume increased to 2.3m cu metres in 2005 from 2m cu metres in 2003 and 2004 and 1.8m cu metres in 2002. The industry, however, faces a number of problems. The debate over the future of PNG’s logging industry has recently intensified, with environmental

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 25

groups, including Greenpeace, criticising the government’s management of the country’s forestry resources and alleging that the forestry minister, Patrick Pruaitch, has been acting in the interests of logging firms and not resource owners. In reply, Mr Pruaitch has accused the environmental non-governmental organisations of undermining the government’s attempts to expand the economy, and he has stated that logging firms are operating within the plans approved by the government. In May 2005 the World Bank cancelled its Forestry and Conservation Project after it failed to reach an agreement with the government on a number of key issues. The project, which was introduced in 2001 and was supported by a World Bank loan of US$17.4m and two Global Environment Facility grants totalling the equivalent of US$17m, had been suspended since 2003. However, in 2005 parliament retrospectively validated extensions to logging permits approved during a moratorium and found to be defective by a World Bank- sponsored enquiry.

Fishery resources are PNG has about 8,300 km of coastline and over 600 islands and large rivers. extensive, especially tuna Altogether, PNG’s exclusive economic zone covers an area of 2.4m sq km. The largest fish resource is tuna, but Spanish mackerel, barramundi, crayfish and prawns are also available in large quantities. Freshwater fishing and fish farming have been developed to a small extent. PNG sells tuna-fishing rights to mainly Asian operators. In May 2006 PNG and Japan signed a one-year, US$3m tuna fisheries access agreement, under which 30 Japanese purse-seine fishing vessels will be permitted to enter PNG!s fishing zone to harvest more than 2bn tonnes of fish, mostly skipjack tuna. A fraction of the total tuna catch is processed onshore for export, as most goes directly to foreign markets. Tuna accounts for the majority of fish exports: annual exports of canned tuna are worth Kina80m (US$22m), those of frozen tuna are worth Kina70m and those of fresh chilled tuna Kina30m. The National Fisheries Authority believes, optimistically, that fisheries exports could reach Kina1bn (US$275m) by end-2010, depending on market access to the EU and the US.

Mining and semi-processing

Reliance on mining and PNG has a large stock of mineral resources, and the country has become petroleum is high increasingly reliant on mineral exploitation for investment, government revenue and foreign exchange. The 1990s witnessed a boom in the mining and petroleum sector as the Misima, Porgera and Lihir gold mines began production (in 1989, 1990 and 1997 respectively), and the Kutubu, Gobe and Moran oil projects commenced production (in 1992, 1998 and 2001 respectively). New projects are likely to be developed in the next few years, for example at the US$850m Ramu nickel/cobalt deposit in Madang, now owned by the China Metallurgical and Construction Company (CMCC) and scheduled to begin construction by end-2006. The mine has an estimated lifespan of 40 years, and should create more than 1,800 jobs. The government is an active participant in the mining and petroleum sectors, normally exercising its option over 30% of new mineral projects and 22.5% of

major petroleum projects. However, the government has elected not to exercise its option in the Ramu nickel/cobalt project, allowing CMCC to hold the 85% needed to access concessional finance. It has granted the company a ten-year tax holiday but has prohibited the "fly-in, fly-out" practice for the project!s employees. Owing to concerns about the lack of exploration activity, in its 2003 budget the government introduced special fiscal terms that were designed to provide an incentive to the industry to explore. The tax rate for new petroleum projects developed before 2018 from prospecting licences issued before 2008 was reduced from 45% to 30%. The additional-profits tax for mining and the first tier of the additional-profits tax for petroleum was also abolished. The changes had an immediate impact"a total of 50 new exploration licence applications were received in 2004 compared with only 15 in 2003. Other important players in the mining sector are landowner groups. Although the state owns the minerals, oil and gas, their development depends on landowners granting access. Landowners usually receive equity stakes in new projects from the government’s share, as well as royalties that they share with provincial governments. Companies developing new mining sites are also usually required to provide more direct benefits for local residents, in the form of roads, community projects and spin-off businesses.

Gold mining sector remains PNG has two major gold mines, two smaller ones and another, in Morobe healthy province, under construction. (Gold is also produced as a by-product of copper mining at Ok Tedi.) The Porgera mine in the Enga Highlands is the longer established of the two major mines. It was due to cease mining in 2006 and to continue processing stockpiled low-grade ore until 2012, but its life has been extended with the addition of 7m oz of proven underground gold reserves. Gold production at the Porgera mine reached about 1m oz in 2004, but declined to 850,000 oz in 2005. The Lihir gold mine, located on an island off New Ireland, produced its first gold in May 1997 and had an estimated 40-year life, including processing of stockpiled ore, although mining will cease in 2023 at current reserves and production levels. Lihir’s production, confronted by mining and metallurgical challenges, fell to 550,000 oz in 2003, after exceeding the designed 600,000-oz target in each of the preceding two years, before recovering to design levels of 600,000 oz in 2004 and 2005. Lihir’s expectation of an extra 100,000 oz in 2005 through higher ore grades and increased plant efficiency was dashed by a landslide costing a month!s production. A smaller-scale gold mine operates at Tolukuma in Central province and another one at Kainantu in Eastern Highlands province commenced production in 2006 with planned output of 100,000 oz per year. Another, on Misima island in Milne Bay province, closed in May 2004 after 15 years working a deposit that had originally been worked 100 years earlier. The Hidden Valley gold and silver deposit project, which is currently under construction in Morobe province, has a planned output of 387,000 gold equivalent oz per year over a nine-year mine life. The mine is expected to come on stream in 2007.

Country Profile 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Papua New Guinea 27

Ok Tedi is the only operating PNG’s only operating copper mine is at Ok Tedi, in Western province, and was copper mine run by an Australian firm, BHP, before that company gifted its 52% holding to a trust company for the benefit of PNG and withdrew. Development of the mine took almost eight years and cost US$1.4bn. Its life has recently been extended by two years to 2012, partly because of improvements in throughput. However, owing to intractable pollution problems, the government has pushed for the mine to be closed in 2010. Production at another important copper mine, Panguna, on the island of Bougainville, was halted by the secessionist troubles in 1989. Although these problems have now been resolved, as the mine was a catalyst for the troubles in the first place, there is a danger that reopening it, as has been hinted with Bougainville!s new status as an autonomous region, would reignite hostilities. There is also the issue of the huge investment, estimated to be up to US$1bn, necessary to rehabilitate the mine.

Moran output props up crude In December 1990 the government gave US-based Chevron Niugini the oil production go-ahead to develop the Kutubu oilfield at an estimated cost of US$1bn. The development included a 275-km pipeline to a terminal in the Gulf of Papua and a small oil refinery to supply field operations. It came on stream in mid-1992, and provided a boost to PNG’s export sector. This was followed by the development of the Gobe field and, in 2001, of the Moran field. However, oil production is declining rapidly, and current reserves are expected to be exhausted by 2012. The new Moran field has compensated for the natural decline in the older fields in recent years. The SE Mananda field came on stream in the first quarter of 2006 and national production reached 60,000 barrels/day of oil during this period, the highest rate in five years.

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

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

Boosting the prospects of the project coming to fruition, in January 2006 Australia Gas Light Company (AGL), Australia’s largest gas utility, converted its indicative gas sales agreement into a binding one for 1,500 petajoules of gas over 20 years. The development consortium, which comprises PNG-based Oil Search, Esso Highlands (an affiliate of the US’s ExxonMobil), MRDC (a PNG company representing local landowner interests) and Japan’s Nippon Oil Exploration, has now settled on a project targeting a sales volume of 250 petajoules/year, with a PNG-based investment cost of US$2.5bn. Project sanctioning, which had been expected by mid-2006, has been delayed amid reports of higher than expected costs at the Australian end, owing to an acute skills shortage. Manufacturing

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

Petroleum refinery The refining of petroleum products, mainly for domestic consumption, began in commences operations in 2004 2004 under a 30-year monopoly agreement. Shipments of refined petroleum products from the Napa Napa oil refinery, which is operated by Canada’s InterOil, commenced in August 2004, marking a major step in PNG’s industrial development. The Kina700m (US$225m) refinery received its first shipment of crude oil from the Kutubu sea terminal in neighbouring Gulf province in June. The refinery was targeted to have an annual output of around 12.8m barrels of refined products, around half of which would be exported. During the second half of 2004, total exports of refined petroleum products reached Kina202.8m (US$65m), and in 2005 as a whole exports rose to Kina495.8m. However, in 2006 the company changed strategy, discontinuing unprofitable products and reducing throughput substantially. In addition to operating the Napa Napa refinery, InterOil’s operations in PNG include retail and commercial distribution. In September 2004 the company opened its first InterOil Products service station in the country. Its assets include three terminals, seven depots and more than 40 retail sites.

Protection has not promoted Although generous tariff protection and, in some cases, quantity restrictions on manufacturing growth imports enabled industries to establish themselves, this protection did not promote growth. Since PNG joined the Asia-Pacific Economic Co-operation (APEC) forum, most such tariffs and restrictions have been lowered or removed. Three tariff rates were set under the reform programme"a 20% standard rate, a 30% protective rate and a prohibitive rate of 45%. The programme requires these

rates to fall to 15%, 25% and 40% respectively in 2006. Exceptions to this broad regime include sugar (70%), wood products (75%) and salt (40%). The government has so far resisted calls to retard the rate of decline in tariffs, but is considering reviving the Industry Assistance Board to consider requests for continuing protection on a case-by-case basis.

Construction

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

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

Financial services

Banking sector is small but The financial services sector in PNG, although relatively sophisticated, is small profitable and mainly urban-based. As economic growth is derived mainly from major resource developments financed offshore, banking sector credit to the private sector has been fairly stagnant over the past decade, as a result of cautious credit policies of the formal financial sector. They favour large clients (many of which are subsidiaries of foreign firms) and short-term financing, particularly in the form of government securities (at end-2005 short-term government securities constituted 30% of the asset base of commercial banks). Bank lending is further hindered by the difficulties of land registration, low population density (which increases transaction costs) and security concerns. Many commercial banks were encumbered with substantial bad loans following the poor performance of the plantation sector in the 1980s and the Bougainville crisis, which began in 1989. Despite this, and in contrast to most private-sector businesses, PNG’s banking sector has posted record profits in recent years, the result of strong government demand at high interest rates together with healthy foreign-exchange earnings. Moreover, credit to the private sector rose by 26% year on year in 2005, reflecting a general pick-up in the domestic economy.

Bank South Pacific is the The most important commercial banks are Bank South Pacific, Westpac Banking dominant commercial bank Corporation (PNG) and Australia New Zealand Banking Group (PNG). Bank South Pacific accounts for more than half of the sector’s assets, following its

merger with the previously state-owned Papua New Guinea Banking Corporation (PNGBC) under the government’s privatisation programme. Before privatisation PNGBC had by far the largest branch network, covering all the urban centres, whereas the operations of most other banks have been traditionally confined to the wealthier provincial capitals. Total assets held by the commercial banks have increased rapidly in recent years, reaching Kina5.7bn (US$1.8bn) at end-2005, up from Kina4.4bn at end-2004 and Kina3.9bn at end- 2003. There are also merchant banks and a number of finance companies, which had combined assets of Kina340m (US$110m) at end-2005. Savings and loan societies are important for small savers and borrowers; their funds totalled Kina326m at end-2005, up from Kina227m at end-2004. There are also two pension funds, the Public Officers’ Superannuation Fund and its private-sector equivalent, NasFund (formerly National Provident Fund, the subject of a commission of enquiry into huge losses a few years ago, from which it has recovered strongly).

The stock exchange is growing, The long-awaited Port Moresby Stock Exchange opened for public trading in but remains fairly insignificant June 1999 with one listed company, a diversified PNG retailer, Steamships Trading. A second company, Oil Search, the largest holder of oil and gas reserves in PNG, listed soon after, followed by Orogen Minerals (which merged with Oil Search in 2002) and Lihir Gold. A total of 14 stocks and one debt security are now listed. Although trading is usually sluggish, there has been a sharp increase in market capitalisation in recent years. In mid-2006 market capitalisation stood at Kina18bn, up from Kina11.7bn at end-2004. Some of the listed companies, including Steamships, Oil Search and Lihir, already trade actively on the Australian Stock Exchange.

Other services

Tourism remains hampered by The tourism industry has great potential, particularly in niche markets such as a number of problems adventure, ecotourism and diving. However, tourism remains a minor source of economic activity, particularly when compared with size of the Fijian tourism industry. Potential visitors to PNG have been deterred by the high cost of visiting the country and, more importantly, by PNG’s serious problems of law and order. In September 2005 the prime minister, Sir Michael Somare, said that the government would seek to provide more incentives to spur growth in tourism, and he blamed the people’s poor attitude towards foreign visitors, in addition to the negative image of the country presented in international media, for the poor development of the industry. In 1995 it was estimated that there were about 42,500 foreign visitor arrivals, and this figure increased to over 60,000 between 1996 and 1998, partly because of cost savings resulting from the depreciation of the kina. The number of foreign visitors has since fallen back, remaining below 60,000 per year in 2000- 04. In 2004 PNG recorded total international arrivals of 59,013, up from a recent low of 53,670 in 2002. Growth accelerated in 2005, with arrivals expanding by 21% year on year in the first half of the year, according to the chief executive officer of the PNG Tourism Promotion Authority (TPA), Peter Vincent. Of the visitors total in 2004, around 62% were travelling on business, 29% on holiday

and the remainder mainly visiting friends and relatives. The largest source of visitors to PNG is Australia (around 55% in 2004), followed by the US, Japan, New Zealand and the UK. The state-owned airline, Air Niugini, recorded a 10.3% year-on-year expansion in domestic passengers and a 7.5% rise in international passengers in 2004. Many tourists now arrive on cruise ships, and about 15 such vessels visit every year. Bougainville has reopened as a tourist destination after a 12-year break.

The external sector

Trade in goods

Foreign trade, 2005 (Kina m) Merchandise exports (fob) 9,922 Merchandise imports (cif) -5,365 Trade balance 4,557

Source: IMF, International Financial Statistics.

Large merchandise trade The merchandise trade balance has been in substantial surplus since the early surpluses have been recorded 1990s, with Papua New Guinea (PNG) being a significant exporter of mining, petroleum and forestry products. The surplus has also reflected generally weak demand for imports. In 2005 the trade surplus (fob-cif) soared to Kina4.6bn (US$1.5bn) compared with an average of Kina2.5bn in 2001-04. The sharp improvement in the trade surplus in 2005 reflected continued growth in export revenue, which reached Kina9.9bn, up from Kina6.1bn in 2001. High world commodity prices for PNG!s main export commodities has contributed to much of this expansion. Minerals (mainly gold and copper) and crude oil account for the majority of export revenue. In 2005 these exports made up around 75% of the total, with gold alone accounting for 28%. In 2000 gold and crude oil each made up around 34% of total exports, but since then the proportion of exports accounted for by crude oil has deteriorated, falling to around 23% in 2005. Exports of refined petroleum products in 2005, the refinery!s first full year of production, accounted for 5% of total export value. The agricultural sector accounted for 15% of total exports in 2005, with palm oil, coffee and cocoa recording the largest shares. Forestry products, mainly logs, made up 5% of total exports in 2005, and marine products less than 1%.

Main exports, 2005 Kina m % of total Gold 2,834.1 27.9 Copper 2,497.7 24.6 Crude oil 2,283.1 22.5 Refined petroleum products 496.8 4.9 Coffee 471.0 4.6 Logs 404.9 4.0 Palm oil 391.4 3.9 Total incl others 10,147.5 100.0

Bank of Papua New Guinea, Quarterly Economic Bulletin.

Imports are closely related to The value of merchandise imports has generally been closely related to the construction trends construction phases of major mining and petroleum projects, and to changes in the exchange rate. For example, in 1997 mining sector imports fell by almost 25%, owing mainly to the completion of the Lihir gold mine, whereas imports associated with the oil industry recorded a three-fold increase in imports, reflecting materials needed for the Gobe oil project. Imports (cif, in kina terms) have expanded steadily in recent years, rising from Kina3.6bn in 2001 to Kina5.4bn in both 2004 and 2005.

Australia remains by far the Much of PNG’s merchandise trade is conducted with Australia"around 55% of

largest trade partner imports and 29% of exports in 2005, according to data from the IMF. After Australia, Singapore supplies the most imports, at around 14% of the total in 2005. Additional important sources of imports are Japan, New Zealand and China. Other major export markets are Japan, China, and a number of European countries. In 2005 Japan accounted for around 8% of PNG’s exports, while China was the destination for nearly 6%.

Main trading partners, 2005 Exports fob to: % of total Imports cif from: % of total Australia 29.0 Australia 54.4 Japan 8.1 Singapore 13.8 China 5.5 Japan 4.5 Germany 3.7 New Zealand 3.8 UK 1.8 China 3.7 Indonesia 2.0 Malaysia 3.1

Source: IMF, Direction of Trade Statistics Yearbook.

Invisibles and the current account

Current account, 2005 (Kina m) Trade balance 5,437 Services balance -2,683 Income balance -1,670 Transfers balance 903 Current-account balance 1,987

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

The current-account surplus The merchandise trade account has been in surplus since the early 1990s, but soars in 2005 there have been continuous and growing deficits on the services and income accounts (in kina terms). Income account outflows have increased as payments on interest, profit and dividends (profit and dividends are related to the overseas investments in PNG’s mining sector) have risen. This increase has been only partly offset by the consistent surplus on transfers, which is related to aid flows, mainly from Australia and increasingly also Japan. After remaining in surplus for most of the late 1990s and in 2000-01, the current account fell back into deficit in 2002, to the tune of Kina502m (US$130m at the average exchange rate in 2002), primarily owing to a smaller merchandise trade surplus. However, since then the current account has remained in surplus. In line with the rapid growth in exports, in part fuelled by the China-induced

commodity price boom, the surplus reached nearly Kina2bn in 2005 (US$645m), up from Kina496m in 2003 and Kina393m in 2004.

Capital flows and foreign debt

The capital account has mainly PNG!s capital account has been subject to fluctuation, largely owing to been in deficit investment flows related to mineral projects. According to the Bank of Papua New Guinea (BPNG, the central bank), the capital-account deficit expanded to Kina650m in 2000 as mineral companies and the government increased loan repayments. Multilateral and bilateral support for the country’s economic reform programme reduced the deficit on the capital account to Kina264m in 2001, and then produced a rare surplus of Kina320m in 2002. In 2003 the capital and financial account balance dropped back to a deficit of Kina183m, according to the BPNG, which narrowed in 2004 to Kina81m before expanding in 2005 to Kina1.7bn (US$550m). The net capital outflow in 2005 mainly reflected a build-up in foreign account balances of the mining and oil sector and higher net foreign asset holdings of the banking sector.

Australia continues to provide Aid flows remain an important source of external funding. Foreign grants from large amounts of aid all sources represented around 20% of total receipts in 2001-04 and around 24% in 2005. The country does not fully utilise foreign aid because the government finds it increasingly difficult to fund its share of projects. Australian aid is particularly important. Before independence, the share of Australian aid in total government revenue was close to 60%, but after a series of five-year agreements and unilateral decisions by the Australian government, the flow of aid has been gradually reduced. Despite some debate in Australia over its government’s aid policy to PNG, the amount of aid committed to PNG in the Australian government’s fiscal year 2006/07 (July-June) budget was A$332.2m (around US$240m), similar to that in recent years. Under the Extended Co-operation Programme, in 2004/05 Australia had agreed to provide a further A$200m per year over four years, mainly to fund the deployment of 300 Australian police, justice and treasury personnel in PNG. However, the programme came to a premature end in May 2005, less than a year after it had been implemented. A much smaller, advisory programme resumed in mid-2006.

The foreign debt burden has According to the World Bank, total external debt fell steadily in 2001-03, but still been fairly stable remained around US$2.5bn. However, external debt outstanding dropped to below US$2.2bn in 2004, in line with an increase in principal repayments. As most of PNG’s external debt is denominated in US dollars, the depreciation of the kina in the late 1990s raised the cost of borrowing from overseas considerably. However, the weakening of the US dollar in recent years has resulted in unrealised currency gains. These gains, together with net loan repayments, have contributed to a sharp reduction in outstanding public-sector foreign debt in kina terms. At end-2005 external public-sector debt stood at Kina3.9bn, down from Kina5.8bn at end-2002, according to the BPNG. Contributing to the drop in public-sector debt, in 2005 PNG completed its repayment obligations under an IMF poverty reduction and growth facility.

External debt (US$ m; debt stocks as at year-end) 2004 % of total Long-term debt 1,976 91.9 Public & publicly guaranteed 1,445 67.2 Private non-guaranteed 531 24.7 Short-term debt 109 5.1 Use of IMF credit 64.3 3.0 Total external debt 2,149 100.0

Source: World Bank, Global Development Finance.

Foreign reserves and the exchange rate

Foreign-exchange reserves PNG!s foreign-exchange reserves position has strengthened in recent years. rebound Reserves plummeted in the late 1990s, dropping to the equivalent of less than two months of imports in 1999, and were nearly exhausted by mid-1994, causing the authorities to float the kina. However, a US$80m swap arrangement with the Reserve Bank of Australia (RBA, Australia’s central bank) in December 1999, followed by multilateral support for economic reforms and a solid trade performance, boosted reserves to US$287m by end-2000, equivalent to 5.4 months of non-mining imports. By end-2001 further multilateral support, coupled with lower import demand (the product of a contracting economy and rising import prices), had strengthened reserves to US$423m (equivalent to 8.7 months of non-mining imports). However, reserves dropped to US$322m at end-2002, partly owing to the central bank’s defence of the kina in late 2002. In 2003 the reserves position again improved, reaching US$494m by the end of the year, largely in line with the strong export performance and the central bank’s participation in the foreign-exchange market. This trend continued and reserves ended 2004 at US$633m and 2005 at US$718m, equivalent to 8.2 months of non-mining imports.

The kina regains ground The kina, which was floated in October 1994, has generally been vulnerable to against the US dollar the changes in PNG’s external trade position, the domestic political scene and other shocks. In the late 1990s and early 2000s the El Niño-induced drought, low world commodity prices and political turmoil all had a negative impact on the currency. However, in line with the general weakness of the US dollar, the kina rebounded in 2003, rising to an average of Kina3.55:US$1, and it continued to appreciate in the following two years, reaching an average of Kina3.10:US$1 in 2005. The kina nevertheless continued to slide against the Australian dollar, depreciating by an annual average of 8.7% in 2003 and 2% in 2004. However, on an annual average basis, the kina remained fairly stable against the Australian dollar in 2005, averaging Kina2.37:A$1.

Regional overview

Membership of organisations

The Pacific Islands Forum The Pacific Islands Forum (PIF) is the most important regional organisation. It was formerly known as the South Pacific Forum, which in turn developed from the South Pacific Bureau for Economic Co-operation, established more than 40 years ago. The Forum officially adopted its new name at its annual meeting in 2000, recognising that not all of its members are in the “South” Pacific since the admission of former US trust territories north of the equator. The Forum was created in 1971 in response to the spread of self-government in the region and the need of the new states to have a political forum. The 16 current members are Australia, the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New Guinea, the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu and Vanuatu. The Forum meets each year at head of state/government level, and immediately after the meeting ministers spend two days in consultation with the Forum dialogue partners" Canada, China, the EU, France, India, Indonesia, Japan, Malaysia, the Philippines, South Korea, the UK and the US. A separate dialogue session is held with Taiwan by the five Forum members that have diplomatic relations with it. The Forum Secretariat (based in Suva, the capital of Fiji, with a staff of about 70), administers a series of programmes aimed at promoting regional co- operation among member states through trade, investment, economic development, and political and international co-operation. It has also developed a growing portfolio of technical training programmes as part of broader initiatives for institutional strengthening, good governance and accountability. Operations are funded by contributions from member governments and donors. Current donors are the dialogue partners, together with Australia, New Zealand, the Commonwealth Secretariat and Germany. Since October 1994 the Forum has had observer status at the UN General Assembly. Island governments have used the PIF and other regional forums to make their voices heard on other issues, such as climate change and the impact of rising sea levels. Other perennial issues are pooled regional governance, greater co- operation on regional air transport, security and crossborder crime (eg money laundering). The PIF is now focusing on implementing the Pacific Plan, a wide- ranging package of measures agreed on at its October 2005 summit meeting in Papua New Guinea. One key objective is to integrate trade in services (including temporary labour movement) into the Pacific Islands Countries Trade Agreement (PICTA) and the proposed EU Economic Partnership Agreement (EPA) by 2008. There are also plans for the bulk purchase of commodities such as oil. Greg Urwin, an Australian and a former high commissioner to Fiji, Samoa and Vanuatu, was appointed secretary-general-designate of the PIF at the organisation’s annual summit in August 2003. The post of secretary-general, the senior regional position, had always previously been filled by a Pacific islander,

and the leaders of some of the smaller PIF member states, including Nauru and the Cook Islands, were unhappy at the aggressiveness of Australian lobbying for their candidate and suspicious of Australia’s motives in seeking the top position in the organisation. Nevertheless, Mr Urwin, who is married to a Samoan, was finally appointed in a secret ballot. Australia’s increasing military role in the region, along with its aid activities, means that it is likely to play a crucial role in PIF activities. The rising power in the region is China, which had discussions with several PIF members in Fiji in 2006.

The Pacific Community A second regional organisation is the Pacific Community (formerly the South Pacific Commission), formed in 1947 by Australia, France, the Netherlands, New Zealand, the UK and the US. They were then the colonial powers in the region and insisted that the organisation be non-political, dealing only with technical issues and matters of practical co-operation. It now has 26 members and continues as a non-political body, offering technical advice, assistance, training and research. Its headquarters are in Nouméa, New Caledonia, with a substantial presence in Suva. It is a bilingual organisation (English and French), with a staff of around 175 and a limited budget, augmented by special funding for particular projects. Its director general is Jimmie Rodgers, appointed in November 2005. It has an integrated work programme based around the development of the region’s land-based, marine-based and human resources. Its current corporate plan concludes in 2006, so the organisation will now need to draw up a new list of priorities. Better use of land and marine resources will be an important future focus.

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

The EU-ACP Convention All PIF members excluding Australia and New Zealand are also members of the 78-state ACP (Africa, Caribbean and Pacific) group within the Cotonou Agreement. This agreement, which was ratified in February 2003, is the successor to the Lomé Convention and gives the ACP nations preferential trading access to the EU market and a share in EU aid programmes and other assistance. The secretariat of the PIF is charged with the task of drafting a joint

position for negotiations between the PIF members and the EU provided for under the agreement. The Cotonou Agreement, which is to last for 20 years, has a strong political dimension. As well as respect for human rights, democratic principles and the rule of law, which were all essential components of the Lomé Convention, the ACP countries have also agreed to promote good governance and to combat corruption and illegal immigration into the EU. Under previous conventions, ACP products, whether agricultural or industrial, entered the EU duty-free, but four agricultural products"beef, sugar, bananas and rum"were subject to a more restrictive system of tariff quotas. The new agreement offers a negotiating framework for tailor-made regional free-trade agreements (RFTAs), under which ACP countries, preferably within existing economic groupings, will gradually open their domestic markets to European products. Given the adjustment costs involved, a preparatory period of eight years has been agreed, during which the old system of preferences will continue to apply. The exact form of future relations with the EU will become clearer over the next two years, as negotiations continue over the proposed EPA. The EU maintains a regional delegation in Suva.

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

non-members. Since then APEC has appeared to lose momentum and effectiveness. APEC’s response to the Asian regional financial crisis in 1997-98 lacked substance, and subsequent meetings provided other distractions from the trade liberalisation theme: the East Timor crisis in 1999, information technology in 2000 and security issues in 2001. Discussion returned to trade relations in 2002 and 2003, and it was agreed in a very general way to proceed towards greater trade and investment liberalisation. These commitments were reiterated at the November 2004 meeting, held in the Chilean capital, Santiago. The most recent APEC meeting, held in Busan, South Korea, in November 2005, was marred by demonstrations by South Korean workers and farmers against liberalisation of global trade, particularly that in agricultural goods. The meeting itself was also characterised by growing tensions on trade issues. The conclusion to be drawn from recent meetings is that APEC is now more an informal talking shop than a serious regional reformer.

Appendices

Sources of information

National statistical sources Bank of Papua New Guinea, Quarterly Economic Bulletin, Port Moresby Department of Mining and Petroleum, Quarterly Bulletin Ministry for Treasury and Planning, Economic & Development Policies, Volume 1, 2006 budget papers

International statistical sources Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries (annual) IMF, Direction of Trade Statistics (quarterly and annual) IMF, International Financial Statistics (monthly) OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual) UN Development Programme, Human Development Report (annual) World Bank, Global Development Finance (annual) World Bank, World Development Report

Select bibliography and Andrew Burke, Rowan McKinnon, Arnold Barkhordarian, Sean Dorney, Tim

websites Flannery, Papua New Guinea and Solomon Islands, Lonely Planet Publications, 2005 Ila Temu (ed), Papua New Guinea: A 20/20 Vision, National Centre for Development Studies and National Research Institute, Australia, 1997

Kira Salak, Four Corners: A Journey into the Heart of Papua New Guinea, 2003 Isabella Tree, Islands in the clouds: travels in the highlands of New Guinea, Lonely Planet Publications, 1996 Australian Agency for International Development (AusAID): www.ausaid. gov.au Department of Finance and Treasury: www.treasury.gov.pg Post Courier newspaper: www.postcourier.com.pg Prime minister’s office: www.pm.gov.pg The Independent newspaper: www.niugini.com/independent/ The National newspaper: www.thenational.com.pg UN Food and Agriculture Organisation, Statistics Database: www.fao.org/

Reference tables

Populationa (m unless otherwise indicated) 2000 2001 2002 2003 2004 Total 5.30 5.42 5.54 5.66 5.77 % change, year on year 2.3 2.3 2.2 2.2 1.9 a Mid-year estimates. Source: IMF, International Financial Statistics.

Formal employment in the private sector by industry (Mar 2002=100 unless otherwise indicated; period averages) 2001 2002 2003 2004 2005 Retail 100.8 97.9 96.9 93.1 93.7 Wholesale 102.7 103.3 113.3 123.8 130.7 Manufacturing 99.5 104.1 110.9 117.7 127.5 Building & construction 92.9 99.0 124.1 107.9 98.4 Transport 99.4 106.3 106.1 106.8 106.1 Agriculture, forestry & fisheries 102.2 103.9 114.1 112.9 112.9 Financial & business 100.5 99.1 100.8 104.7 105.7 Mining 96.9 98.8 97.6 95.8 101.5 Total excl mining 100.6 102.2 108.6 109.2 111.0 % change, year on year -5.5 1.6 6.3 0.6 1.6

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

Central government finances (Kina m unless otherwise indicated) 2001 2002 2003 2004 2005 Total revenue 3,185 3,231 3,610 4,350 5,313 Tax 2,294 2,370 2,678 3,255 3,767 Non-tax (incl foreign budgetary grants) 891 861 932 1,095 1,546 Total expenditure 3,544 3,682 3,734 4,148 5,266 Recurrent expenditure 2,425 2,542 2,695 2,801 3,417 Development expenditure 1,119 1,140 1,039 1,327 1,849 Budget balance -360 -450 -124 202 47 % of GDP -3.5 -3.9 -1.0 1.5 n/a

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

Central government revenue (Kina m) 2001 2002 2003 2004 2005 Tax revenue 2,294 2,370 2,678 3,255 3,767 Taxes on income & profit 1,509 1,487 1,787 2,223 2,794 Personal tax 599 690 758 827 841 Company tax 687 570 731 1,071 1,593 Other direct taxes 223 227 297 326 360 Import duties 74 84 74 151 102 Excise duties 295 296 285 326 335 Value-added tax 198 290 312 316 326 Other indirect tax 121 107 110 137 74 Non-tax revenue 172 170 239 245 263 Total internal revenue 2,466 2,540 2,917 3,460 4,030 Foreign grants 719 691 693 850 1,283 Total revenue & grants 3,185 3,231 3,610 4,350 5,313

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

Central government expenditure (Kina m) 2001 2002 2003 2004 2005 Recurrent expenditure 2,425 2,542 2,695 2,801 3,417 National departmental 1,242 1,357 1,192 1,555 2,224 Provincial governments 589 588 595 691 657 Interest payments 433 437 740 377 333 Foreign 181 188 161 138 117 Domestic 253 248 579 239 216 Other grants & expenditure 165 165 178 208 207 Net lending & investments -4 -5 -10 -10 -3 Development expenditure 1,119 1,140 1,039 1,327 1,849 Total expenditure 3,544 3,682 3,734 4,148 5,266

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

Public debt outstanding (Kina m; debt stocks as at year-end) 2001 2002 2003 2004 2005 Domestic 2,115.1 2,588.3 3,022.9 3,181.2 3,405.4 Treasury bills 1,748.8 2,169.1 2,755.3 2,236.2 1,796.5 Inscribed stock 366.3 283.8 174.7 898.0 1,567.9 External 5,294.0 5,777.0 4,901.1 4,409.5 3,891.3 International agencies 5,178.0 5,553.4 4,717.4 4,239.5 3,722.7 Commercial loans 116.0 223.6 183.7 170.0 168.6 Total public debt 7,409.1 8,365.3 7,924.0 7,590.7 7,296.7

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

Gross domestic product (market prices) 2000 2001 2002 2003 2004 Total (Kina m) At current prices 9,736 10,396 11,657 12,949 13,861 At constant (1988) prices 7,750 7,741 7,728 7,953 8,183 % change, year on year -2.5 -0.1 -0.2 2.9 2.9 Per head (Kina) At current prices 1,837 1,918 2,104 2,288 2,402 At constant (1988) prices 1,462 1,428 1,395 1,405 1,418 % change, year on year -4.7 -2.3 -2.3 0.7 0.9

Source: IMF, International Financial Statistics.

Gross domestic product by sector (Kina m; constant 1988 prices) 1998 1999 2000 2001 2002 Agriculture 2,629 2,992 3,054 2,909 2,789 Oil & gas extraction 618 671 753 694 670 Mining & quarrying 590 640 499 427 273 Manufacturing 722 845 874 1,045 1,092 Electricity & other utilities 106 109 113 107 107 Construction 410 390 403 588 787 Commerce 692 712 741 828 1,016 Transport & storage 386 481 373 455 476 Finance & real estate 349 386 326 343 324 Community & social services (incl defence) 1,065 1,123 1,165 1,140 1,174 Other services 349 386 326 343 324 GDPab 7,804 8,591 8,592 8,823 9,003 a Sum of sectors less imputed bank service charges, plus import duties minus subsidies. b Total differs from that published by IMF. Source: National Statistical Office.

Gross domestic product by expenditure (Kina m; current prices) 2000 2001 2002 2003 2004 Private consumption 4,343 4,962 7,060 6,515 6,891 Government consumption 1,613 1,688 1,788 1,917 1,938 Gross fixed capital formation 1,988 2,200 2,264 2,281 2,294 Change in stocks 144 186 206 222 236 Exports of goods & services 6,443 6,792 7,100 8,724 9,130 Imports of goods & services 4,794 5,432 6,761 6,790 7,455 GDP 9,736 10,396 11,657 12,949 13,861 Note. Sum of components does not equal total GDP in source. Source: IMF, International Financial Statistics.

Money supply (Kina m unless otherwise indicated; year-end) 2001 2002 2003 2004 2005 Currency in circulation 272 366 399 420 426 Demand deposits 1,049 1,169 1,309 1,795 2,543 M1a 1,321 1,535 1,708 2,215 2,968 % change, year on year 3.9 16.2 11.3 29.7 34 M3b 3,905 3,226 3,110 3,598 4,703 % change, year on year 4.2 -17.4 -3.6 15.7 30.7 a Notes and coins in circulation plus demand deposits. b M1 plus savings deposits, term deposits and other items (net). Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Consumer prices 2001 2002 2003 2004 2005 Index 1977=100 Food 568.2 665.2 753.5 757.4 784.1 Drink, tobacco & betelnut 737.1 806.0 920.7 940.3 991.2 Clothing & footwear 419.8 457.0 478.2 490.4 480.5 Rents, council charges, fuel & power 257.2 265.1 281.1 301.0 328.6 Household equipment 497.6 531.4 606.5 604.7 591.5 Transport & communications 898.9 995.8 1,216.0 1,242.2 1,165.9 Others 402.7 400.4 458.8 532.7 547.6 All groups 596.8 667.3 765.4 782.0 795.2 % change, year on year Food 9.6 17.1 13.3 0.5 3.5 Drink, tobacco & betelnut 13.4 9.3 14.2 2.1 5.4 Clothing & footwear 11.7 8.9 4.6 2.6 -2.0 Rents, public charges, fuel & power 6.2 3.1 6.0 7.1 9.2 Household equipment 1.9 6.8 14.1 -0.3 -2.2 Transport & communications 6.0 10.8 22.1 2.1 -6.1 Other 7.4 -0.6 14.6 16.1 2.8 All groups 9.3 11.8 14.7 2.2 1.7

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

Commercial production and value of forestry, agriculture and marine resources (export data) 2001 2002 2003 2004 2005 Logs ‘000 cu metres 1,212.2 1,834.0 2,016.0 1,859.0 2,270.0 Kina m 234.3 365.5 369.6 355.7 404.9 Coffee ‘000 tonnes 51.6 63.1 68.8 63.0 72.1 Kina m 188.8 201.9 298.5 283.8 471.0 Palm oil ‘000 tonnes 327.6 323.9 326.9 339.0 295.2 Kina m 290.5 389.9 421.3 438.7 391.4 Cocoa ‘000 tonnes 36.5 34.9 40.3 41.5 44.2 Kina m 110.3 226.3 257.7 218.0 198.7

Commercial production and value of forestry, agriculture and marine resources (export data) 2001 2002 2003 2004 2005 Copra oil ‘000 tonnes 27.1 28.2 47.7 45.1 54.4 Kina m 27.3 33.3 67.4 81.0 93.7 Copra ‘000 tonnes 46.4 15.8 8.4 19.2 22.3 Kina m 15.5 10.7 6.5 17.2 17.3 Marine products ‘000 tonnes 5.1 15.6 17.8 7.9 15.7 Kina m 77.2 94.1 125.3 58.2 69.4 Tea ‘000 tonnes 8.8 5.2 6.6 8.1 6.9 Kina m 22.0 18.1 19.3 22.9 20.2 Rubber ‘000 tonnes 3.6 3.8 4.2 3.8 4.8 Kina m 6.8 8.8 12.3 13.8 18.0 Note. Break in series from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Commercial production and value of major minerals and petroleum (export data) 2001 2002 2003 2004 2005 Gold Tonnes 69.1 59.1 68.4 67.3 70.5 Kina m 2,115.1 2,294.8 2,811.2 2,779.5 2,834.1 Copper ‘000 tonnes 170.1 170.1 230.6 173.9 226.1 Kina m 859.1 1,017.7 1,415.0 1,544.2 2,497.7 Crude oil ‘000 barrels 21,369.7 15,370.5 14,983.4 12,546.7 13,299.8 Kina m 1,889.4 1,431.2 1,631.9 1,625.2 2,283.1 Note. Break in series from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Foreign trade (Kina m) 2001 2002 2003 2004 2005 Merchandise exports (fob) 6,077 6,387 7,842 8,233 9,922 Merchandise imports (cif) -3,633 -4,826 -4,866 -5,409 -5,365 Trade balance 2,444 1,561 2,976 2,824 4,557

Source: IMF, International Financial Statistics.

Main exports (Kina m; fob) 2001 2002 2003 2004 2005 Major agricultural products 661.2 889.0 1,083.0 1,075.4 1,210.3 Forest products 310.9 414.1 415.8 459.5 476.3 Logs 234.3 365.5 369.6 355.7 404.9 Refined petroleum products - - - 202.8 496.8 Marine products 77.2 94.1 125.3 58.2 69.4 Minerals (incl silver) 4,895.6 4,774.0 5,890.0 6,007.5 7,651.9 Gold 2,115.1 2,294.8 2,811.2 2,755.9 2,834.1 Copper 859.1 1,018.7 1,415.0 1,544.2 2,497.7 Crude oil 1,889.4 1,431.2 1,631.9 1,625.2 2,283.1 Other products 139.9 195.9 308.0 409.8 242.8 Total 6,084.8 6,367.1 7,822.1 8,213.2 10,147.5 Note. Break in series from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Main trading partners (US$ m) 2001 2002 2003 2004 2005 Exports fob to: Australia 646 645 980 1,198 1,382 Japan 279 252 266 248 416 China 111 145 210 195 281 Germany 106 77 135 201 191 Indonesia 11 60 107 85 102 UK 54 67 90 102 92 Philippines 59 13 68 60 78 Imports fob from: Australia 574 589 602 745 1,065 Singapore 213 225 278 347 271 Japan 52 51 47 70 88 New Zealand 45 53 104 67 75 China 21 30 67 55 73 US 25 26 33 47 61 Malaysia 31 36 43 45 54

Source: IMF, Direction of Trade Statistics Yearbook.

Balance of payments, national series (Kina m) 2001 2002 2003 2004 2005 Merchandise exports 6,105 6,387 7,842 8,233 10,168 Merchandise imports -3,165 -4,197 -4,231 -4,703 -4,732 Trade balance 2,940 2,190 3,611 3,530 5,437 Services credit n/a 630 829 656 938 Services debit n/a -2,640 -3,092 -3,217 -3,621 Services balance n/a -2,010 -2,263 -2,561 -2,683 Income credit n/a 106 58 64 81 Income debit n/a -894 -1,757 -1,470 -1,751 Income balance n/a -788 -1,699 -1,406 -1,670 Transfers credit n/a 334 1,137 1,080 1,193 Transfers debit n/a -229 -290 -250 -290 Transfers balance n/a 106 847 830 903 Current-account balance 943 -502 496 393 1,987 Direct investment n/a 74 371 82 85 Portfolio investment n/a -5 -166 -338 76 Financial derivatives n/a 0 83 -32 -6 Other investment n/a 251 -470 207 -1,844 Capital & financial account balance -264 320 -183 -81 -1,689 Net errors & omissions 29 -57 40 16 -43 Overall balance 708 -239 353 329 255 Note. Data are presented in a new format from 2002. Source: Bank of Papua New Guinea, Quarterly Economic Bulletin.

Net official development assistance (US$ m) 2000 2001 2002 2003 2004 Bilateral 268.6 198 197.1 218.8 249.9 Australia 198.2 158.2 180.4 208.9 242.3 New Zealand 6.7 6.8 5.9 7.7 8.4 Germany 3.9 3.3 3.2 2.5 1.9 Japan 55.8 26.2 4.4 -3.1 -6.1 Multilateral 5.2 1.7 6.1 2.2 17.3 EU 0.6 4.3 4.9 3.3 7.8 Asian Development Bank 0.2 -3 -1.3 -1.6 6.8 UN Development Programme 2 0.3 1.6 0.9 2.2 Total incl net flows from Arab countries 275.4 203.1 203.3 220.3 266.3

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

External debt (US$ m unless otherwise indicated; debt stocks as at year-end) 2000 2001 2002 2003 2004 Public medium- & long-term 1,490.3 1,397.0 1,479.3 1,504.5 1,445.1 Private medium- & long-term 1,013.5 931.8 817.8 726.9 530.7 Total medium- & long-term debt 2,503.8 2,328.8 2,297.1 2,231.4 1,975.8 Official creditors 1,430.0 1,332.3 1,392.0 1,410.9 1,367.2 Bilateral 567.2 480.5 497.3 513.1 466.2 Multilateral 862.8 851.8 894.7 897.8 901.0 Private creditors 1,073.8 996.5 905.1 820.5 608.6 Short-term debt 49.5 68.3 63.6 111.0 109.0 Interest arrears 0.0 0.0 0.0 0.0 0.0 Use of IMF credit 38.9 107.5 116.3 121.5 64.3 Total external debt 2,592.2 2,504.6 2,477.0 2,463.9 2,149.1 Principal repayments 215.9 191.4 208.2 221.9 390.3 Interest payments 90.0 78.3 69.0 72.0 84.0 Short-term debt 3.7 2.1 1.2 1.1 3.3 Total debt service 305.8 269.7 277.2 294.0 474.2 Ratios (%) Total external debt/GDP 67.1 72.2 72.1 56.5 43.2 Debt-service ratio, paida 12.9 12.7 15.1 12.0 16.7 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.

International liquidity (US$ m unless otherwise indicated; end-period) 2001 2002 2003 2004 2005 Foreign exchange 413.6 315.0 489.9 631.2 717.5 SDRs 8.7 6.1 3.7 0.7 0.0 Reserve position in the IMF 0.4 0.5 0.6 0.7 0.6 Total reserves excl gold 422.7 321.5 494.2 632.6 718.0 Gold (national valuation) 7.4 21.9 25.2 28.5 27.6 Total reserves incl gold 430.1 343.4 519.4 661.1 745.6 Memorandum items Commercial banks’ foreign assets 112.2 153.1 106.7 116.6 212.5 Commercial banks’ foreign liabilities 24.2 26.0 16.9 21.9 31.0 Commercial banks’ net foreign assets 88.0 127.1 89.8 94.7 181.5 Import cover Months of total imports 6.1 4.2 4.9 5.6 6.0 Months of non-mining imports 8.7 6.2 6.1 7.5 8.2

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

Exchange rates (Kina per foreign-currency unit; averages) 2001 2002 2003 2004 2005 A$ 1.83 2.11 2.31 2.37 2.37 US$ 3.36 3.89 3.55 3.23 3.10 ¥ 2.77 3.10 3.12 2.98 2.82 £ 4.83 5.82 5.80 5.90 5.64 € 3.01 3.65 4.02 4.01 3.86 SDR 4.17 5.02 4.98 4.78 4.58

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

Editors: Danny Richards (editor); Gerard Walsh (consulting editor) Editorial closing date: July 18th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]