Papua New Guinea Papua New Guinea at a Glance: 2001-02

COUNTRY REPORT

Papua New Guinea Papua New Guinea at a glance: 2001-02

OVERVIEW The prime minister, Sir Mekere Morauta, will face an invigorated opposition in the run-up to the next general election, scheduled for June 2002, although his party now has an unprecedented majority in parliament. The government will press ahead with the contentious economic reform programme, supported by the IMF and the World Bank, albeit more slowly. Opposition groups will seek to capitalise on the public resentment towards the government and domestic protests are likely to become more common. The EIU forecasts GDP growth of only 1.2% in 2001 as the development of major minerals and gas projects is unlikely to begin this year. However, economic activity will pick up in 2002 with growth of 4.2% as the projects finally get underway. Inflation will be relatively restrained in 2001-02 as the central bank continues to focus on price and exchange-rate stability as its primary objective. Key changes from last month Political outlook • Domestic opposition to the reform programme has intensified, high- lighted by student protests in June. Political groups opposed to the government will seek to capitalise on the anti-government feeling in their campaigns for the election in June 2002. Economic policy outlook • The government is expected to press ahead with the IMF/World Bank- supported reform programme, including the controversial privatisation of PNG Banking Corporation. However, the focus is likely to shift from sale to contracted management as a strategy to remove political interference and raise productivity. Economic forecast • The economy now looks set to record a disappointing growth rate of only 1.2% in 2001 as a result of the continuing delays in reaching agreements on the Ramu nickel-cobalt project and the PNG-Queensland gas pipeline.

July 2001

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ISSN 1366-4085

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

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

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2001-02 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

15 Economic policy

18 The domestic economy 18 Economic trends 19 Oil and gas 21 Mining 22 Agriculture 24 Infrastructure 24 Financial and other services

25 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 18 Quarterly inflation 22 Mineral exports, by volume 23 Agricultural exports, by volume 24 World commodity price forecasts 25 Balance of payments 26 Exports 26 Exchange rates 27 Public debt outstanding

EIU Country Report July 2001 © The Economist Intelligence Unit Limited 2001 2 Papua New Guinea

List of figures

12 Gross domestic product 12 Kina real exchange rates 19 Interest rates 20 Kutubu oil price 21 Mineral exports 26 Exchange rates, 2000-01 27 External debt

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Summary

July 2001

Outlook for 2001-02 The prime minister, Sir Mekere Morauta, will face an invigorated opposition in the run-up to the election next year, as the economic reform programme, supported by the IMF and the World Bank, is proving increasingly contentious. However, his party now has an unprecedented majority in parliament. The EIU forecasts GDP growth of only 1.2% in 2001 as the development of major minerals and gas projects is unlikely to begin this year. But economic activity will pick up in 2002, with growth of 4.2%, as the projects finally get underway. Inflation will be relatively restrained in 2001-02 as the central bank continues to focus on price and exchange-rate stability as its primary objective.

The political scene A student protest in June against economic reforms turned violent. Agreement has been reached on Bougainville autonomy. The PDM now holds the first ever single party majority in parliament. A cabinet reshuffle followed changes in the government coalition. Bill Skate has resigned as leader of the opposition. Political parties must register by August 22nd. National-provincial government relations remain tense. Overseas missions are in the process of being closed.

Economic policy The privatisation programme has suffered further setbacks. Court injunctions threaten the sale of PNGBC. Commercial banks have called for a relaxation of monetary policy. Minimum wage talks remain in deadlock. The government has suffered from acute cash flow problems. The budget will come under further strain. The budget deficit in the first quarter was Kina43m.

The domestic economy The population grew by an annual average of 3.5% between 1990 and 2000. The quarterly rate of inflation has increased. Interest rates have dropped sharply. The PNG-Queensland gas pipeline has fallen further behind schedule. The Napa Napa oil refinery is expected to be completed by end-2002. The volume of oil exports rose 11% year on year in the first quarter of 2001. There has been a further delay in finding a partner for the Ramu project. Gold exports have fallen but copper exports remain strong. Coffee growers are looking to the government for help. Falling palm oil prices have canceled out volume growth. The copra industry continues to suffer. The condition of major roads remains a concern. “Grassroots banks” have been set up on Bougainville.

Foreign trade and The current-account surplus was 14% lower year on year in the first quarter payments of 2001. Oil and minerals accounted for 86% of exports in first quarter. The kina continues to lose value despite central bank intervention. Exchange rate losses have offset loan repayments. Australia’s budget for 2001/02 included Kina558m in assistance for PNG.

Editors: Danny Richards (editor); Graham Richardson (consulting editor) Editorial closing date: July 11th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report July 2001 © The Economist Intelligence Unit Limited 2001 4 Papua New Guinea

Political structure

Official name Independent State of Papua New Guinea

Form of state Constitutional monarchy

Head of state Queen Elizabeth II, represented by the governor-general, who is nominated by the national parliament

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

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

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

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

National elections June 1997; next general election due June 2002

National government Sir Mekere Morauta, the leader of the People’s Democratic Movement (PDM), was elected prime minister by parliament on a vote of 99:5 on July 14th 1999. The PDM now holds a single party parliamentary majority – the first ever in PNG.

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

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

Key ministers Agriculture Muki Taranupi (PPP) Bougainville affairs Moi Avei (NAM) Civil aviation John Tekwie (PDM) Defence Kilroy Genia (PDM) Education John Waiko (PDM) Environment Herowa Agiwa (PDM) Fisheries Ron Ganarafo (PDM) Foreign affairs John Pundari (PDM) Health Tommy Tomscoll (PDM) Home affairs William Ebenosi (PDM) Labour & employment Chris Haiveta (PP) Lands Charlie Benjamin (PDM) Justice Puri Ruing (PDM) Mining Peter Ipatas (PDM) Petroleum & energy Roy Yaki (PDM) Planning & implementation Vacant Privatisation Vincent Auali (PDM) Public service Philemon Embel (PDM) Trade & industry Tukape Masani (PDM) Transport & Works Alfred Pogo (PDM)

Central bank governor Wilson Kamit

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Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (Kina bn) 6.9 7.1 7.9 9.4 11.0 GDP (US$ bn) 5.2 4.9 3.8 3.6 3.9 Real GDP growth (%) 7.8 –3.9 –3.8 3.3 0.7 Consumer price inflation (av; %) 11.6 3.9 13.6 14.9 15.6b Population (m) 4.4 4.2 4.6 4.7 4.8 Exports of goods fob (US$ m)c 2,529.8 2,160.1 1,773.3 1,927.4 2,014.3 Imports of goods fob (US$ m)c 1,513.3 1,483.3 1,078.3 1,071.4 991.3 Current-account balance (US$ m) 189.0 –192.3 –28.8 97.2 278.4 Foreign-exchange reserves excl gold (US$ m) 583.9 362.7 192.9 205.1 308.5b Total external debt (US$ bn) 2.5 2.6 2.7 2.8a 2.6 Debt-service ratio, paid (%) 16.3 20.5 8.6 9.6 a 15.0 Exchange rate (av) Kina:US$ 1.32 1.44 2.07 2.57 2.78b

July 11th 2001 Kina3.29:US$1

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

Principal exports fob 2000 US$ m Principal imports cif 1994 US$ m Gold 712.0 Machinery & transport equipment 442.9 Crude oil 636.0 Manufactured goods 334.0 Copper 217.3 Food & live animals 204.2 Palm oil 110.6 Chemicals 85.9 Coffee 106.2 Mineral fuels & lubricants 40.8 Logs 97.8 Total incl others 1,526.5 Total incl others 2,038.6

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total Australia 30.0 Australia 52.9 Japan 11.9 Singapore 12.7 Germany 6.8 Japan 5.5 South Korea 4.1 New Zealand 4.1 Philippines 2.7 US 3.6 UK 2.6 Malaysia 3.6 a EIU estimates. b Actual.

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Quarterly indicators

1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Consumer prices (1995=100) 140.2 143.6 158.8 163.4 167.6 174.9 178.1 179.6 % change, year on year 14.2 14.1 18.3 13.2 19.5 21.8 12.2 9.9 Financial indicators Exchange rate Kina:US$ (av) 2.22 2.53 2.78 2.75 2.96 2.52 2.65 2.83 Kina:US$ (end-period) 2.38 2.56 2.96 2.70 2.62 2.43 2.76 3.04 M1 (end-period; Kina m) 1,114 1,298 1,367 1,344 1,294 1,252 1,259 1,375 % change, year on year 20.3 35.2 32.8 21.0 16.1 –3.5 –7.9 2.3 M2 (end-period; Kina m) 2,812 2,916 2,982 2,982 2,929 2,990 3,029 3,164 % change, year on year 7.7 7.9 6.5 9.2 4.2 2.5 1.6 6.1 Sectoral trends Exports Copra ('000 tonnes) 12.4 14.6 16.6 19.9 29.6 16.9 10.5 9.5 Copra oil ('000 tonnes) 18.1 14.0 11.3 6.9 15.1 9.8 14.9 8.2 Cocoa ('000 tonnes) 7.3 11.2 6.0 4.5 14.2 9.9 9.0 4.4 Coffee ('000 tonnes) 10.8 20.2 33.9 14.3 10.2 20.5 16.7 18.1 Logs ('000 cu metres) 324 470 230 288 312 322 352 338 Gold (tonnes) 12.7 14.8 18.5 17.0 19.4 17.2 17.0 19.2 Fish ('000 tonnes) 0.3 1.3 0.6 0.5 0.4 0.5 0.4 0.4 Oil, crude ('000 barrels) 7,520 7,642 7,735 7,749 5,889 5,930 5,239 4,338 Foreign trade & reserves Exports foba (Kina m) 868 1,208 1,504 1,426 1,554 1,337 1,283 1,432 Gold 279 351 486 430 589 435 413 514 Oil, crude 187 272 415 509 458 409 441 435 Imports foba (Kina m) –557 –713 –717 –773 –758 –630 –656 –714 Trade balance (Kina m) 311 495 787 653 796 707 627 718 Reserves excl gold (end-period; US$ m) 138.3 89.1 106.1 205.1 175.7 268.1 248.5 308.5 a Balance-of-payments basis. Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; IMF, International Financial Statistics.

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Outlook for 2001-02

Political outlook

Domestic politics The political environment in Papua New Guinea (PNG) has dramatically deteriorated and looks set to worsen in the lead up to the next general election, scheduled for June 2002. The prime minister, Sir Mekere Morauta, will face an invigorated opposition when parliament reconvenes on July 23rd, as well as increasing domestic resentment towards the reform programme. The ruling People’s Democratic Movement (PDM), led by Sir Mekere, will have an unprecedented parliamentary majority, with 70 members of parliament (MPs) (out of 109) declaring allegiance to the party. The opposition will have 25 MPs, including the 16 MPs from the National Alliance (NA), which was ejected from the government coalition in May. The leader of the NA, Sir Michael Somare, will take up the leadership of the opposition, following the resignation of Bill Skate in June, and as a well respected politician regarded by many as the “founding father of the nation” he will be more successful in fighting against the government than his predecessor, Bill Skate. Sir Michael has already made clear his intention to, in his words, “kill” Sir Mekere’s party at the next election.

Even though Sir Mekere cannot be subjected to a vote of no confidence, as under the constitution such events are not allowed during the 12 months before an election, he will undoubtedly come under severe pressure, particularly since he is likely to press ahead with the controversial reform programme. As expected, the military rebellion in March has become the rallying point for all groups opposed to the government’s reform programme and the strong influence exerted by the World Bank, IMF and Australia. The prospect of widespread privatisations, and the ensuing increase in unemployment and foreign ownership of former state assets, has presented the opportunity for domestic protest. In late June, around 3,000 PNG university students protested outside government offices in the public service suburb of Waigani. In scenes reminiscent of the military rebellion in March, the students handed the prime minister a four-point petition calling on the government to: halt the privatisation programme; stop land mobilisation and land registration (although this is not on the government’s agenda); cease all borrowing from the IMF and World Bank and expel all officials from these institutions; and finally, resign if it could not act on the first three demands. The peaceful protest turned violent as the police attempted to break up the rally by firing tear gas. Three people were killed and shops burned and looted. Opposition groups have called on Sir Mekere to resign over his mishandling of the affair and will seek to capitalise on the anti- government feeling in their campaigns to defeat the new PDM at the next election. The newly formed People’s Labour Party and the Labour Party of PNG, formed by the PNG Trade Union Congress, will both be focused on overthrowing the current government. The governors of the Highland provinces have plans to form their own political party later in the year and will be pushing for a non-PDM, Highland prime minister in 2002.

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Bougainville The Bougainville peace process has gathered a momentum which could see the Bougainville affairs minister, Moi Avei, presenting the draft comprehensive agreement to the cabinet in the very near future, with it being signed in Arawa, Bougainville, thereafter. (The agreement was to be put before the cabinet on June 21st, but the meeting had to be postponed as a result of the student protests.) The Bougainville governor, John Momis, wants to have the Bougainville constitution in place before the next general election in June 2002 (for which the responsibility lies with the Bougainville constituent assembly and the Bougainville constitutional commission). The national parliament is expected to give the two-thirds vote necessary at two meetings in September and November, in order to change the national constitution and allow for Bougainville’s autonomy. An autonomous government on Bougainville could then be a reality early in 2002. (Failure to get the necessary vote would lead to Bougainville losing its special transitional status on December 31st 2001 and reverting to the normal provincial and local level government system.) A referendum of the citizens of Papua New Guinea on the issue of independence for Bougainville would then take place in 10-15 years time.

International relations Sir Mekere’s recent visit to China has helped to strengthen technical and economic ties between the two countries. Sir Mekere repeated his government’s commitment to its “one China policy” and said that “dollar diplomacy” with Taiwan had threatened the stability of relations between China and PNG. Australia has also reaffirmed its confidence in the current PNG government. The Australian prime minister, John Howard, expressed his full support for Sir Mekere during the military crisis in March, and his government has committed A$343m (US$177m) in aid for financial year 2001/02. Irian Jaya (West Papua), an Indonesian province with a strong secessionist movement, still looms large as PNG’s biggest foreign policy challenge. However, the government has endorsed a report on border talks between PNG and Indonesia that covers issues such as the management and administration of the shared border.

Economic policy outlook

Policy trends Despite increasing domestic opposition, the government is expected to press ahead with the economic reform programme, supported by the IMF and the World Bank. The reforms are aimed at: restoring budgetary discipline; securing independence for the Bank of Papua New Guinea (the central bank); stabilising the kina; reducing high levels of domestic debt; strengthening political institutions; and, most controversially, privatising state-owned enterprises. An IMF review team in March was satisfied with the government’s reform progress, and on April 23rd the IMF approved the disbursement of a US$48m credit under the current stand-by arrangement to support the balance of payments. The planned disbursement from the World Bank of US$20m, part of its US$90m budgetary support programme, has been postponed as a result of the further delay in selling off the PNG Banking Corporation (PNGBC)—a condition of the loan. The privatisation programme continues to suffer from delays, not only with the sale of PNGBC but also with the national

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airline, Air Niugini (see Economic policy). Foreign investor sentiment towards the privatisation programme will continue to be negative while the threat of serious domestic turmoil is apparent. It is more likely that the focus will shift from sale to contracted management as a strategy to remove political interference and raise productivity.

Fiscal policy The 2001 budget does not include any new tax burdens but incorporates taxation reforms: the most significant changes were made to the tax regime for gas, oil and mining and should encourage new exploration and development in these areas. (However, the PNG Chamber of Mines and Petroleum has called for further exploration incentives.) For 2001 the government forecasts a budget deficit equivalent to 1.3% of GDP. However, the risks to the government’s fiscal strategy are not trivial and the EIU expects the deficit to be slightly higher than this. The government has given no basis for its budgeted privatisation proceeds and the delay in privatising PNGBC and Air Niugini will further increase the risks to the government’s fiscal strategy, which is already facing an outstanding requirement of US$70m in external financing. In 2002 construction work on major minerals projects should provide a boost to the economy and government revenue.

Monetary policy Macroeconomic policy will continue to focus on price stability, with the central bank adopting a cautious monetary policy stance for 2001. However, the depreciation of the kina witnessed during the second half of 2000 and into 2001 (temporarily reversed during April) will slow the recent downward trend in inflation. Accordingly, in order to maintain stable real interest rates, nominal rates will not fall as quickly as in the past and may even rise. However, with inflation gradually coming under control, we expect the government to move towards a more accommodative policy stance at some point this year, possibly by easing either the cash reserve requirement or the minimum liquid assets ratio. Monetary policy may become slightly more restrictive again in 2002 as growth picks up and new resource development projects proceed.

Economic forecast

International assumptions World GDP growth will average 2.8% in 2001, compared with an estimated 4.9% in 2000. This sharp deceleration in world growth will have a significant impact on global flows of trade and investment. Economic growth in Australia, by far PNG’s largest trading partner, will slow to 1.8% in 2001. The US economy is decelerating rapidly and we expect growth of only 1.5% in 2001. The Japanese economy is forecast to contract by 0.6% in 2001, reflecting a worsening domestic situation and slowing export demand. Prices for PNG’s major commodity exports are expected to fall. Gold and oil are PNG’s largest exports by value, and average prices for these commodities in 2001 will fall, by 5.8% and 5.5% respectively. Coffee prices are also expected to fall this year, by 24.2% following a decline of 16.2% in 2000.

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International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.6 4.9 2.8 3.7 OECD 3.1 4.0 1.5 2.5 EU 2.5 3.4 2.3 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 120.5 122.0 US$:¤ 1.07 0.92 0.88 0.96 SDR:US$ 0.731 0.758 0.792 0.769 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.06 4.75 Commodity prices Oil (Brent; US$/b) 17.9 28.5 26.9 25.5 Gold (US$/troy oz) 278.8 279.3 263.0 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 1.2 15.0 Industrial raw materials (% change in US$ terms) –4.6 13.4 –3.1 3.7

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) exchange rates. Economic growth The PNG economy looks set to record a disappointing growth rate of only 1.2% in 2001 as a result of the ongoing delays in both the US$850m Ramu nickel-cobalt mining project and the US$3.5bn PNG-Queensland gas pipeline project. It is increasingly unlikely that construction will start on either of these projects this year, therefore precluding the much needed boost to other sectors of the economy—a crucial element in our previous forecasts. However, this is mitigated somewhat by the correspondingly lower forecast for imports of construction equipment and materials. Even though the current government has shown its commitment to the economic reform programmes supported by the IMF and World Bank, foreign investor confidence is waning: constant ministerial reshuffles and landowner politics have deterred investment in the mining industry, with exploration falling to a 16-year low, according to the PNG Chamber of Mines and Petroleum. The forecast for growth in 2002 is more positive at 4.2%. We expect the government and its partners to persevere with the two major development projects and reach agreements in the early part of 2002 at the latest, therefore reviving investment and providing a huge stimulus to the rest of the economy.

The agricultural sector will grow by 4.5% in 2001, supported by a recovery in coffee production. (Coffee export volume was down by 17.3% in 2000 compared with 1999.) The mining sector is forecast to contract by a further 8.5% in 2001 after an estimated 9% contraction in 2000. Most notably, crude oil production and export volumes will continue on a downward trend. However, expected production of 25,000 barrels/day from the Moran oilfield (which received its formal development licence from the government on February 17th) will boost PNG’s total exports and partially offset declining production at Kutubu, which is nearing the end of its economic life. However, further construction work, expected to take at least 18 months, must be

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completed before the Moran field can be brought into full production. Gold production at Porgera is expected to fall by more than 20% in 2001 as the mine moves into a new stage of development.

Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 3.3b 0.7 1.2 4.2 Gross agricultural production growth 15.0 2.8 4.5 3.3 Consumer price inflation Average 14.9 15.6a 9.8 10.2 Year-end 13.2 10.0 a 9.5 10.4 Short-term interbank rate 18.9 17.5 a 15.5 12.0 Government balance (% of GDP) –2.5b –1.8 –1.5 –1.3 Exports of goods fob (US$ m) 1,927 2,014 1,857 1,913 Imports of goods fob (US$ m) 1,071 991 1,093 1,401 Current-account balance (US$ m) 97 278 –30 –409 % of GDP 2.7 7.1 –0.8 –9.2 External debt (year-end; US$ bn) 2.8b 2.6 2.8 3.2 Exchange rates Kina:US$ (av) 2.57 2.78a 3.05 3.12 Kina:¥100 (av) 2.26 2.58a 2.53 2.56 Kina:¤ (year-end) 2.71 2.88 a 2.90 3.33 Kina:SDR (year-end) 3.70 4.00 a 4.06 4.38

a Actual. b EIU estimates. c EIU forecasts.

Inflation The central bank’s commitment to fighting inflation should ensure that monetary policy continues to focus on price and exchange-rate stability. Falling oil prices, and fewer tax rises, will help to restrain inflation in 2001-02 relative to the past three years—we expect annual average inflation to fall to 9.8% in 2001, before increasing slightly to 10.2% in 2002. High unemployment among graduates and school-leavers will offset surges in labour demand related to new resource projects in 2002, and low levels of capacity utilisation will minimise demand-pull inflationary pressures in the economy.

Exchange rates The central bank, boosted by a relatively strong foreign-exchange reserves position, will continue to intervene in the currency market to maintain a relatively stable exchange rate. However, after reaching a seven-month high of Kina2.92:US$1 in late April, the kina slipped to Kina3.33:US$1 on May 31st as a result of high importer demand exerting downwards pressure on the local currency. We expect the kina to average Kina3.05:US$1 in 2001 and Kina3.12:US$1 in 2002. Continued IMF and World Bank support will help the central bank to boost its reserves and maintain exchange rate stability.

External sector We expect export receipts to decline by 7.8% in 2001. Oil exports in particular will suffer—world oil prices will fall by 5.5% in 2001, and new supplies from the Gobe and Moran oilfields will only partially offset declining production from the ageing Kutubu fields. Imports of capital goods and construction materials will rise in 2002 in preparation for the new mining and gas projects. The trade surplus will therefore fall from an estimated US$1bn in 2000, to

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US$764m in 2001 and further to US$512m 2002. Income and services debits associated with the new projects will also increase, thus contributing to a current-account deficit of US$30m (0.8% of GDP) in 2001 and US$409m (9.2% of GDP) in 2002. This relatively large deficit in 2002 will be sustainable only because the two minerals projects will be accompanied by significant capital inflows, namely commercial borrowings by PNG companies participating in the projects and foreign direct investment (FDI).

The political scene

Student protest against University students surrounded government offices in the public service reforms turns violent suburb of Waigani on June 21st to protest against the World Bank and IMF reform programmes, in particular the plans to privatise state-owned assets. The main concerns of the protesters are that the privatisation of entities such as the Papua New Guinea Banking Corporation (PNGBC) and Air Niugini will turn control over to foreign firms and lead to redundancies. The sale of these assets is a condition of the World Bank-support package; the disbursement of funds has so far been delayed as the government has failed to bring the entities to the point of sale (see Economic policy). For the first few days of the protest, over 3,000 students maintained a peaceful presence outside the government offices; roads and schools were, however, closed and public transport services severely disrupted. In scenes reminiscent of the military rebellion in March, the students were demanding that the prime minister, Sir Mekere Morauta, receive their petition in person. The four-point petition called on the government to: halt the privatisation programme; stop land mobilisation and land registration (although this is not on the government’s agenda); cease all borrowing from the IMF and World Bank and expel all officials from these institutions; and finally, resign if it could not act on the first three demands. On June 26th, under heavy police guard, the prime minister, Sir Mekere Morauta, accepted the petition and promised to provide answer to the demands. He also thanked the students for respecting law and order in a peaceful protest. However, violence erupted later in the day as police fired tear gas in an attempt to break

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up the rally and disburse the remaining protestors. Three people were killed and over 15 injured in the ensuing turmoil as shops were burned and looted. A dawn to dusk curfew on June 27th-July 6th was enforced in the National Capital District. The restrictions were eased, with a curfew from midnight to 5am, during the Acts 2000 satellite programme (a public evangelism event organised by the Seventh Day Adventist Church) on July 6th-21st. A curfew between 10pm and 5am will now remain in force until August 25th. Sir Mekere said the curfew was necessary to help the law enforcement agencies in returning the district to normalcy. Opposition groups and the Trade Union Congress called on the prime minister to resign for failing to deal with the situation more effectively and for not immediately addressing the issues raised by the students.

Agreement reached on An agreement to end the decade-long secessionist war on Bougainville was Bougainville autonomy reached on June 1st by all parties at the peace talks. Under the agreed arrangement, expected to be put to the national parliament when it reconvenes on July 23rd, any future national legislation affecting Bougainville would require ratification by the Bougainville government before it could take effect. In addition, maritime and border surveillance within Bougainville’s jurisdiction would be conducted jointly by the national defence force and Bougainville police. Apart from wearing the crest of the Royal Papua New Guinea Constabulary, the Bougainville police force would be autonomous, as would public service and tax matters. All arms (other than, at this stage, those controlled by rebel leader, Francis Ona, in his Panguna “no-go zone”) are to be containerised under independent control. Mr Ona’s attitude to the peace process has been ameliorated by the participation in the final round of talks of Damien Damen, paramount chief and mentor to Mr Ona.

First ever single party For the first time in PNG’s 26 years of independence a single party holds a majority in parliament majority in parliament. The ruling People’s Democratic Movement (PDM) now claims 70 seats in parliament. The party’s numbers have been boosted over the last three months both by high-profile defections to its ranks, most notably that of Peter Ipatas, governor of Enga Province, and by the “merger” with the Advance PNG Party (APP). In late April the APP leader, John Pundari, decided to disband the party and demanded that its members join the PDM. With the PDM now able to rule in its own right, the National Alliance (NA) was ejected from the government coalition on May 17th. The prime minister, cited the constant political manoeuvring by the NA’s leader, Sir Michael Somare, as the reason behind his decision. The NA had been readying itself for the 2002 elections in which Sir Michael had already professed an intention to, in his words, “kill” the ruling PDM. Sir Michael was also sacked from cabinet last December for disloyalty over the integrity bill.

Cabinet reshuffle following Four government ministers lost their jobs as a result of the changes in the change in coalition government coalition—the NA’s Bart Philemon (foreign minister) and Michael Laimo (mining minister), and Pangu Pati’s (PP’s) Samson Napo (culture and tourism minister). The veteran politician and member of PP, Sir Pita Lus, lost his job as housing minister, but takes over the post vacated by Mr Napo at the Department of Culture and Tourism. The PP parliamentary leader, Chris Haiveta, has returned as minister at the Department of Labor and Employment, which

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he vacated just a few months ago when he was promoted to minister for petroleum and energy. Moi Avei, who resigned from the NA, lost his responsibilities as minister for national planning but kept his position as minister for Bougainville affairs and gained the role of chairman of the gas committee, the central focus of which is the PNG-Queensland pipeline (see Domestic economy). The prime minister, Sir Mekere Morauta, rewarded his own, recently augmented PDM with four new ministerial appointments, including the Enga governor Peter Ipatas who takes over as the minister responsible for mining, Roy Yaki who takes on the petroleum and energy portfolio, with Tommy Tomscoll becoming the minister for health, and Tukape Masani the minister for trade and industry. In attempting to explain the move, Sir Mekere said his hands were tied and that his personal preferences had to come second to the “interests of the nation and party”, leaving people to ponder whether these interests are one and the same.

Skate resigns as leader of Bill Skate announced his decision to hand over the leadership of the the opposition opposition to Sir Michael Somare on June 13th. The opposition has been very ineffective in recent years, but is now a much stronger force following the inclusion of 16 members from the NA and four from the People’s Progress Party (PPP). Mr Skate said his decision was not based on the numerical strength of the NA but rather that Sir Michael was the most appropriate person for the job, being the “founding father of the nation”. Sir Michael will remain opposition leader designate until parliament resumes on July 23rd and the parliament speaker recognises the change. Mr Skate has also announced that he is no longer a member of the People’s National Congress, the party he established when forming the government in 1997. He has said that he would announce details of a new party when he returns from Australia, where he has been receiving treatment for a heart condition.

Political parties must Regulations which provide details of processes and forms to effect the register by August 22nd registration of political parties have been promulgated. This paves the way for registration of political parties as required under the Organic Law on the Integrity of Political Parties, certified by the speaker of the national parliament, Bernard Narakobi, on February 22nd. As parties are required to register within six months from certification, party numbers will be temporarily fixed by August 22nd. However, during the 30 days preceding the issue of writs—the integrity law requires publication in the National Gazette of a list of political parties upon the issue of writs for a national election—party members may change their party affiliations, but would then be locked in for five years. This period (March/April 2002) will test the PDM’s current numerical dominance. Meanwhile, updating the common roll in preparation for the 2002 election is three months behind schedule owing to a lack of funding, according to the Electoral Commissioner, Reuben Kaiulo.

Uneasy national-provincial The New Guinea Islands governors have established the New Guinea Islands government relations Development Bureau as a prelude to seeking financial and administrative autonomy. The dean of the national governors’ council and Manus governor, Stephen Pokawin, has spoken of a breakdown in trust between governors and the prime minister, Sir Mekere Morauta (see April 2001, page 17). Similar

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sentiments have come from Peti Lafanama and Father Robert Lak, governors respectively of the provinces of Eastern and Western Highlands, both provinces under investigation by the national government. On the eve of the mid-June cabinet meeting in Mount Hagen, Father Lak began court proceedings under the Organic Law on Provincial and Local-level Governments claiming Kina70m (US$21m) from the national government in outstanding grants since 1997. However, the prime minister has explained that there was simply no money to meet the terms of the organic law and, therefore, it had to be changed.

Overseas missions in the In a Kina6m exercise, aimed at annual savings of Kina8m to Kina10m, process of being closed diplomatic missions and consular offices in Cairns and Sydney (Australia), Singapore, Kuala Lumpur (Malaysia), Seoul (South Korea), Paris (France), Bonn (Germany), and possibly Washington DC (US) are in the process of being closed. Missions in Canberra and Brisbane (Australia), Suva (Fiji), Tokyo (Japan), Jakarta (Indonesia), Brussels (Belgium) and the UN mission in New York are unaffected. The closures reverse a build up that reflected the expans- iveness, associated with a resources boom, of the Wingti-Chan government, formed following the 1992 general election.

Ombudsman commission The chief ombudsman, Ila Geno, who has expressed concerns about frequent has a growing agenda changes of personnel in government delaying the implementation of the commission’s recommendations (see April 2001, page 19), is examining the activities of the Gaming Board. Immediately following an interview with Mr Geno, the prime minister sacked his chief of staff, Dr Jacob Jumogot (who is also the PDM general secretary), whom he had appointed as Registrar of the Board. The Commission is also examining the link, if any, between the recent swelling of the PDM’s numbers in parliament and the distribution of district support grants. Mr Geno has also questioned the competence of the cabinet in granting amnesty to mutinous soldiers and the wisdom of not appointing a substantive defence force commander, noting that Brigadier General Marlpo has filled the position for 18 months in an acting capacity only. The appointment of Dr Ninkama, a medical doctor, as chief executive of the national radio broadcaster six months before the expiry of the term of his predecessor, a long-serving journalist, is also on the commission’s agenda.

West Papuans freed as law In May, the National Court of Justice freed two West Papuans held since January does not apply on charges of raising an illegal military force in PNG—charges to which they had pleaded guilty—because, being foreign citizens, the law did not apply to them. The presiding judge said the proper place to consider this case would be under international law. Another West Papuan, Joe Poma, was similarly charged in April. The Papua Council Presidium, the democratically elected body leading West Papua’s independence campaign, has opened an office in Melbourne, Australia, in order to facilitate international diplomacy with Indonesia.

Economic policy

Privatisation programme The privatisation programme has suffered further setbacks in getting both Air suffers further setbacks Niugini and PNGBC to the point of sale, putting pressure on the national

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budget, which assumes a Kina178m (US$54m) reduction of domestic debt from the proceeds of asset sales in 2001. Bids received for Air Niugini did not meet government expectations and the sale was postponed. The military mutiny that occurred just weeks before the closing date would not have helped. Indeed, the chairman of the Privatisation Commission, Ben Micah, claimed that the bid process was aborted because of the incident.

Court injunctions threaten Court injunctions are certain to challenge the privatisation commission’s tight sale of PNGBC programme to have selected a buyer for PNGBC by the end of September. The root of the problem lies in the parliamentary act which transfers to the commission for sale only the assets of the state-owned entities, leaving the liabilities with the entities. The problem came to light when the former chief executive of Finance Pacific Ltd., PNGBC’s previous owner, was granted a court judgment for wrongful dismissal but could not act on the judgment because Finance Pacific’s assets had passed to the commission. Its liabilities, the court was told, would be considered and settled at a later date. It seems likely that these will be the subject of side settlements between the state and the bank’s creditors. PNGBC staff also threatened to derail the privatisation process by going on a week-long strike in mid-June. According to the president of the PNGBC National Staff Association, Elijah Luke, the strike was not a protest against privatisation but was to ensure that staff received proper entitlements and that “an appropriate package was in place for workers come the sale of PNGBC”. The commission is proceeding with the marketing of the sale. However, the World Bank says that the bank is not yet ready for sale, a condition for the release of its second tranche of US$20m in support for the reform programme. PNGBC’s assets are expected to realise Kina108m, according to information tendered to the court.

Earlier, in preparing PNGBC for partial sale, the state was forced to act as guarantor to the compulsory third-party motor vehicle insurer, Motor Vehicle Insurance Trust Limited. The state guarantee replaces the one the bank gave when it took over the insurer’s reserves on the amalgamation, under the previous government, of the PNGBC, MVIL, the Insurance Corporation and the Rural Development Bank. The amalgamation has been reversed and MVIL is now scheduled for privatisation as a separate entity by November.

Banks call for a relaxation The kina facility rate (KFR)—the central rate for the seven-day liquidity of monetary policy management instrument designed to make the financial markets more responsive to the bank’s monetary policy stance—was unchanged in June at 14%. The rate had fallen each month since its introduction by the central bank in February at 15.5%. In May it fell by 70 basis points. In response, two banks reduced their indicator lending rates by 50-60 basis points to 16.5-16.6%, effective from May 23rd. Despite this relief in commercial banks’ indicator lending rates, banks have warned that many businesses will struggle to survive unless the central bank eases its tight monetary policy. The central bank has maintained the liquidity ratio, which has been at 25% for the last three years, the cash reserve requirement of 5%, a capital adequacy ratio of 10%, and an equity to deposit ratio of 5%. Commercial banks have also said that they want the central bank’s treasury-bill tap system abolished. They say that wholesale

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deposit rates are kept high by a few big players conducting Dutch auctions, a practice facilitated by the tap system. Subsequently, the central bank did reduce the volume of treasury bills offered, resulting in a substantial rate fall.

Minimum wage talks The government has made no headway with trade unions in its attempts to remain in deadlock establish a new minimum wage in the wake of its rejection of the Kina60 per week determination by the 2000 Minimum Wage Board (MWB). The MWB tribunal considered claims by unions for Kina100 per week and Kina28 per week by employers and government. The government appealed to the PNG Trade Union Congress (TUC) to accept a temporary arrangement of Kina33 per week (Kina18.5 for the youth wage) while a new MWB tribunal is established, the legal alternative being reversion to the 1992 determination. Employers had accepted the arrangement provided that affected rural employers could claim exemption on grounds of incapacity to pay. On March 15th the delegation walked out of the national tripartite consultative council meeting called to break the months-long deadlock (see April 2001, page 21). Subsequently, the government called a compulsory conference, but the TUC (which has announced the formation of the Labour Party to contest the general elections next year) refused to attend.

Government suffers from The government experienced an acute cash-flow problem in April and had to acute cash flow problems breach the Central Banking Act (CBA) to finance a budget shortfall of Kina140m. (The CBA imposed a limit of Kina100m on the Temporary Advance Facility to the government.) The budget shortfall was mainly a result of slippages in the timetable for the sale of the PNG Banking Corporation (PNGBC), to which foreign assistance is linked. The World Bank has yet to release US$20m to the government because of the ongoing delay to the privatisation programme for PNGBC. However, the government’s cash-flow problem eased with the disbursement, following the IMF’s review mission during March, of the remaining US$48m of balance-of-payments support for 2000, and Australia’s second and third disbursements of US$20m.

The budget will face Strains in the budget are evidenced as well by the government being called further strains before the courts to settle the following judgments in favour of Dr Hamidian-Rad, economic adviser in the previous government: to settle claims by long- discharged soldiers; to hear claims for unpaid grants since 1997 by a suspended provincial government; and, after reportedly being threatened by the electoral commissioner, to find unbudgeted funding needed to prepare for next year’s election. Moreover, preliminary census data point to a deeper fiscal malaise. The 2000 census has resulted in a revision of the population growth rate from 2.3% to 2.9%, and a consequent revision of the rate of growth in demand for government services. On the other hand, the tax base has been shrinking with the decline in oil production. More importantly, conventional policies— for example, the 1992 wage deregulation, the 1994 currency re-alignment and the more recent tariff reduction associated with value-added tax (VAT)—have not succeeded in expanding non-mining per capita output.

First-quarter budget deficit Preliminary data show that the government recorded a deficit of Kina43m in of Kina43m the first quarter of 2001, larger both than budgeted for (pro rata) and than the

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outturn in the first quarter of 2000 (Kina30.8m). Compared with the first quarter of 2000, direct tax receipts were up by 17% but indirect tax receipts were 9% lower. Company tax was the star performer, with receipts up by 36%, but VAT receipts were down by 55%. Mineral and oil companies paid 50% more tax in the first quarter of 2001 than in the year-earlier period. Interest payments, 23% of total expenditure for the quarter, were higher than for the same period of 2000, by 18% on foreign debt (influenced by the kina’s depreciation), and by 9% on domestic debt. Reflecting enhanced expenditure control, departmental expenditure was 3% less in the first quarter than a year earlier.

The domestic economy

Economic trends

Population growth 3.5% The focus on Papua New Guinea’s poor formal employment growth, as a result per year in 1990-2000 of the minimum wages debacle, has been sharpened by the significantly higher population growth rate revealed by the 2000 census. On the basis of the 1980 and 1990 censuses, total formal employment growth in the period 1990-2000 was forecast at 2.1% per year and formal unemployment at around 50% in 2000. The Bank of Papua New Guinea’s index of formal non-mining private-sector employment reveals less than half the forecast rate of growth. On the other hand, preliminary results of the 2000 census have raised population growth from 2.3% during 1980-90 to 3.5% in 1990-2000.

Quarterly rate of inflation The quarterly rate of inflation, after slowing in the fourth quarter of 2000, increases to 0.9% quarter-on-quarter, increased to 1.6% in the first quarter of 2001, only slightly less than in the third quarter of last year. At the end of the first quarter, year-on-year inflation was running at 8.9% compared with 19.6% a year earlier. Underlying inflation (excluding seasonally-affected fruit, vegetables and betelnut, and indirect tax rate changes) in first quarter of 2001 was 1.7% quarter on quarter and 6% year on year. The reversal of the downward trend in quarter-on-quarter inflation in the first quarter is associated with the kina’s softening since June 2000, a weakness which carried through into April 2001, decreasing the likelihood of inflation falling in the second and third quarters.

Quarterly inflation

1999 2000 2001a 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Index: 1977=100 Consumer price index 495.1 509.5 522.9 545.6 555.5 560.3 569.3 % change, year on year 18.2 13.2 19.6 21.8 12.2 10.0 8.9 Underlying inflationb 439.6 453.3 465.3 477.0 480.1 484.9 493.1 % change, year on year n/a n/a 17.0 15.0 9.2 7.0 6.0 a Provisional. b Revised series. Source: Bank of Papua New Guinea.

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Interest rates drop sharply Interest rates, which had remained relatively stable since July 2000 at around 15% for 182-day treasury bills (the rate was 28% in August 1999), dropped sharply in mid-May to around 12% on reduced volumes on offer. Rates on bills of shorter maturities were around 50 basis points higher. The central bank’s rate for its kina facility (formerly the kina auction facility), which was 15% for March, fell to 14.75% for April and 14% for May. The rate was unchanged at 14% for June. This is the rate below and above which the central bank either pays commercial bank for deposits, on a weekly basis, or charges them for borrowings. Changes in the rate reflect the bank’s assessment of prevailing and expected economic conditions and are meant to be followed by the market.

Oil and gas

Gas pipeline falling further The next announcement from the revamped project management of the PNG- behind schedule Queensland gas pipeline is expected in July in an environment that has seen its head start over the Timor Sea Sunrise project narrow considerably over the last two years. (The PNG-Queensland gas pipeline was originally expected to be completed ahead of the Timor Sea Sunrise project, its rival in the bid to pipe gas to Queensland.) The cabinet was expected to finalise the extent of state participation in the project and the associated financing at its meeting on June 13th. Since the recent cabinet re-shuffle, the Bougainville affairs minister and gas committee chairman, Moi Avei, and the minister for petroleum and energy, Roy Yaki, have conferred with Queensland government ministers in Brisbane to confirm their continuing support for the project. The Queensland premier, Peter Beattie, is on record as wanting both projects to go ahead—there is not enough competition in the gas industry in his view. At a recent Queensland power conference the Queensland treasurer, Terry Mackenroth, announced that long-term supply contracts with the state-owned utilities, Ergon Energy and Energex, were expected to be in place by the end of the year.

Oil exploration expenditure Oil exploration expenditure fell to just US$13.2m in 2000, according to the a major concern PNG Chamber of Mines and Petroleum, a massive decline from the peak in 1990 of US$236.5m. The chamber’s executive director, Greg Anderson, has said

that the oil industry would in effect “cease to exist by 2010 to 2012” if mining exploration was not revived. Furthermore, according to Oil Search, PNG’s oldest and most active energy company, the petroleum and energy sector, which contributes up to 30% of the national income through exports, is at a crossroads that could result by 2005 in either a slump to a 10% contribution to national income or an increase to 50% depending on an early conclusion of protracted negotiations on the PNG-Queensland gas pipeline project. If the project does not go ahead and no new oil reserves are exploited, production from the Southern Highlands oil field would decline rapidly in the two years to 2010, and the resource would be completely depleted by around 2012. On the other hand, gas production from existing oil fields would improve the recovery of the remaining in-place oil reserves.

Development of Moran oil Meanwhile, with reserves of 80m barrels, development is progressing in the field is progressing Moran oil field owned by Exxon-Mobil of the US, with a 53% share, and Australia’s Oil Search, which eventually got its development licence on February 17th. Operated by Chevron, it has been producing around 12,000 barrels/day over the past two years under a well test regime from an investment of US$200m, supplementing Kutubu’s dwindling reserves (300m barrels originally). Development of the field to double production will take around 18 months—barring further disruptions from landowners—and a further US$200m.

Napa Napa oil refinery to Overseas Private Investment Corp (Opic), the US government’s investment be completed by end-2002 promotion agency, has agreed, on conditions yet to be agreed by PNG, to lend US$85m to InterOil Corp to finance construction of the proposed Napa Napa oil refinery, according to InterOil. Construction, already underway, is expected to take 18 months. The refinery is currently located in Houston Texas from where it will be shipped to PNG. The company is negotiating oil supply from 26 regional fields in PNG, Indonesia and Malaysia, with the local Kutubu supply coming at import parity prices, a condition agreed by the government together with 30-year product dumping protection. The refinery will process 32,500 barrels of crude oil per day by 2003, providing fuel for the entire PNG market with around 35% of capacity available for export. In an alliance with InterOil, Shell, whose PNG assets would be acquired by InterOil, has agreed to source all its domestic requirements from the new refinery and to market the entire export capacity in neighbouring Pacific island nations and in North Queensland for a period of three years for an estimated US$1.4bn.

Oil export volume up by Crude oil exports amounted to 6.52m barrels in the first quarter of 2001, an 11% year on year increase of 11% compared with the year-earlier period, with the export value having increased 33% to Kina609m (US$186m). The 10% depreciation of the kina against the US dollar accounted for much of the value increase in kina terms, the world price received being 8% higher. Revised volumes for 2000 were down by 23% on 1999 to 23.7m barrels, but the two-thirds increase in average world prices received and the 8% kina depreciation saw values increase by 40% to Kina1.9bn.

Mining

Further delays in finding The timescale for the US$850m Ramu nickel-cobalt project has been breached partner in Ramu project again. In January, Highlands Pacific Ltd announced that they expected discussions with potential equity partners to commence during the first quarter of 2001. Subsequently the expectation was that they would only know at the end of June who they would be negotiating with, with the outcome only reached by September. Equivocation by Orogen Minerals Limited, the government-controlled resource-holding company listed on the Port Moresby and Australian stock exchanges, about its option to take up the government’s 30% interest in the project was posited as an element of uncertainty for potential partners. In addition, the two-tier additional profits tax, introduced in the 2001 budget, has been labeled an impediment. At the 15% return threshold, the project would pay an additional profits tax of 20% on top of the normal rate of tax, and should the project return reach 20% the additional profits tax would be 25%. In addition, a 5% increase in the general taxation rate, as applied to mining developments based on a mining lease, is a serious disincentive for investment in small mines. Finally, having eight different ministers for mining in just four years has not fostered an image of political stability.

Ok Tedi begins Ok Tedi Mining Limited has begun consultations with villages in the South Fly continuation talks region as part of the mine continuation agreement process. The other five regions affected by the mine’s operations have already signed up. The integrated benefits packages negotiated under the mine continuation agreement process will include sustainable development initiatives to take communities up to closure in 2010. The consultation process, overseen by the Individual and Community Rights Advocacy Forum, was initiated by a former mining minister, Sir Michael Somare, on learning of BHP’s desire to close the mine or withdraw from it. (BHP owns a 52% stake in the controversial mine.) Appeals by PNG landowners to the Australian government to step in and pay for the clean-up operation if BHP failed to do so have been rejected.

Production of copper concentrate at the Ok Tedi mine in the first quarter of 2001 totaled 53,500 tonnes, a 35% increase year on year. The production of gold concentrate showed a corresponding increase of 8%.

Mineral exploration at a According to the PNG Chamber of Mines and Petroleum, mineral exploration 16-year low is at its lowest level in 16 years, falling from a high of US$83m in 1988 to around US$15m in 2000. Mineral exploration flourished in the 1970s and 1980s with plenty of international interest and grassroots exploration, but the 1990s saw a decline in exploration as companies started pulling out as improved environments for exploration and development became available elsewhere. However, gold production on Lihir exceeded 600,000 ounces in 2000 reflecting improved process-plant reliability and the success of the brick-lining system that is now incorporated into all three autoclaves. Lihir Gold Limited announced that ore reserves at the end of 2000 were 14% higher than in the previous year, despite adjusting the gold price downwards from US$350 to US$300 per ounce. Meanwhile, exploration by another company is proceeding

on Fergusson Island. Perth-based mining company Aurora Gold Ltd is continuing to advance its project in Morobe province.

Bougainville Copper agrees Bougainville Copper Limited, whose shareholding comprises Rio Tinto Limited to sell remaining assets (53.6%), the PNG government (19.1%) and the public, and which holds an operating contract with the government under an act of the national parliament, has finally resolved to sell to a third party its remaining assets that have survived the 12-year-old Bougainville crisis. A class action filed in September last year in the US against Rio Tinto Limited and Rio Tinto plc, by some landowners for alleged environmental destruction and the company’s role in assisting the PNG government’s military campaign on the island, is still pending.

Gold exports fall but Gold exports for the first quarter of 2001 were 7% down on the previous year, copper exports strengthen to 18.1 tonnes. Export value for the quarter was down 11% on the previous year to Kina523m as weaker world prices, down 14% from the first quarter last year, were partially offset by the kina depreciation. The government forecasts gold production to fall slightly in 2001 before increasing to reach a volume of production some 20% higher in 2004 than in 1999.

Copper exports were strong in the first quarter with volume 38% higher than for the first quarter of 2000 and value 30% higher. The kina depreciation partially offset the 15% lower world price received. Looking ahead, the government sees stable copper production at around 160,000 tonnes.

Mineral exports, by volume

1999 2000 2001a 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Crude oil (‘000 barrels) 7,735 7,749 5,889 5,930 5,239 4,338 6,520 Copper (‘000 tonnes) 37.0 40.4 30.5 32.6 24.0 39.7 42.1 Gold (tonnes) 18.5 17.0 19.4 17.2 16.9 19.2 18.1 a Provisional. Source: Bank of Papua New Guinea.

Agriculture

Coffee growers look to Coffee growers have called on the government to provide subsidised prices for government for help pesticides and airfares, or excess baggage fees for growers in remote areas lacking roads. They also called on the government to reinvigorate extension services, fix roads and bridges and combat “rascal” activity (coffee stealing and armed highway robbery). Because of these problems, plantation production is diminishing, leaving smallholders to take a more prominent role. A proposal by the Highlands governors for a coffee bank more flexible in its lending than commercial banks has been backed by growers in the Eastern Highlands.

Coffee exports suffered big declines in both volume and price for the first quarter, by 31% and 39% respectively, relative to 2000. Export value was down a massive 53% to Kina26m on volume of 7,000 tonnes. The government forecasts export volume in 2001 of 66,000 tonnes, the same as for 2000, with 5% annual growth thereafter.

Changes to Cocoa Board Wholesale changes to the Cocoa Board are expected following the sacking of management expected its chairman and chief executive. Three senior executives terminated or suspended by the previous management are expected to be reinstated. A Bougainville businessman, Thomas Lomataku, one of two nominations made by the growers’ association, is the new chairman. He holds a cocoa export licence and owns and operates a tourist resort. Cocoa exports, in terms of both volume and value, were about 17% down in the first quarter compared with a year earlier, the kina depreciation offsetting the reduction in world prices received. The government is expecting cocoa export volumes in 2001 to be two-thirds more than they were in 1999 and to remain steady thereafter.

Falling palm oil prices Palm oil in 2000 overtook coffee as the premier agricultural export crop. In cancel out volume growth 2000, 336,000 tonnes were exported, a third more than a year earlier. In the first quarter of 2001, a 26% volume increase over the same period last year was cancelled out by a 28% reduction in world prices received. The kina depreciation allowed export value for the quarter to remain unchanged from a year earlier, at Kina55m on a volume of 62,500 tonnes. The government is hoping for 5% annual growth in palm oil export revenues.

Copra industry continues Copra and copra oil fared the worst of the agricultural commodities in the first to suffer quarter. World prices received were 45% lower than in March 2000 and total volume was 70% down. Copra oil faired better than copra; export volumes for the two commodities were down 48% and 83%, respectively. The industry has been plagued by problems with the marketing board which on occasion has lacked the finances to purchase crops. The government budget forecasts stagnant copra exports but exports of copra oil growing at 10% annually by volume.

Hardwood logs make up more than 90% of exports of forest products. The kina depreciation more than offset a 7% reduction in world price received between the first quarters of 2000 and 2001, and log exports were down by 10% on volume and 7% on value. Revised figures for log exports in 2000 show that they fell 7% short of the government’s estimate of 1.5m cubic metres, the level that the government forecasts to be maintained in the coming years.

Agricultural exports, by volume (‘000 tonnes unless otherwise indicated) 1999 2000 2001a 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3Qtr 4 Qtr 1 Qtr Cocoa 11.2 6.0 4.5 14.2 9.9 9.0 4.4 11.8 Coffee 20.2 33.9 14.3 10.2 20.5 16.7 18.1 7.0 Tea 1.8 2.0 2.6 2.0 2.2 2.3 2.0 n/a Copra 14.6 16.6 19.9 29.6 16.9 10.5 9.5 5.0 Copra oil 14.0 11.3 6.9 15.1 9.8 14.9 8.2 7.9 Palm oil 64.1 74.4 46.4 49.8 95.6 100.4 85.5 62.7 Rubber 0.6 0.7 1.1 0.6 0.9 1.4 0.8 n/a Logs (‘000 cu metres) 470.1 230.3 288.2 312.2 322.4 352.2 337.5 281.0 a Provisional. Source: Bank of Papua New Guinea.

World commodity price forecasts (US$/tonne unless otherwise indicated; % change year on year) 1999 % change 2000 % change 2001 % change 2002 % change Cocoa (US cents/lb) 51.7 –32.0 40.3 –22.2 50.1 24.3 52.3 4.4 Coffee (US cents/lb; Arabica) 103.9 –23.2 87.1 –16.2 66.0 –24.2 57.0 –13.7 Tea (US$/kg) 1.8 –12.8 1.9 5.8 1.7 –8.5 1.6 –3.2 Copra 461.5 12.2 304.8 –34.0 192.3 –36.9 195.5 1.7 Coconut 737.1 12.3 450.3 –38.9 309.3 –31.3 321.3 3.9 Sugar (US cents/lb) 6.3 –29.8 8.2 30.8 9.2 12.0 8.9 –2.7 Crude palm oil 436.0 –35.0 310.3 –28.8 239.3 –22.9 235.3 –1.7 Palm kernel oil 694.0 1.1 443.5 –36.1 308.5 –30.4 383.5 24.3 Rubber 808.0 –9.6 832.5 3.0 756.3 –9.2 745.0 –1.5 Crude oil (US$/barrel; Brent) 17.86 39.9 28.48 59.5 26.91 –5.5 25.54 –5.1 Gold (US$/troy oz) 278.8 –6.2 279.3 0.2 263.0 –5.8 255.0 –3.0 Copper (US cents/lb) 71.1 –5.5 81.3 14.2 76.8 –5.5 81.0 5.5 Source: EIU, World commodity forecasts.

Infrastructure

Condition of major roads Construction of the second stage of the Gulf-Southern Highlands Highway is remains a concern set to resume after Chevron Niugini approved a Kina10m funding package under the tax credit scheme. Once completed the 187km highway will connect Kikori in the Gulf province with Sembirigi in the Southern Highlands, providing a link through to Madang and Lae via the Okuk Highway. However, the deterioration of other major highways, such as the Highlands Highway, is a pervasive problem adding to production costs and limiting production—a number of major resource projects rely on the highways for the transportation of supplies. Heavy rainfall, making road maintenance extremely difficult, and transport operators ignoring load limits have contributed to the deteriorating condition of roads. The recently announced transport plan, however, allows for some maintenance to be funded by foreign aid.

Financial and other services

“Grassroots banks” set up On Bougainville, funding from Aus-Aid, the Australian government’s overseas on Bougainville aid programme, has helped establish 70 “grassroots banks” where members deposit money and can then borrow to meet school fees or set up small businesses. The village-based banks will deal with a district bank which in turn deals with the parent bank, managed by the division of commerce, which pays interest on deposits. The scheme was initiated by the former Bougainville transitional government as part of the restoration programme on Bougainville.

Regional business council is The South Pacific Forum, according to its newsletter, has established the established Australia-Pacific Islands Business Council to bring together business people with interests in Australia and the region. The new body will work with existing bilateral business councils such as the Australia Papua New Guinea Business Council and the Australia Fiji Business Council. Bob Lyon, general

manager Pacific, International for the ANZ Banking Group, based in Melbourne, is the inaugural president.

Foreign trade and payments

Current account surplus Preliminary data on the current account show a surplus of Kina304m 14% lower year-on-year (US$92.7m) for the first quarter of 2001, 14% lower than for the same period last year. The merchandise trade surplus for the quarter, at Kina790m, was little changed from the year-earlier period, but the invisibles deficit of Kina476m showed an increase of 5%. Merchandise exports increased by 1% to Kina1.57bn and merchandise imports by 3% to Kina782m. Over the 12-month period the average daily exchange rate depreciated against the US dollar by 11% and appreciated by 6.6% against the Australian dollar, respectively the most influential currencies for PNG’s exports and imports.

Balance of payments (Kina m) 1 Qtr 1 Qtra 1997 1998 1999 2000 2000 2001 Merchandise exports 3,079 3,707 5,006 5,813 1,554 1,572 Merchandise imports –2,129 –2,231 –2,760 –2,779 –758 –782 Trade balance 950 1,476 2,246 3,034 796 790 Invisible credits 619 699 691 760 159 237 Invisible debits –1,823 –2,238 –2,620 –2,809 –611 –713 Net transfers 87 187 50 –12 9 –10 Current–account balance –167 124 367 973 353 304 Official capital flows –89 –92 119 –3 –45 –42 Private capital flows 134 –189 –305 –502 –167 –186 Non–official monetary sector transactions –61 31 –6 –54 30 –73 Change in offshore account balances –46 –114 22 –91 –224 –64 Capital–account balance 30 –364 –170 –650 –406 –365 Net errors & omissions 14 –23 –29 36 –38 31 Overall balance –123 –276 160 359 –91 –30 International reserve level 666.9 390.9 550.8 909.6 459.5 879.5 a Provisional. Source: Bank of Papua New Guinea.

Oil and minerals account Oil and minerals accounted for 86% of merchandise exports in the first quarter for 86% of exports of 2001 and agricultural produce for 9%, with forest and marine products contributing 4.5% and 0.5% respectively. Crude oil accounted for 45% of sector exports and gold for 39%, with copper contributing 15%. Palm oil contributed 38% of agricultural exports, while cocoa made up 20%, coffee 18%, and copra and copra oil 6%. Export volumes for the first quarter of 2001 showed declines for exports of gold, cocoa, coffee, copra and copra oil, and logs, compared with the year-earlier period, while oil, copper and palm oil

recorded increases. Average world prices received for all commodities except oil and marine products were lower than in the first quarter of 2000.

Exports (Kina m) 1 Qtr 1 Qtra 1997 1998 1999 2000 2000 2001 Agricultural 777.2 1,020.2 1,165.0 955.5 253.1 145.5 Forest products 433.6 173.2 265.9 308.8 76.1 70.7 of which: logs 409.3 154.2 255.6 283.5 69.9 59.7 Marine products 9.6 42.2 30.4 33.7 5.4 4.9 Minerals (includes silver) 1,838.9 2,452.1 3,524.0 4,494.6 1,214.6 1,346.0 Gold 718.7 1,227.8 1,546.1 1,950.8 588.5 523.2 Copper 259.8 395.7 574.3 595.4 158.5 207.0 Crude oil 852.2 813.1 1,382.4 1,921.7 457.9 608.7 Total 3,059.3 3,687.7 4,985.3 5792.6 1549.2 1567.1 a Provisional. Source: Bank of Papua New Guinea.

Kina slides despite central The kina’s weakness since mid-2000, following a strong performance in the bank intervention first half of that year, continued into the first quarter of 2001. In the first quarter the kina lost a further 8% of its value against the US dollar quarter on quarter, losing 5% against the Australian dollar and 11% against the euro, but remaining steady against the yen. Compared with the year-earlier period, in the first quarter of 2001 the kina strengthened by 6.6% against the Australian dollar, held steady against the yen and sterling but weakened against the US dollar by 11% and the euro by 4%. However, the kina strengthened in April and reached a seven-month high of Kina2.92:US$1 on April 27th, but then dropped to a low of Kina3.34:US$1 by the end of May, prompting central bank intervention in a bid to support the ailing currency. Despite this intervention the kina has continued to slide as high importer demand has exerted downwards pressure on the currency.

Exchange rates (kina per foreign currency unit; average) Jul 11th 1996 1997 1998 1999 2000 2001 A$ 1.036 1.068 1.297 1.643 1.598 1.665 US$ 1.324 1.435 2.059 2.550 2.760 3.295 0.012 0.012 0.016 0.022 0.026 0.026 2.064 2.345 3.409 4.122 4.151 4.661 Sources: Bank of Papua New Guinea, Quarterly Economic Bulletin; Bloomberg.

Exchange rate losses offset During the first quarter of this year the government drew down Kina44.7m loan repayments from foreign lenders and repaid them Kina86.7m. However, Kina76.3m of unrealised exchange rate losses pushed the level of outstanding overseas public debt higher at the end of March, to Kina3.8bn. Since the end of September 1999, when foreign public debt reached a peak, driven by the depreciating kina and

despite net loan repayments, debt has eased by Kina90m, or 2% of total foreign debt. The government paid Kina135.7m interest on foreign debt in 2000, and Kina32.6m in the first quarter of 2001 compared with Kina 27.6m for the year- earlier period.

Public debt outstanding (Kina m) Marcha 1996 1997 1998 1999 2000 2001 Domestic 1,969.5 2,251.7 2,473.0 2,021.3 1,783.3 2,057.5 Treasury bills 1,615.3 1,931.6 2,186.9 1,775.2 1,577.2 1,746.3 Inscribed stock 354.2 320.1 286.1 246.1 206.1 194.4 External 1,811.3 2166.3 2,704.6 3,812.8 3,728.9 3,763.3 International agencies 1,579.2 1,997.4 2,567.5 3,650.4 3,574.1 3,611.3 Commercial loans 219.6 157.1 124.1 144.6 137.5 135.6 Other loans 12.5 11.8 13.1 17.9 17.3 16.4 Total public debt 3,780.8 4,418.0 5,177.6 5,834.2 5,512.2 5,820.8

a Provisional Source: Bank of Papua New Guinea

China agrees to continue to The prime minister arrived back from China on June 7th “fully satisifed and provide assistance pleased” with the his two-week trip, which has enhanced relations between the two countries. Sir Mekere met with the Chinese president, Jiang Zemin, and the premier, Zhu Rongji, the latter saying that China would expand economic and trade co-operation with PNG and continue to provide assistance. The two countries signed a technical and economic co-operation agreement which will see China provide an additional Kina10m to that already approved for PNG. Financial support from China has been forthcoming since Sir Mekere came to power in July 1999. He reversed a controversial decision by his predecessor, Bill Skate, to recognise Taiwan in return for a multi-million-dollar aid package.

Australia’s budget includes The PNG-Australia high level consultation (HLC) on Australia’s development Kina558m PNG assistance co-operation programme took place in Port Moresby soon after the Australian federal government announced its 2001/02 budget in May, which included

Kina558m assistance to PNG. This is the first of five years of assistance covered by the development co-operation treaty which came into force on July 1st 2000. Australian aid now comprises predominantly programmed assistance. It includes the Kina109m national development charter, signed by the national governors conference in 1999, principally aimed at health, education, roads and bridges, and integrated planning systems in the most needy areas of the country. Implementing this home-grown approach—a component of the 2001 development budget––has been hampered by a shortfall in the budget appropriation for the programme. The HLC complements the annual PNG- Australian ministerial forum.