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 interfer- ence 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. 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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 EIU Country Report July 2001 © The Economist Intelligence Unit Limited 2001 Papua New Guinea 3 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);