Jonathan Pryke writes in the Australian Financial Review on the financial crises reelected Prime Minister Peter O'Neill must address during the next parliamentary cycle.
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Papua New Guinea's Parliament has returned Peter O'Neill as Prime Minister for a second five-year term. Let's hope that he can do better than his first.
After a heated and tumultuous election where the electoral roll left thousands ineligible to vote, O'Neill returns to power with a reduced but still comfortable majority, 60 to 46. Mr O'Neill faces immediate challenges that he left to fester in his first term, chief among them the state of the economy.
O'Neill started his first term in office when PNG was booming. The construction phase of its largest natural resource project, a $US19 billion liquefied natural gas project, had just begun, and was expected to transform the nation's economy.
Anticipating more money than they would know how to spend, the government made bold commitments to free education, free healthcare, a massive decentralisation program, and hosting the APEC leaders' summit in late 2018. It even went so far as to make a dubious deal to acquire a stake in Oil Search, PNG's largest company.
PNG's fortunes abruptly turned with the collapse of global commodity prices at the end of 2014, just as the LNG project came online. Government revenue has collapsed to 2004 levels after adjusting for inflation and population growth, and is expected to remain low for the foreseeable future. The government was very slow to react, and expenditure priorities have not been realigned. They have been unable to finance record deficits, and cash on hand for the government has come close to running out numerous times.
This fiscal crunch has been exacerbated by an overvalued exchange rate, a result of the central bank's effort to prevent a hard landing for the kina and an evaporation of their diminishing foreign reserves. This process is being managed through a regime of foreign exchange rationing, which is choking private sector investment. While the kina is slowly depreciating, experts argue that it is still 20 per cent higher than a market clearing rate.
A bold move that needs guts
How can the new government address these slow-boiling monetary and fiscal crises? A clear answer is to bring in more US denominated loans, plugging the fiscal gap and shoring up foreign reserves to allow for fiscal reform and continued devaluation of the kina. But where will this money come from? The government is already above its legislated debt limit set at 30 per cent of GDP, which is very low by international standards where the OECD average is close to 90 per cent of GDP. It has tried numerous times to secure a sovereign bond to no success.
A more responsible strategy would be to approach the IMF to intervene. The IMF could provide much more generous terms than those available anywhere else. But this would bring with it unpalatable conditions for the O'Neill government, such as increasing the transparency of their state-owned enterprises. Australia could play a critical role here in negotiating an arrangement that works for both sides, which would improve our relationship with our nearest neighbour. A starting requirement for IMF intervention should be the effective implementation of PNG's recently legislated Sovereign Wealth Fund.
Such a move would take guts from O'Neill. It would be an acknowledgment of their failure to manage the economy in their first term in office, and would be a blemish on PNG as they prepare to host the world's leaders next year.
It is more likely that they will try to continue on the course set in their first term, to wait it out, try to find more loans, and hope for a rebound in commodity prices or for promised new mining investments to come online quickly. This would be short-sighted, and would set PNG up for a start of the same resource-dependent cycle that has got them in trouble so many times in the past.
If there is ever a time in a parliamentary cycle to act boldly, it is now. O'Neill has the opportunity, the support and the insight to make a course correction. Hopefully he can bring his ministers with him.
This article was originally published in the Australian Financial Review, and republished on the Lowy Institute's website. It is reproduced here with permission.