The Real Exchange Rate (RER)

The Real Exchange Rate (RER)

2018 PNG Economic Survey Rohan Fox (ANU), Stephen Howes (ANU), Nelson Atip Nema (UPNG), Dek Sum and Bao Nguyen (UPNG and ANU) 1 Introduction The fifth in our series of annual economic surveys. A joint ANU-UPNG project providing independent, expert economic analysis. Based on interviews as well as our own research. 2 Introduction Growth Fiscal/macro Private sector Conclusion

Key messages Focus on the non-resource economy: where nearly all PNGians work. The non-resource economy has not been doing well, with sluggish and even negative growth. This is resulting in a loss of jobs and poor service delivery. The main drag on growth is the shortage of foreign exchange. To stimulate growth, which needs to be the governments top priority, it needs to depreciate the exchange rate, which is the only way to address foreign exchange shortages. 3 Introduction Growth Fiscal/macro Private sector Conclusion

Structure Introduction Section 2 Economic growth Section 3 Fiscal trends and macro policy Section 4 Private sector policies and perspectives Conclusion 4 Economic growth 5 Introduction Growth Fiscal/macro Private sector Conclusion

New NSO data suggests nonresource recession in 2015 Table 1 Estimates of GDP, resource GDP and non-resource GDP real growth for 2015 GDP growth Resource GDP growth Value Source Non-resource GDP growth Value Source

Value 2017 estimate 10.5% Treasury 48.3% Treasury 0.7%

2018 estimate 5.3% NSO 48.3% Treasury -5.9% Source Treasury NSO & Treasury combined

Source: NSO (2018) and Treasury (2017) 6 Introduction Growth Fiscal/macro Private sector Conclusion Formal sector employment has fallen every year since 2013 Formal sector employment (March 2002=1) 7

Introduction Growth Fiscal/macro Private sector Conclusion Economy-wide taxes stabilized in 2017 Economy-wide taxes, 2014-2017 (adjusted for inflation) 8 Introduction Growth Fiscal/macro Private sector Conclusion There was some growth in imports in 2017 after a massive contraction Exports and imports of goods and services 9

Introduction Growth Fiscal/macro Private sector Conclusion But private sector credit growth was negative in 2017 10 Introduction Growth Fiscal/macro Private sector Conclusion Growth summary and outlook In 2015, the non-resource economy contracted by 5.9%. Likely that 2016 another year of negative non-resource growth. Non-resource growth performance in 2017 and this year still unclear. Mild boost this year from APEC, but businesses are not very positive

short-term. Government itself is projecting growth only at 2.5-3.5% in the next few years, barely above population growth. Longer-term, business confidence rests on new resource projects, but there is considerable uncertainty as to timing. 11 Fiscal & macro 12 Introduction Growth Fiscal/macro Private sector Conclusion Credit downgrades Credit agencies rate the sovereign credit of countries based on their

risk perception S&P downgraded PNG in April from B+ to B Moodys did the same downgrade to PNG (B1 to B2) two years earlier, and this year downgraded its outlook from stable to negative. These downgrades reflect PNGs ongoing fiscal and macro difficulties. 13 Introduction Growth Fiscal/macro Private sector Conclusion Government revenue Government revenue, adjusted for inflation 14

Introduction Growth Fiscal/macro Private sector Conclusion Resource revenue is very low At lowest level since 1992. New projects are not paying taxes due to accelerated depreciation and/or tax holidays (PNG LNG, Ramu Nico) Old projects not paying much tax either. Why? Lower profitability in the case of Ok Tedi. Unclear in the case of Lihir There is a case for re-examining the resource revenue regime prior to the approval of new projects. 15

Introduction Growth Fiscal/macro Private sector Conclusion In addition to low revenue, need to reduce large deficits also constraining expenditure Government revenue minus expenditure 16 Introduction Growth Fiscal/macro Private sector Conclusion Debt is at record levels 17

Introduction Growth Fiscal/macro Private sector Conclusion Increasing debt is driving up interest payments 18 Introduction Growth Fiscal/macro Private sector Conclusion All of these factors make for a bleak expenditure outlook. 19 Introduction Growth Fiscal/macro Private sector Conclusion

Inflation is heading down. Inflation in selected Pacific Island countries (%) 20 Introduction Growth Fiscal/macro Private sector Conclusion The exchange rate has been stable for the last two years. 21 Introduction Growth Fiscal/macro Private sector Conclusion

But the real exchange rate is at a record high. real exchange rate index and terms of trade 22 Foreign exchange reserves are depleted, but now stable due to foreign exchange rationing. Introduction Growth Fiscal/macro Private sector Conclusion 23 The large current account surplus is matched by a large capital account

deficit. Introduction Growth Fiscal/macro Private sector Conclusion 24 Introduction Growth Fiscal/macro Private sector Conclusion The capital account deficit reflects profit repatriation. 25 Introduction Growth Fiscal/macro Private sector Conclusion Fiscal/macro summary

The fixed nominal exchange rate is preventing the adjustment of the economy to the end of the boom, and forcing reliance on foreign exchange rationing. Weak revenue. smaller deficits, and higher interest means declining funds for service delivery. Progress on deficit reduction, but mounting arrears. Credit downgrades reflect perception of increased risk. All of these problems require faster economic growth, which only the private sector can provide the next section. 26 Private sector policies and perspectives

27 The two-decade-long Tariff Reduction Program has been abandoned. Introduction Growth Fiscal/macro Private sector Conclusion Intermediate Protective Prohibitive pre19991999 00 30

30 49 40 55-100 55 2001- 20032 5 25 20 35 30 50 45

2006 15 25 40 2011 15 25 40 2012 12.5 20 35

2015 10 15 30 2018 10 10 25 28 Introduction Growth Fiscal/macro Private sector Conclusion 2018 tariff developments

Some 600 pre-legislated tariff reductions were abandoned. In addition, another 250 tariff lines increased. On average, tariff increases moderate (about 7% on average), but some exceptions: From 0% to 25% for milk 29 Introduction Growth Fiscal/macro Private sector Conclusion Selective tariff increases Clothes Household and consumer items

Food Old New Stockings, socks 15% 20% Cotton or woollen clothes 15%

20% Toilet paper 15% 20% Tablecloths 10% 20%

Baths, sinks, washbasins 10% 25% 10%-15% 20%-25% Glue 10% 20%

Soap 15% 20% Shampoo 10% 20% Nail polish

10% 20% Ice cream 15% 20% Milk 0% 25%

Cocoa products 10% 15% 10%-15% 12.5%-20% Detergents Meat

30 Introduction Growth Fiscal/macro Private sector Conclusion Commentary on 2018 tariff increases Past protectionist efforts have not succeded (Ramu Sugar; Halla Cement). Inconsistent with APEC. New system more complex (6 rates rather than 3). Result may be more lobbying. Import-competing industries do need assistance, but they would equally benefit from an exchange rate depreciation. Tariff increases do not help exporters

31 Introduction Growth Fiscal/macro Private sector Conclusion Tuna canning Last year, PNG announced that all tuna caught in PNG waters would need to be processed in PNG. Processors dont want to do this, despite offer of rebate, because PNG much more expensive (e.g. minimum wage 50% higher than in Philippines.) Recently, one of the six tuna processors closed down resulting in the loss of 800 jobs. Tariff increases will not help tuna processing, but exchange rate depreciation will. 32

Introduction Growth Fiscal/macro Private sector Conclusion Private sector surveys in PNG INA has undertaken four five-yearly surveys of PNG businesses since 2002 Since 2012, Business Advantage has undertaken 7 annual surveys of PNG businesses. What does business think? 33 Introduction Growth Fiscal/macro Private sector Conclusion PNG business surprised by recent

economic performance Index of business performance against expectations (calculated from BA surveys) 34 Introduction Growth Fiscal/macro Private sector Conclusion Foreign exchange has been businesss top worry for the last three years Top four impediments facing business according to the BA surveys 35 Introduction Growth Fiscal/macro Private sector Conclusion

The INA survey gives the same message over a longer period Top three constraints 2007 6 5 4 3 2 1 0

Law and order 6 6 5 5 4 4 3

3 2 2 1 1 0 Law and order Corruption

Telecoms 2017 2012 0 Corruption Transport Foreign exchange access Corruption

Exchange rates 36 Conclusion 37 Introduction Growth Fiscal/macro Private sector Conclusion Top priority has to be a boost to non-resource GDP per capita Kina (2013 prices)

8000 7000 6000 5000 4000 3000 2000 1000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 non-resource GDP per capita resource GDP per capita

38 Introduction Growth Fiscal/macro Private sector Conclusion Top priority has to be a boost to non-resource GDP per capita Kina (2013 prices) 8000 7000 6000 5000 4000 3000 2000

1000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 non-resource GDP per capita 39 Introduction Growth Fiscal/macro Private sector Conclusion Need to get employment growth happening again. 40

Introduction Growth Fiscal/macro Private sector Conclusion Conclusion: diagnosis Focus on the non-resource economy: where nearly all PNGians work. The non-resource economy has not been doing well, with negative growth in 2015 and probably 2016 and at best sluggish growth since. This is resulting in a loss of jobs (negative job growth every year since 2013) and poor service delivery. The main drag on growth is the shortage of foreign exchange: thats what our analysis says and what business says. 41 Introduction Growth Fiscal/macro Private sector Conclusion

Conclusion: remedy To stimulate growth, the government needs to depreciate the exchange rate, since this is the only way to address foreign exchange shortages. Not a new or popular idea, but if there was an alternative, it would have worked by now. Not a panacea and will have costs, but at this stage there is no alternative, and it will bring many benefits, especially to rural areas, where most PNGians live. 42 Postscript The main impediment to private sector development is macroeconomic policies. The main obstacle to business activity and

investment are difficulties in obtaining foreign exchange. [We] recommend that the Kina be allowed to depreciate to eliminate the current over-valuation of the currency, end the FX shortage, and promote external competitiveness. IMF 2017, PNG Article IV 43 Tenkyu tru! Paper available soon from devpolicy.anu.edu.au or devpolicy.org Email: [email protected] 44

Recently Viewed Presentations

  • Task Force for Technology Readiness Structure and Evolution ...

    Task Force for Technology Readiness Structure and Evolution ...

    Piezio strain field in GaN due to substrate mismatch - not confirmed GaN thermionic noise The noise of a wide band gap emitter without high internal fields (eg. a TE photocathode) such as GaN will be dominated by the electron...
  • Fire Protection Systems in the International Existing Building

    Fire Protection Systems in the International Existing Building

    NFPA 13 and NFPA 13R. Requires a paper trail to justify the sprinklers. Use as a handout: D:\Programs\EBC. 803.6. Level 2 Alteration with fire sprinklers throughout could reduce the fire rating of a two-hour fire barrier to a one-hour fire...
  • Conducting Research - WordPress.com

    Conducting Research - WordPress.com

    Topic# 7 Introduction to Scientific Research Methods *
  • Lärarutbildningsnämnden

    Lärarutbildningsnämnden

    Nämnden beslutade i december att ämneskombinationerna vid GU under HT2011 och VT 2012 ska vara fasta - det har visat sig att flera lärosäten som till hösten ger Ämneslärarprogrammet kommer att ha fasta kombinationer, några har valt att ge ett...
  • cp - Public Service Association

    cp - Public Service Association

    Poor Law distinction: " So . that instead of saying, 'There is the working class and the marginal,' we would say, 'Within the overall lower class, there is a divide between those who work and those groups who are not...
  • Personal Qualities.

    Personal Qualities.

    Gradual Build Up. In your own word, describe the term Gradual Build Up. Now name an activity from your course, and describe how you would learn a skill from that activity using gradual build up. When would you use this...
  • How Science works : Graphs

    How Science works : Graphs

    5 steps in drawing a line graph. In summary: Choose good scales,with the dependent variable on the y-axis. Plot the points carefully. Draw a line of best fitusing a ruler for a straight line graph, or draw free-hand for a...
  • Michigan Medicaid on BCBSM web-DENIS

    Michigan Medicaid on BCBSM web-DENIS

    Michigan Medicaid on BCBSM web-DENIS Eligibility Requests and Responses Agenda Web-DENIS Information Review of the Process Medicaid on web-DENIS Functionality How to access web-DENIS Web-DENIS Examples Web-DENIS Information: Collaborative effort between BCBSM and MDCH.