Posted by Jason Harris
Papua New Guinea is a developing, resource-dependent economy located on the Pacific Rim, east of Indonesia and north of Australia. While not well known or much visited, it is a reasonably large country, with an incredibly varied population of around 6 million people and 800+ different languages. It has also been home to some interesting fiscal policy innovations over recent years. In particular, it is one of only a few countries to formally adopt a non-mineral budget balance target to deal with the recent commodity boom.
Since emerging from its recent economic nadir in the early 2000s, the PNG economy has enjoyed a robust turnaround. Real GDP growth has averaged 4.3 percent since 2002, compared to average growth of less than 1 per cent in the previous 7 years, and growth has been broad based, with non-mining growth outpacing overall GDP growth. While only a small proportion of the population is involved in the formal sector, and poverty is still widespread, employment growth has been strong, averaging 5.1 percent a year since 2002, compared to the previous decade where employment growth had stagnated at 0.6 percent a year. The budget position has improved significantly over this period, with large budget surpluses, a halving of government debt to less than 30 percent of GDP, and a large accumulation of public resources.
This turnaround has been due to three main factors: an unprecedented terms of trade boom; sound macroeconomic policy settings, which have successfully adjusted to changing circumstances; and some surprisingly effective micro-reforms, which have encouraged growth in the non-mining sector (particularly in the telecom sector). This post looks at how fiscal policy in PNG has adjusted to meet the challenges associated with the terms of trade boom. The strategies that were adopted have been successful in stabilizing public finances and avoiding the boom-bust cycle of past commodity booms in PNG. However, they have also resulted in a great deal of pressure being applied to an already overstretched public financial management system, creating new challenges and opportunities for leakages.