ANZ Bank’s quarterly report on the Asia Pacific Economy says Papua New Guinea appears to be facing a &lsquo’Fiscal Conundrum’rsquo;, with non-mineral growth running well below trend; that revenue is at risk of undershooting, and domestic funding is becoming increasingly expensive.
This is based on ANZ’s recent Mid-Year Economic and’Fiscal Outlook released by the government, which stated that the 2014 budget remains strongly expansionary, with government expenditure overtaking revenue receipts and domestic financing becoming exorbitantly expensive.
This is a view strongly supported in ANZ’s latest review.
The review argues that while the level of deficit spending is appropriate, deficit spending ‘is likely to become more constrained as revenue appears likely to miss targets and domestic financing is becoming prohibitively expensive.’
If new sources of deficit financing or revenue extraction do not emerge soon, ultimately deficit spending will have to stabilize at much lower levels than is now the case.
As a result, much needed infrastructure spending will be delayed to later in the decade and the allocative efficiency of the economy will be slow to improve.
The’Fiscal balance is now expected to be -6.9% of GDP, up from an initial target of 5.9%. If K600 million of state asset sales do not eventuate, the’Fiscal deficit would rise to 8.3% of GDP.
The authors of the report say the time to consider a global bond issue is drawing closer.
As well as being a cheaper source of funding, a bond issue will provide exporters greater incentives to return to the foreign exchange market.
Meanwhile, according to economist and one of the authors of the report, Daniel Wilson, the country is going through a current account deficit. This deficit, however, compared to the import/export deficit, is actually better for the country because it is an investment and savings deficit.
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