How Effective is the 2016 National Budget?

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By Hope Imaka – EMTV Online

We all have felt the impact of the drop in commodity prices experienced in 2015, will this year be any better?

As we are now into 2016, it is important for us to review points from the 2016 National Budget and see what experience, as a nation, Papua New Guinea should anticipate in the coming year.

Economic Outlook

According to the released 2016 National Budget Economic and Development Policies, the global economy is projected to improve, growing by 3.6 per cent from 3.1 per cent in 2015; consistent with this outlook, commodity prices are also expected to increase slightly.

The PNG economy itself is projected to grow at a rate of 4.3 per cent in 2016 driven by a rebound in the mining and non-mining sectors. ADB statistics indicate the bulk of this growth will be from the agriculture sector, with support from fisheries and forestry.

Inflation for 2016 is estimated to see around a 5.7 per cent increase, to which the national budget is formulated around.

Fiscal Strategy

The 2016 Budget is framed against two dominant influences: a relatively weak world economic environment, and a lower than anticipated domestic growth rate.

In response to the 12 per cent drop in revenue (even after raising an additional K1 billion in revenue from State Owned Enterprises), drastic cuts in government expenditure have been undertaken, with the government aiming for a balanced budget in 2020.

In essence, the strategy that has been drafted by the government is ideal, they have done well to avoid past mistakes by keeping revenue projections pessimistic and making it clear the years of rapid expenditure increases have come to an end. Furthermore, it responds to the global situation well and now requires proper execution.

Budget cuts? From where within the budget?

Trade-offs through large cuts had to be made in the National Budget. The question is, where in the budget have these cuts been made?

Unfortunately, the fall of 8 per cent that has taken place again in this year’s budget, has been done to core government services. Areas such as administration, education, and transport have suffered the most having cuts of 20 per cent and over.

Whilst these cuts have been made, the big-ticket items like the APEC Summit in 2018 remain the same. The 2017 National Election itself requires K192 million, and with major cuts done to core government services like education, what is to be done about delayed payments from last year to avoid future incidents from occurring like that of Wednesday’s suicide attempt?

Risks

ADB’s Resident Mission Country Economist, Yurendra Basnett, reaffirmed there are risks to the 2016 budget. These risks include:
• The continuation of low commodity prices
• Soft global demands
• Contraction in US Monitory Policies
• Weak budget execution

More efficient public spending could yield savings. It is estimated that up to K700 million could be saved, and since “off-budget spending” is not new for Papua New Guinea; weeding a few non-performing activities would be a favourable choice.

Each year, the government places a sizeable part of the budget in commercial bank trust accounts. Not only are these subject to service fees, banks also use the cash to purchase Treasury Bills when the government faces cash flow problems. This reportedly costs the Treasury over K1 billion, which could be avoided through better planning and budget implementation. In principle, there is nothing wrong with a sovereign bond. It has the potential to reduce PNG’s debt servicing burden in the medium term while shoring up the country’s depleted foreign reserves.

The bond will only be of value, however, if the government secures favourable terms. There also doesn’t seem to be a Plan B to deal with PNG’s foreign reserves challenges if the bond doesn’t pay off. It’s a risky move at a time of economic fragility for the country.

There are tough times ahead for PNG and today’s government has a huge task to follow through with the budget, this will be their true test of conviction.

EMTV Online

EMTV Online is the premier destination for Papua New Guinea news on the internet.

EMTV Online

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