The 1995 government of Prime Minister Sir Julius Chan and his deputy Chris Haiveta is faced with the toughest challenge ever to win international public support and confidence and to revitalise the Papua New Guinean economy.
The current government took over in mid-1994 amid fears that the economy was near to collapse. Social and economic indicators pointed to a recession and something drastic needed to be done.
The events of the latter part of 1994, including the 12 % devaluation and subsequent floating of the kina, the introduction of a tough monetary policy which has seen big increases in rates of interest and the mini-budget of November 1994, are all part of that drastic move that was considered necessary to fix the economy.
Deputy Prime Minister and Minister for Finance and Planning Chris Haiveta, a young politician who is in his first term in Parliament, has had to contend with another major issue: a “structural adjustment” programme.
The programme is the initiative of both the PNG government and the World Bank. The World Bank recommended massive restructures and reforms which the government agreed to implement in exchange for a loan from the bank. The government also included its own reforms in the 1995 budget.
Endorsement of PNG’s reform programme by the World Bank and its implementation is required if PNG is to access funds for both public sector and private sector projects from international financial sources.
“If Papua New Guinea wants to remain in the deep and dark hole in which past government abuses have left us, then our friends in the international community will not be willing to help us,” said Mr Haiveta. “Our friends would be quite indifferent to our problems if we chose to show no commitment to correcting the abuse and pulling ourselves out of the hole we are in. We must help ourselves first before asking others to help us.”
More importantly, the outcome of the structural reforms will decide whether PNG will recover economically and rebuild stability in its finances and planning.
Mr Haiveta has been vigorous in his pursuit of the reforms. He said he does not want to see a repeat of the failed 1989 structural adjustment programme. The 1989 reforms, also recommended by the World Bank, were abandoned when the government then pushed all efforts and resources into the Bougainville uprising and the effects of the mine closure.
Over the next few years, Papua New Guineans can expect the cost of living to remain high. But in the long term, when the adjustments have been completed and are in place, a more positive outcome is forecast.
“Structural adjustment means changing the way the government operates to make it more efficient and more responsive to community needs. It means providing the country with the right environment to produce more jobs and improve our living standards. This means that government policies, programmes, regulations and laws governing resource allocation must be changed,” said Mr Haiveta. In the short term, Mr Haiveta suggested, the government must restore economic stability, with sustainable and balanced budgets, a comfortable level of international reserves, a stable exchange rate, low inflation and internationally competitive interest rates. Standard monetarist policy.
“We must re-orientate our taxation and tariff systems to meet our budget requirements while at the same time providing a good economic environment that will encourage growth in private sector business,” he said.
He said that industries must be restructured to be able to compete internationally.
“The changes we are beginning to implement will produce higher growth and higher employment opportunities for our people. The reforms,” he said, “seek to increasing the proportion of investment and development spending.”
The structural adjustments are in the main areas of expenditure controls: a year-long wage freeze, cuts to the public service, restructuring of government departments, improvements to draw down on donor funds, implementation of projects funded by those donor funds, trade liberalisation and land reforms.
“The benefits of the reforms,” Mr Haiveta said, “outweigh the costs. The structural adjustment the government is pursuing is aimed at revitalising the economy, which over the past few years has deteriorated badly. The current state of the economy has been the result of unplanned and irresponsible spending by governments over the years.”
Public expenditure levels in PNG have grown from a mere K330 million in 1975 to nearly K2 billion in 1995. However, these levels of growth, while not sustainable in relation to the revenues earned, are low in relation to population growth and in relation to the much undeveloped state of infrastructure handed over by the Australian administration at Independence.
A review of the past trends suggests considerable variation in past public service levels, compared to the desirable patterns of expenditure. The huge fluctuations in budgeting over the years have had adverse effects, especially on planning.
The closure of the Panguna copper mine in 1990, the prolonged low world prices of commodity exports and the uncontrolled growth in expenditure over the years have resulted in huge deficits being amassed, thus the current major structural adjustments.
The difficulty that PNG faced was in applying a disciplined approach and in resolving the conflicting ideas and initiatives of different governments. Expenditure growth over the period 1982 to 1988 was restrained, averaging 5.2% per annum. This shot up to 12% for the years 1989, 1991 and 1992. In the past governments planned on a five year time frame but because of the lack of continuity, planning objectives have been reduced to three years.
The planning functions have also been moved back and forth according to government priorities. Recent governments have realised the importance of expenditure planning and in the latest (July 1995) reshuffle, the government has again shifted Planning out of Finance and given it a ministerial portfolio.
The traditional approach of analysing expenditure has been to divide it by different departments and agencies into six or seven key sectors. The many changes in the nature and functions of departments and agencies naturally caused problems. Expenditure is analysed by departments and agencies presenting their requirements to the Finance and Planning Department, which then allocates the money. The Finance and Planning Department monitors the expenditure by the departments through regular checks on expenditure records. When Departments keep changing, analysis becomes difficult.
Only recently have governments started acting on the imbalances of budgeting, with new objectives being put in place. Among them were: expenditure to be planned on medium term resource availability, focus on important areas of public concern, letting go of assets that are not profitable, priority to be given to rural sector development, to education and training, to physical infrastructure, to health and to law and order. That was a lot of priorities. Nonetheless, expenditure was reduced for urban based administration, non-productive investments and subsidies.
Generally, the years after 1987 saw increased emphasis on the economic and social sectors. When the Bougainville crisis flared in the late 1980’s and the Panguna copper mine was shut, taking with it over 40% of export earnings for the country and 20% in direct tax incomes to the national coffers, a new problem arose. Suddenly, expenditure for Defence expanded in order to finance the security operations on the island. Cocoa and copra producers on the island also stopped producing. Also the Australian government decided to reduce gradually its direct budget support to PNG.
With the revenue inflows greatly reduced and expenses still high, the deficit began to grow large.
There are indications that revenue collections are now improving. The Internal Revenue Commission (IRC) said that, in the first six months of 1995, it collected a total of over K500 million in taxes. This exceeded its budget forecasts and its collection in the corresponding period in 1994. The IRC says it will surpass its 1995 budget forecast for collection of K1.2 billion.
The IRC, which comes under the Finance Ministry, has also gone through a major revamp recently, with improvements in collection capacities and more defined tax regimes.
Taxation policies and regimes have also been in continuous change since pre-Independence periods. The main emphasis now is to create a taxation regime that will encourage investment as well as ensuring that the country earned sufficient revenues from the taxes. Personal income tax and company taxes, which are traditional, continue to exist at the same levels while fringe benefit taxes have been introduced, removed and re-introduced.
Import and export taxes have also continued to have changes to their rates made from time to time. Generally, there has been a reduction in the rate of import duties for products needed for domestic production and exemptions from duty on capital imports.
Protective measures aimed at assisting local production, such as bans and tariffs have been created. To encourage foreign investments, incentives have been put in place, including tax discounts, 5 to 10 year tax holidays and special rates of tariffs and import duties.
Tax revenues from mining and petroleum projects and other companies in general have shown increases. The improved capacity of the IRC to collect, has been the main reason for the increases.
Despite the problems, there is widely held optimism that the PNG economy will lift itself and quickly start to grow again. But this once more depends on whether the government is able to control spending over the coming years.
The structural reforms the government is now undertaking will, it is hoped, be the catalyst to the future health of PNG’s economic growth and development as a whole.
The return of public confidence in the government at home and by the international community are paramount to achieving the desired goals and objectives.