The two most significant events in the Papua New Guinean economy recently have been the closure of the Panguna copper mine on Bougainville in 1989 and the devaluation and subsequent float of the kina in 1994.
Unfortunately for the nearly four million people of the country both came within a space of just over four years. The pains being felt now are the direct results of both events. The mine closure took with it 40% of the country’s annual export revenue and 20% of direct revenue flows to the national budget.
The hole left in the economy remained, despite government attempts to fill it in. By the end of 1993 it became apparent that public expenditure needed to be reduced drastically. The deficit had increased significantly and inflation rose.
The unprecedented but inevitable happened in late 1994. The kina was devalued by 12% and subsequently floated to find its own value in the open market. Up until then the Bank of PNG set the rate for the kina on a daily basis.
Since independence in 1975, PNG’s small and open economy has been the envy of the rest of the South Pacific. In the developing world, the country fared well, being given the “middle income country” status. Within a decade per capita income had reached K500 per year. But being dependent on primary exports – agricultural, forestry, fisheries, minerals and petroleum – it was subject to price fluctuations in the world markets.
The post-Panguna years saw sharp swings in economic performance. Domestic production fell by nearly 5% between 1989 and 1991. Then it swung back, aided by the mineral and petroleum sector, to record a huge 16.6% growth in 1993. Speculation in the currency market and concerns over the huge deficits resulted in money leaving PNG’s shores.
A new government took over in mid-1994 and made a firm commitment to pay its international debts, thus more money left. The result was depleted foreign exchange reserves. In September 1994 the kina was devalued and a month later it was floated. The objectives were to end the on-going speculation over the currency strength and also to boost exports, which would in return help rebuild the foreign reserves.
Economic indicators pointed to an improvement by the end of 1994, but a major restructure of the economy and policies was needed to lift PNG. Public confidence internationally had been lost. The 1995 budget contained major reforms, both those recommended by the World Bank and those by the government. They were aimed at improving delivery of services to the majority of the people and achieving economies of scale. Controversial as they may be, the reforms and their endorsement by the World Bank are necessary for PNG’s standing in the international community.
Moves have also been made towards liberalisation of trade. PNG’s membership of international bodies such as World Trade Organisation (WTO) and Asia Pacific Economic Corporation (APEC) require it to free up trade restrictions and protective tariffs and duties. There is optimism that, as soon as the current balance of payment crisis is passed, Papua New Guinea’s economy will rejuvenate and rapidly grow.
Start of construction for the Lihir gold mine, the Gobe oil field and a host of other major resource projects, will be the catalysts to the PNG economy’s rebounding.