Papua New Guinea
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
07 Apr 1998
eISBN:
9781451831610
Language:
English
Keywords:
ISCR; CR; private sector; treasury bill; price support; balance of payments; debt service; export receipt; rate of return; consumer price index; domestic borrowing
Download PDF (4.8 MB)

This paper reviews economic developments in Papua New Guinea during 1995–97. The nonmineral sector was characterized by uneven growth. Following a period of slow growth at the time of the Bougainville crisis (1989–90), nonmineral growth began to pick up, averaging 5½ percent during 1991–94. However, nonmineral output declined some 1 percent in 1995 following the onset of the financial crisis in 1994, recovered strongly in 1996 with the restoration of macroeconomic stability, and is estimated to have stagnated in 1997 owing primarily to the impact of adverse weather conditions on agricultural output.

Abstract

This paper reviews economic developments in Papua New Guinea during 1995–97. The nonmineral sector was characterized by uneven growth. Following a period of slow growth at the time of the Bougainville crisis (1989–90), nonmineral growth began to pick up, averaging 5½ percent during 1991–94. However, nonmineral output declined some 1 percent in 1995 following the onset of the financial crisis in 1994, recovered strongly in 1996 with the restoration of macroeconomic stability, and is estimated to have stagnated in 1997 owing primarily to the impact of adverse weather conditions on agricultural output.

Papua New Guinea: Basic Data, 1993-97

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Sources: Data provided by the Papua New Guinea authorities; and Fund staff estimates and projections.

Includes credit to provincial governments and nonfinancial public enterprises, but excludes loans to the commodity stabilization funds.

Percent change from 12 months earlier, based on the IMF Information Notice System index, excluding Brazil.

I aggregate output and price developments1

A. Trends in GDP and its Sectoral Composition

Overview

1. Papua New Guinea’s (PNG) economy is dual in nature, including a “modern” formal economy, in which a foreign-controlled mineral sector plays a strategic role, and a large informal economy, where subsistence farming accounts for the bulk of economic activity.2 The formal sector provides a rather narrow employment base, consisting of workers engaged in mineral sector production, a relatively small manufacturing sector, public sector employees, and service industries including finance, construction, transportation, and utilities. The bulk of the population is engaged in agricultural activities, although migration to major city centers in the past decade has contributed to urban unemployment and attendant social problems.

2. Overall trends in output (Chart 1, Tables 1 and 2) are strongly influenced by the cycles of activity in individual mineral projects, with the mineral sector as a whole generally accounting for some 20 to 30 percent of aggregate output. Rising production from the Porgera gold mine and the emergence of PNG as an oil producer with the development of the Kutubu oil field led to mineral sector growth that averaged nearly 60 percent over 1992–93. More recently, the drop off in production as a result of the maturing of those two projects, exacerbated in 1997 by the temporary drought-related closures of Porgera and the Ok Tedi mine, led to a decline in mineral sector output estimated at an average of nearly 12 percent per annum over 1994–97. Rising output from the recently completed Lihir gold mine (opened in 1997) and the commencement of production from the Gobe oil field in 1998 are expected to reverse this decline in the years ahead.

CHART 1.
CHART 1.

PAPUA NEW GUINEA: Real GDP Growth by Sector, 1989–97

Citation: IMF Staff Country Reports 1998, 018; 10.5089/9781451831610.002.A001

Source: Data provided by the Papua New Guinea authorities.
Table 1.

Papua New Guinea: Contribution to GDP by Sector at Current Market Prices, 1993-97

(In millions of kina)

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Sources: Bank of Papua New Guinea; and National Statistical Office.
Table 2.

Papua New Guinea: Contribution to GDP by Sector at Constant 1983 Prices, 1993-97

(In millions of kina)

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Sources: Bank of Papua New Guinea; National Statistical Office; and Fund staff estimates.

3. The nonmineral sector has been characterized by uneven growth. Following a period of slow growth at the time of the Bougainville crisis (1989–90), non-mineral growth began to pick up, averaging 5½ percent during 1991–94. However, non-mineral output declined some 1 percent in 1995 following the onset of the financial crisis in 1994, recovered strongly in 1996 with the restoration of macroeconomic stability, and is estimated to have stagnated in 1997 due primarily to the impact of adverse weather conditions on agricultural output.

Mineral Sector

4. The principal mineral exports of Papua New Guinea are gold, copper and petroleum. Until the early 1970s, gold predominated, but with the commencement of production in 1972 at the Panguna mine on Bougainville, copper began to form a significant portion of PNG’s mineral output. The Ok Tedi mine in Western province began production in 1984, with large reserves of gold, copper and silver. The outbreak of hostilities in Bougainville led to the suspension of production in 1989 at the Panguna mine, but much of the decline in mineral sector output was reversed with the opening of the Porgera gold mine in 1990. The most significant development in Papua New Guinea’s mineral sector in recent years has been the development of the Kutubu oil field, which started production in 1992.

5. Annual gold production at the Porgera mine peaked at some 46 metric tons in 1992, and has been declining since. Production at the Misima gold mine is similarly winding down after production of some 10 to 12 metric tons per year throughout the first half of the decade, but gold production at Ok Tedi remained steady at some 15 metric tons per annum through 1996 as new discoveries continued to be made. In total, by 1996, gold production had declined to about 70 percent of the peak level of 1992. Total production in 1997 was expected to increase on 1996 levels with the commencement of production at the new Lihir mine in mid-year, but this effect was offset by drought-related cessations of production at Porgera and Ok Tedi.

6. Since the suspension of production at the Panguna mine on Bougainville, copper has been produced solely at Ok Tedi. Copper production increased modestly from 193,000 metric tons in 1992 to 213,000 metric tons by 1995, but fell by some 40 percent in 1996 due to a decline in the quality of copper ore and weather-related difficulties. Production was expected to recover to around 200,000 metric tons in 1997, but the onset of the drought has kept Ok Tedi closed for much of the year as water levels in the Fly river, which is used to transport the copper concentrate, declined to below navigable levels. As a result, copper production is now estimated to have fallen a further 32 percent in 1997 to only 87,000 metric tons.

7. Petroleum production commenced in PNG with the coming on stream in 1992 of the Kutubu oil field. Output peaked quickly with production of 46 million barrels in 1993, falling to 37 million barrels by 1995. Improvements in extraction technology yielded temporary production increases in 1996, but declining reserve levels were reflected in an estimated 30 percent decline in production in 1997. Production at the new Gobe project, which is about one-quarter the size of the Kutubu field, was to have started in 1997, but has now been postponed to mid-1998 due to the slow resolution of issues with landowner groups. Production at Gobe is expected to be sufficient to ensure modest increases in total petroleum production in the next two to three years.

Agriculture Sector

8. Agriculture in PNG consists of both smallholder and plantation-based export crops, and subsistence agriculture. The traditional cash crops are coffee and palm oil, which together account for some 70 percent of agricultural exports (excepting logs), with significant production also of cocoa, copra, and copra oil. From the beginning of the 1990s, a substantial forestry industry has also developed that has come to account for about half of non-mineral export earnings. While data on export crops and forestry is generally reliable, little direct information is available on the volume of subsistence production.

9. Output levels for cash crops are a function of a number of factors, including price levels, weather conditions, and specific agronomic factors.3 Commodity prices have generally been fairly buoyant in the last few years. Average US dollar prices for 1995–1997 exceeded average prices in the preceding three year period (1992–94) by nearly 70 percent for palm oil, 45 percent for coffee, nearly 40 percent for copra, and roughly 25 percent for cocoa and copra oil (Table 21). As a result, agricultural production in 1996/97 has increased vis-a-vis the levels of 1992–95, even adjusting for temporary declines in production in 1994 due to the eruption of the Rabaul volcano.

Table 3.

Papua New Guinea: Employment Classified by Sector, 1993-97

(June 1989 = 100)

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Source: Quarterly Economic Bulletin, Bank of Papua New Guinea, Table 10.6.

Not included in overall index; excludes subcontractors.

Table 4.

Papua New Guinea: Consumer Price Index by Commodity Group, 1993-97

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Source: Quarterly Economic Bulletin, Bank of Papua New Guinea, Table 10.3

Weights are based on the 1977 expenditure survey.

Table 5.

Papua New Guinea: Central Government Revenue and Grants, 1989-97

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Source: Data provided by the Papua New Guinea authorities.
Table 6.

Papua New Guinea: Summary of Central Government Operations, 1989-97 1/

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Source: Data provided by the PNG authorities; and Fund staff projections.

Major changes in the expenditure classification system introduced in the 19% budget create significant difficulties for tracking changes in the composition of government outlays. The table reflects a number of adjustments that were made in an effort to present as consistent a picture over time as possible. Trends should still be interpreted with caution, however.

Original program target as established in EBS/95/108.

Excludes Austalian project assistance

Before 1996, proxied by item “construction and maintenance” in old budget presentation.

Trend GDP was estimated as nonmineral GDP marked up with the quadratic trend in the ratio between total GDP and nonmineral GDP.

Table 7a.

Papua New Guinea: Central Government Expenditure, 1989-95

(Old budget presentation)

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Source: Data provided by the Papua New Guinea authorities.
Table 7b.

Papua New Guinea: Central Government Expenditure, 1995-1997

(New budget presentation)

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Source: Data provided by the PNG authorities and staff projections.

The 1997 budget differs slightly from the 1997 program (see table 6).

For 1995 and 1996, provincial development expenditure has been reclassified as recurrent expenditure.

Table 8.

Papua New Guinea: Central Government Expenditure by Function, 1993-97 1/

(In millions of kina)

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Source: Data provided by the Papua New Guinea authorities.

Includes amortization payments.

Table 9.

Papua New Guinea: Mineral Resources Stabilization Fund, 1993-97

(In millions of kina)

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Source: Data provided by the Papua New Guinea authorities.
Table 10.

Papua New Guinea: Government Domestic Debt Outstanding, 1989-1997

(In million of kina, unless otherwise indicated)

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Source: Bank of Papua New Guinea, Quarterly Economic Bulletin, Table 8.4

Including public authorities.

Including special loans, promissory notes and temporary advances.