Rumors have been floating lately that Government has proposing some changes to the Central Banking Act which would give the executive Government powers to print money as and when needed. Inflationary pressures are inevitable when the Government prints money that is now commensurate to economic activities. The Executive Director of the Institute of National Affairs discuss his views on this
Any amendment to the Central Banking Act that would weaken the Independence of the Bank of Papua New Guinea in performing its role would be a concern, although suitable Amendments that might reinforce systems, governance and accountability of public institutions, including regulators, including the Central Bank, and are not unduly burdensome in their administration, may have merit and be considered.
Some consideration, for example was mooted this year over extending control over aspects of monetary policy to a Monetary Policy Committee, Chaired by the Governor, as occurs widely in other countries, and seems to have a sound initiative.
The Amendment passed in association with the Supplementary Budget in September 2020, raising the allowable temporary advance to 12% of a three yearly average of Revenue and Grants, and extending the definition of temporary to 12 months, would normally appear to weaken fiscal and debt management and potentially erode public and business confidence, however, during this pandemic year, when fiscal controls and public borrowing and debt ceilings have been relaxed around the world, it is unsurprising that that such a measure is also is being applied to PNG.
PNG already had a weak economy and with substantial budget deficits since 2012, and bring the deficit under control and debt to be more sustainable is a priority. However, with the pandemic imposed economic slow down and the need to sustain core expenditure some additional temporary borrowing from different sources is needed, and, as elsewhere, this seems a reasonable arrangement, so long as it’s not used to fund unproductive or political expenditure (eg in the lead up to the 2022 election) and is conducted together with a range of firm measures to restrain debt and bring it back on to a sustainable path.
The same can be said for the debt to GDP rising above 50%, with a new ceiling being set of 60% covering the expected deficits and increased borrowing in 2020 and 2021. After several years of budget deficit from 2012, 2019 finally saw a significant recovery in growth and improved revenue.
However, expenditure was inadequately restrained in 2019, leaving a continued high deficit. 2020 was expected to see the continued improved trajectory for economic growth, but the pandemic, and other factors, including the untimely closure of the Porgera mine, badly disrupted forecasts. 2021 is expected to see a return to growth, but largely only making up lost ground in 2020, while the deficit will continue and debt level have taken a substantial, largely externally induced further leap.
This is a global phenomena, and partly inevitable in the circumstances, but highlights the need to bring the deficit and debt under control into the future, in accordance with firm strategies, including ensuring that expenditure is more productive and targeted, wasteful expenditure is identified and cut out, and greater effort made to removing impediments to sound and diversified investment and economic growth and associated revenue raising.