The issue of debt, particularly the fear of it inducing Papua New Guinea bankrupt to the extend of surrendering sovereign rights to creditors has been a source of public anxiety as debt continue to rise under different Governments.
Paul Barker of the Institute of National Affairs provides a historical context to the debt scenario and warns borrowing can be hazardous and pose a trap if associated cost is not reduced over time.
PNG Economics Bulletin sought insights from Barker on issue of debt and the practicality of bringing the debt phenomenon under control appears in quoted excerpt below.
“The debt objectives are achievable, especially if strong commodity price prevail for a while, but the issue is not so much whether they can be achieved, but more will they be achieved, which is dependent substantially upon commitment, to:
- Grow the economy consistently (which largely entails being an attractive destination for investment and restraining unnecessary impediments to investment),
- Focus expenditure on priorities and not be tempted by costly, but low priority white elephants projects, or tempted to borrow just because one can,
- To build up revenue, by applying taxation fairly, extensively and consistently (i.e. without special or exclusive exemptions) and also collecting revenue from windfall profitability, e.g. for resource projects.
The 1990s were a period of economic and fiscal instability, and often unrestrained expenditure, and borrowings and debt went through the roof, while economic growth was largely static, or rather leapt and fell heavily each year. In the early 2000s debt had reached 70% of GDP. It fell over that decade thanks to a combination of factors, but the biggest was that the economy grew steadily, partly on the back of strong commodity prices, but also because of improved economic and fiscal stability and more attractive investment conditions, which encouraged investment and growth. It was also a period of fiscal prudence, with restraint on expenditure and borrowing, which, with stronger revenue, enabled some debt to be repaid and avoided new debt.
The 2000s saw a return to unrealistic forecasts of revenue, related to new resource projects, some of which had been granted long tax holidays or other concessional treatment, while others had long repayment schedules. The severe fall in commodity prices, including oil/gas, but also copper and other products, restrained resource sector revenue and extended the duration of repayment of PNGLNG’s project debt, deferring revenue contributions.
The 2000s also saw a major increase in public expenditure, substantially paid for through public borrowing, particularly from domestic sources, but also international commercial sources. Some of this was parked with State-owned enterprises, which unfortunately have sometimes proven to be rather unaccountable entities, collecting the resource rents and running parallel budgets, and weakening, rather than strengthening sound fiscal management.
Over the past three years there has been a valuable improvement in debt management, starting with improved transparency of the debt portfolio, with assistance of the IMF and other international partners. Some of the higher debt figure is a reflection of the data that is being provided, including with SOEs and contingent liabilities and other material hitherto not released under debt data. This is valuable, as having the data more accessible and transparent, enhances trust and confidence, including amongst international creditors, and lately PNG’s credit rating has improved, partly on the back of this transparency, as well as on the grounds of improved revenue flows, which are attributable largely to the improved commodity prices on some of PNG’s major export, including LNG and petroleum, copper and some agricultural crops.
The past two and a half years have been dominated, worldwide, by the Covid-19 pandemic and the associated measures taken internationally and domestically to contain the virus. The response to the virus resulted in a major decline in world trade and economic activity, and hit particular industries, such as travel and hospitality, especially hard. Revenue was severely impacted in PNG, and in most countries, while efforts to tackle the pandemic and sustain public sector functions and welfare support resulted in unprecedented public sector borrowing across the world, including PNG.
So, while the allowable ceiling for debt to GDP was set under the Fiscal Responsibility Act of 2006 at 30%, it was progressively raised during the 2010s in the face of the constant budget deficit since 2012; when revenue finally looked as if it was going to improve from 2019, especially from higher commodity prices and output, the pandemic and associated measures necessitated further public borrowing and Parliament authorised two further increases in the allowable debt ceiling to 60% of GDP.
The more concessional nature of the international borrowing through the pandemic years at least restrained the debt servicing costs, and even slightly reduced them in 2021, despite the total borrowing increasing. So, the total debt seems to have flattened out at around 51% of GDP, along with the cost of debt, and with a return to economic growth and improved revenue forecast for 2022, we should be seeing the debt to GDP declining slightly again this year, and over the next years, if the government succeeds in expenditure control and avoids major new financial commitments.
Debt to GDP is just one measure of debt manageability, but of course, the capacity to service debt and the level that it affordable is determined more by the capacity of government to collect revenue from the country’s economic activity. PNG has a relatively low revenue collection in relation to economic activity, including a low revenue rate from its extractive industries. It must avoid having high or uncompetitive tax rates, that discourage investment, but it needs to have an equitable application of taxes across businesses and households, so some don’t become tax free loaders, using public goods, but not contributing to their cost.
So, as in the 2000s, PNG’s debt level, at least in relation to the size of the overall economy should fall substantially, and therefore it’s capacity to manage that debt, but it does require commitment to sound fiscal and debt management, as reflected in strategy, which needs to be applied after the new government takes office, so that even major expenditure plans are manageable and consistent with that strategy, and don’t take the government off down a further track of unaffordable public borrowing for marginal or relatively unproductive activities.
It should be recognised that the State has extensive functions to perform, in provision of public infrastructure and core services, such as health, education, public safety, law and justice. Most other functions are more efficiently handled by the private sector, including business investment and job creation, providing goods for the domestic market and export and most services from financial and insurance to transport and hospitality. Government should largely avoid misdirecting limited funds into performing these functions, as experience has shown that it conducts them inefficiently and that they provide undue opportunities for patronage and other corruption and abuse.
In due course, once, instead of incessant deficits and debt, PNG has accumulated revenue in a Sovereign Wealth Fund, as operated by other resource rich countries, for the purpose of fiscal and economic stabilisation and as a future fund, then public investment in the market is justified, but at this stage the government has failed to be able to save and accumulate, and remains in a medium debt scenario. Shaking this off, requires fiscal focus and discipline, as opposed to temptation to borrowing and spending often for unproductive purposes and sometimes with relatively uncompetitive public procurement.
Borrowing is not bad per se, but as with personal or household debt, can be hazardous and pose a trap. Nevertheless, public, including project borrowing, especially at concessional rates over the long term, is sound, with the cost reduced over time, if the function of that borrowing really is productive and provides clear net economic and public welfare gains, and remains within prudent borrowing ceilings,”.