Expenditure Cuts Expected: ANZ Insight
The government will have no choice but to cut expenditure via a supplementary budget later this year.
This came at the back of having an underperforming economy with a budget deficit yet to be funded.
According to the ANZ Pacific Insight, PNG’s economy has been bumping around the bottom of the cycle waiting for a recovery in construction, in particular resource investment, to come through.
Without such an upturn, 2020 was never going to be better. With no recovery in sight, it is no surprise that government revenue will undershoot targets this year, notwithstanding the impact of Covid-19.
The insight said it is estimated that the government will take a K2.5bn hit on revenue due to a K2.2bn shortfall in revenue due largely to a collapse in oil prices and the subsequent fall in resource tax and dividends.
This was according to Treasurer Ian Ling-Stuckey who projected a budget financing requirement of K4.6bn for the 2020 calendar year, however, the report estimated the deficit to be K6.8bn.
“In our view, the government will have a shortfall of K1bn in petroleum taxes and dividends.
Further, we believe another K1.5bn of projected overall tax revenue won’t be realised due to a lacklustre economy.
The shutdown of the Porgera gold mine, while Barrick Niugini pursues a legal challenge to the government’s decision not to extend its Special Mining Lease, will also impact revenue.”
“This means that, by our estimates, the budget deficit will blow out to K7.1bn this year.
So far, the government has raised a total of K2.4bn (K1.1bn through domestic bond issuance and K1.3bn from an IMF loan) leaving a deficit financing gap of K4.7bn.”
The Treasurer has also said he is confident of raising another K0.5bn from the domestic market, and that he will actively seek additional multilateral and bi-lateral development partner support to bridge the gap.
However, the Pacific insight argues that the lending pipeline of multilateral is under pressure from a large volume of requests from member countries for emergency financing.
ADB has already cut USD110 from a USD300m Partial Credit Guarantee Bond for the PNG government.
Further, the government’s cash flow problems are well documented combined with heightened uncertainty over PNG’s medium term economic prospects and, in turn, the sustainability of the government’s revenue stream may make lenders and investors a little cautious in financing PNG’s budget deficit.
“Given these constraints, the government’s ability to fully fund its deficit will be quite challenged.
The PNG government may be able to borrow another K2bn for budget support (K0.5bm through domestic bond issuances and K1.5bn in development partner loans including K0.6bn ADB assisted loan).”
“That would leave a gap of around K2.7bn in deficit financing.
Hence, expenditure cuts of a similar magnitude are, in our view, unavoidable.”