Papua New Guinea is seeking a World Bank loan of hundreds of millions of dollars to tackle a foreign exchange crisis linked to a slump in oil prices, a severe drought and a ballooning budget deficit.
The move to borrow K720 million (US$232 million ) follows the country’s failure to raise K2400bn (US$775 million) on bond markets late last year and a slowdown in the South Pacific nation’s economy, which until recently was the best-performing in the region thanks to the construction and start-up of a K40bn (US$14 billion) gas plant operated by ExxonMobil.
PNG, one of the world’s most culturally diverse but least explored countries, said last week that government revenues in 2015 had come in 21 percent below expectations, mainly because of lower commodity prices. The country’s difficulties mirror those of other petrodollar economies, which have been hit by weak oil prices and widening budget gaps.
“The International Finance Corporation identified that the private sector in Papua New Guinea was facing severe challenges due to the US dollar liquidity in the market,” said Gavin Murray, PNG acting country manager at the IFC, a World Bank division that focuses on supporting the private sector in developing markets.
“We expect the negotiations to continue for a month,” he said.
PNG’s three commercial banks are in talks with the IFC and the Bank of Papua New Guinea to provide them with access to US dollars to help clients conduct international trade.
The shortage of dollars is the top concern of PNG business leaders, according to a survey this week by Business Advantage PNG, a local news provider. Up to K1.2bn (US$383 million) in foreign exchange transactions was estimated to be awaiting clearance at the central bank, it said.
But analysts warn that securing an IFC loan will not solve PNG’s financial difficulties or even its foreign exchange problems.
“The IFC loan is a band aid,” said Paul Flanagan, a former senior Australian and PNG treasury official.
He says part of the problems related to dollar liquidity stem from a June 2014 decision by the central bank to intervene in the market to tackle what it claimed was “profiteering” by foreign exchange dealers. It set a trading range for the kina that led it to appreciate by about 17 percent — a move he claims was not supported by economic fundamentals.
“Only a more rapid depreciation of the currency or a rise in business confidence among local businesses and foreign investors is likely to lead to increases in supply of foreign currency,” said Flanagan.
Business confidence has been rocked by a sharp fall in oil prices, which has dented state revenues that had been expected to flow after ExxonMobil’s liquefied natural gas plant came on stream in 2014. Political instability linked to a corruption investigation into Peter O’Neill, PNG’s prime minister, is denting sentiment, adding to other economic concerns.
Aid agencies say the worst drought since 1997 has hit farmers and led to malnutrition in remote areas, although the government has denied reports of widespread deaths. A lack of water temporarily closed the Ok Tedi gold and copper mine, hitting government revenues.
“The situation is very difficult, particularly in remote areas where a lack of rain has led to food shortages and malnutrition,” says Barbara Jackson, humanitarian director of Care International, who recently returned from PNG.
PNG also faces mounting debt-servicing costs, which are expected to rise to 10 percent of government spending this year, and a K3bn (US$959 million) bill over the next three years on preparations to host the Asia-Pacific Economic Co-operation summit in 2018 in Port Moresby.
“Fiscal management is a challenge,” says Yurendra Basnett, ADB economist. “It would be gross underestimation to say that the coalescing of the structural shift in the LNG project, commodities downturn and impact of weather — on agriculture and closure of mines — was not going to produce severe challenges.”