Bank of Papua New Guinea Presentation at the

Bank of Papua New Guinea Presentation at the 32 nd Australia-PNG Business Council Forum by Mr. Loi M. Bakani, CMG Governor ~ Monday 16 th May 2016 Cairns

Outline of Presentation 1. State of the PNG economy 2. Medium to long term prospects 3. Current short term issues

Gross Domestic Product (GDP) • 2015, 14 th successive year of economic growth • Recent GDP growth rates highest in the world • 2010 -2015, nominal GDP grew from K 38. 6 billion to K 64. 2 billion, growth of 69% or on average, 13. 8% per annum • Not inflation driven, real GDP over the same period grew from K 17. 3 billion to K 27. 1 billion, growth of 59% or on average 12% per annum

Per Capita Nominal GDP • 2010 -2015, Per capital nominal GDP grew from K 5, 456 to K 8, 378, growth of 54% or on average, 11% per annum • Over the same period, per capita real GDP increased from K 2, 443 to K 3, 547, increase by 45% or on average 9% per annum

Fiscal Operations (K’mn) • Responsible fiscal management – supplementary budgets were introduced in 2014 and 2015 given the declining revenues from international commodity prices and El Nino drought effects • Key priority areas of education, health, transport & infrastructure, law & order, and rural development in general were not affected

Increased Gov’t spending on key economic enablers (K’bn) • Budget deficit spending put to good use – growing the economic base • Largest allocation and spending was to the key priority sectors of economic & agriculture, education, health, transport & infrastructure, law & order, and rural development increased from K 6. 2 bn in 2011 to K 7. 6 bn in 2015 • Spending in these priority areas averaged 68% of the total budget over the five years 2011 -2015

Low Debt Service Indicator 2010 2011 2012 2013 2014 2015 1) Nominal GDP (K'mn) 38627 42567 44315 47459 56417 64162. 0 2) Domestic Debt (K'mn) 4145. 2 5121. 1 6118. 2 8845. 2 11827. 9 13908. 7 3) External Debt (K'mn) 2751. 5 2290. 1 2367. 4 3032. 5 3537. 2 4058. 1 4) Total Debt (K'mn) 6896. 7 7411. 2 8485. 6 11877. 7 15365. 1 17966. 8 5) Total Debt service (K'mn) 533. 3 584. 5 593. 1 652. 7 1141. 4 1261 6) Total Interest service (external + Domestic) K'mn 353. 1 416. 3 433. 4 484. 8 953. 1 1074. 7 7) External public debt service (K'mn) 228 232 201 210 301 270. 1 8) Total Govt Revenue (K'mn) 8278. 9 9304. 9 9566 9832. 7 11497. 6 10963. 5 Ratios 2010 2011 2012 2013 2014 2015 1) Total domestic debt as % GDP 10. 7 12. 0 13. 8 18. 6 21. 0 21. 7 2) Total external debt as % GDP 7. 1 5. 4 5. 3 6. 4 6. 3 3) Total debt as % GDP 17. 9 17. 4 19. 1 25. 0 27. 2 28. 0 4) Debt service as % of Government revenue 6. 4 6. 3 6. 2 6. 6 9. 9 11. 5 5) Interest service as % GDP 0. 9 1. 0 1. 7 6) Interest service as % of Government revenue 4. 3 4. 5 4. 9 8. 3 9. 8

Government Debt (K’mn) • Total Gov’t debt in 2015 totalled K 18 bn • K 13. 9 bn was from domestic sources and K 4. 0 bn from external sources, which is 5. 5% of 2015 GDP • External debt was all concessional from ADB, World Bank, JICA, Australian Gov’t, etc.

Debt to GDP • Prudent debt management by the Gov’t and Central Bank • No breach of statutory borrowing limit (debt-to-GDP ratio of 35%) under the Fiscal Responsibility Act • Highest ratio of 28% was reached in 2015 • Very low debt burden and negligible foreign debt burden

Diversified economic structure In 2010 • Dominant sectors are: mining, oil and gas; agriculture/forestry/fisheries; and construction • Others include commerce, transport, manufacturing, finance By 2015 • Full year of LNG production and export - mining, oil & gas sector’s share increased to 29% • Other traditional sectors – agriculture/forestry/fisheries, construction remain dominant

Exchange Rates

Inflation – annual % change

Foreign Exchange Reserves

Foreign Exchange Reserves • The Central Bank continued to support the foreign exchange market by supplying some foreign currency out of its reserves to meet some of the import demand by the private sector. • From 2012 to date in 2016, the Central Bank has intervened by supplying US$2. 3 billion in the foreign exchange market. • With low Government external debt, the private sector has been the beneficiary of the FX intervention. • Consequently, Reserves declined from US$4. 0 billion at the end of 2012 to US$1. 7 billion currently.

Foreign Exchange Reserves • The Bank has to balance the foreign currency need of the Government, private sector demand ensure that it continues to hold adequate level of foreign exchange reserves for the country. • The current level of reserve is sufficient for 10. 0 months of total and 15. 8 months of non -mineral import covers.

Foreign Exchange Reserves • The conventional argument for free movement in exchange rate to clear the market does not necessarily hold in PNG. Those who argue for a faster depreciation of the kina to clear the market have to prove what this exchange rate is? • For a highly import dependent country, it is hard to know what exchange rate will clear the market. • The Central Bank has to tread a fine line between movements of kina exchange rate, maintaining adequate reserves and ensure monetary policy objective of Price Stability is not threatened.

Part 2: Medium to Long Term Prospects • The PNG economy will continue to grow but a lower pace (2% to 3%). Inflation projected to be in the range of 6 to 7%. • Supported by pipeline of investments, including Penyang by Exxon. Mobil, Papua LNG by Total and Wafi-Golpu gold, which will have positive impact on the economy (like the PNG LNG project). • Government to realise full revenue stream of LNG exports.

Medium to Long Term Prospects (cont. . ) • After the debt service and accelerated depreciation provisions are catered for there will be more foreign exchange inflows from the LNG project. • The result will be a turn-around in the FX market, leading to increases in Government revenue and growth in economic activity. • We will be dealing with the situation opposite to the current one

Medium to Long Term Prospects (cont. . ) • The non-mineral sectors have the potential for inclusive growth and employment opportunities. • Expect positive benefits from Government’s focus agriculture and other non-mineral sectors. • The Government’s refocus on diversifying the economy through agriculture, tourism and SME, would reduce its reliance on the non-renewable sectors. • Production and consumption of import substitutes will reduce demand foreign currency.

Part 3: Short Term Issues – Forex & Budget Financing • At the present, there is a queue in the foreign currency market of non-served orders. • What are the prospects for improvement in the FX market? Positive news include: • The resumption of Ok Tedi mine with a monthly inflow of around US$40 -US$50 million, • Lihir's increasing production and exports, • Commencement of any pipeline projects such as Penang LNG by Exxon,

Short Term Issues – Forex & Budget Financing • The Government and the Central Bank are seeking foreign currency facilities from external sources for budgetary financing and to support the FX market. • Need for exporters to take advantage of the kina depreciation to increase production and exports that would bring in the much needed foreign exchange. Positive signs of export receipts. • Importers & consumers to resort to domestically produced goods, reduce FX demand support local industries.

To Summarise: • Medium to long term prospects and outlook for PNG economy are positive and strong. • We face issues and challenges in the short term. • The Government is in control and managing the situation with appropriate adjustments • We need support of private sector, donor partners, • Critics need to base their criticisms on facts, and not on hear say and social media. • Hope the clarifications provided are sufficient.

Thank you