Marape’s economic challenges this term around

Author: Stephen Howes, ANU

Papua New Guinean Prime Minister James Marape achieved a landslide victory in Papua New Guinea’s (PNG) 2022 general election. Marape and his PANGU party posted the second most successful electoral performance in the country’s 11 general elections held since independence in 1975.

Marape has been Prime Minister since 2019. He is not new to the job, but what challenges will he face and where should his policy priorities lie this term? PNG’s economy has been in a slump since the country’s commodity boom ended in 2014. Non-resource GDP per capita — GDP minus the output of the resources sector — and employment have both been on a downward trajectory since. The COVID-19 pandemic has made things worse.

It is not all gloomy. There is a massive road investment program underway and a large new resource project may finally be approved, with several already at advanced stages of negotiation or preparation. High commodity prices will also help boost government revenue.

But there are also plenty of problems ahead.

PNG has run a series of large budget deficits that have left the country with limited fiscal space. Marape plans to reduce the deficit, but to do this he needs to restrain expenditure.

This will not be easy. Marape’s inaugural speech was full of promises around health, education and infrastructure that will be very expensive to implement. But the Prime Minister did, in that same speech, recommit to reducing the deficit and promised a balanced budget by 2027. If he can get at least part of the way there, his government will be doing well.

The other big issue is the exchange rate. In 2014, the central bank retook control of the exchange rate, ending 20 years of a floating kina and returning it to a pegged arrangement. The goal was to minimise depreciation but the move came at the cost of ending PNG’s long-established regime of currency convertibility and replacing it by foreign exchange rationing.

This practice has damaged economic growth, compressed imports (now at a record low relative to GDP) and trashed PNG’s reputation with foreign investors. Restoring the convertibility of the kina, even at the cost of some depreciation, is Marape’s second challenge. Unfortunately, the exchange rate and foreign exchange rationing did not rate a mention in his inaugural speech. Yet without action on this front, Marape’s goal of diversifying the economy will not succeed.

These two challenges are intertwined. The Bank of Papua New Guinea’s (BPNG) practice of foreign exchange rationing is essentially a commitment to prevent a balance of payments crisis. This is an invitation for the government to borrow as much as it can — confident that it will not deplete the country’s foreign exchange reserves as a result.

Even if Marape wants to implement serious economic reform, several things may get in his way.

Neither fiscal nor expenditure reform will be popular. Efforts to restrain expenditure will clash with the new government’s commitments. The projection of a balanced budget by 2027 rests on the assumption that expenditure is only increased in line with inflation out to that year.

Exchange rate depreciation will also be unpopular, especially at a time when imported inflation is already relatively high. Although businesses list foreign exchange shortages as one of their top complaints, they do not get a sympathetic hearing from government.

The Marape government amended the Central Banking Act in 2021 so that it had to take into account the implications of its actions for growth as well as inflation. This should change the way BPNG goes about managing the foreign exchange regime — with the latest statement from the Bank at least acknowledging the problem of the country’s ‘foreign exchange imbalance’.

Despite his impressive popularity, Marape is unlikely to have an unchallenged hold on power for long. After 18 months in office, votes of no confidence will be allowed and surely attempted.

Marape is the fourth incumbent prime minister to be returned in four consecutive elections since 2007. This incumbency bias is due to a quirky combination of PNG electoral policies and legislation. It might seem like a good thing for political stability, but the incumbency bias at elections intensifies anti-incumbency sentiment between elections. There is no guarantee that efforts to remove Marape will succeed, but there certainly will be attempts, and these will consume a lot of his time and attention.

Meanwhile, the issue of Bougainville’s independence rumbles on in the background. The 2019 referendum saw 98 per cent of Bougainvillians vote for independence. Marape is more sympathetic to their cause than the previous prime minister, Peter O’Neill, but still does not support full independence. The issue is meant to be resolved by 2027 — the year of the next general election. A compromise looks unlikely, and this may lead to tensions or even violence.

Marape and his PANGU party have done extremely well in the recent election. Converting their electoral popularity into economic reform will be an even bigger and more challenging task.

Stephen Howes is Director of the Development Policy Centre and Professor of Economics at the Crawford School of Public Policy, the Australian National University.

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