Pursuant to the Agreement Establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), the policy statement by Papua New Guinea is attached.
Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on china.
I. MACROECONOMIC PERFORMANCE 5
II. PAPUA NEW GUINEA'S VISION FOR DEVELOPMENT 7
III. TRADE POLICIES AND PRACTICES 9
IV. TRADE POLICIES BY SECTOR 11
(1) Agriculture 11
(2) Forestry 12
(3) Fisheries 13
(4) Mining 14
(5) Petroleum (oil and gas) 15
(6) Manufacturing 17
(7) Services 18
(8) Transport 20
(9) Intellectual property rights 20
V. CONCLUSION 22
ANNEX 1: Trade related technical assistance 23
After a long period of stagnation experienced during the 1990's, Papua New Guinea showed positive economic growth over the last decade with a GDP growth average of around 5-6% and reaching 7.2% in 2008. This strong growth was attributed mainly to the commodity price boom enhanced by structural reforms and supported by the Government's prudent macroeconomic and fiscal policies.
As a small commodity exporting economy, Papua New Guinea's economic performance is influenced by international prices movements for tradable goods. Between 2005 to 2007, Papua New Guinea experienced a commodity price boom for its mineral and oil exports; as well as for its main agricultural exports. However, in the second half of 2008, prices began to fall sharply for most of the major export commodities, with the exception of copper and crude oil and this was mainly due to the global economic downturn in September of 2008.
A major contributing factor that helped Papua New Guinea moderate the negative impacts of the global economic recession and maintain sustained periods of uninterrupted economic growth has been the current Government's prudent economic and fiscal management. In 2006, the Government introduced the Fiscal Responsibility Act (2006), which aims for greater accountability and tighter discipline on Government expenditure.
The Government also adopted the Medium Term Fiscal Strategy (MTFS) from 2008-2012, another key platform that has supported Papua New Guinea's economic growth by guiding the Government through challenges faced in the commodity boom years and through the global economic recession.
The Government has managed to contain inflation during the commodity price boom by controlling excessive government spending from trust accounts. The MTFS also strengthened the Governments fiscal position by reducing government debt to sustainable levels by using 'windfall' revenues that flowed in from the commodity boom to pay off government debt. Currently, government debt is around 23% of GDP.
In the periods of the commodity boom, Papua New Guinea maintained a strong balance of payments position due to trade surpluses in the current account. However, while there was an overall surplus in the balance of payments reported in September of 2009, this was mainly due to a significant surplus in the capital accounts, which more than offset a deficit in the current account. The surplus in the capital accounts was attributed to higher net inflows of Foreign Direct Investment (FDI). The current level of reserves amounts to US$2.2 billion, which is sufficient to cover 4.4 months of imports and 10 months of non-mineral imports. This is a positive improvement in the economy since the last Trade Policy Review (TPR), when reserve levels were only able to cover 1 month of imports.
Inflation declined from high levels of around 20%, which were reported in the 1999 TPR to lower levels during the commodity boom years. However, peaked to 13.5% in late 2007 and fell to about 5.7% in the December quarter of 2008. In 2009, inflation rose by 6.7% in the year to June quarter of 2009 and is projected to be around 7.4% in year average terms.
The major factors that have seen inflation moderate from 2008 levels include: the reversal of the international drivers of inflation such as oil and food prices in 2008; the lagged effect of the appreciation of the Kina in the latter half of 2008 (although this has been unwound in the second half of 2009); and the tightening of monetary policy by the Bank of Papua New Guinea (BPNG) in the second half of 2008. However, inflation remains at high levels due to strong domestic demands and very high levels of government spending from trust funds.
Since the last TPR, the Government has also embarked on substantial structural reforms in the communication, transport and financial sectors. The communications sector has seen another new competitor, Digicel enter the mobile phones sector. The aviation sector has also seen a new competitor, Pacific Blue enter the market and is now servicing some international routes, which were originally serviced by the national flag carrier. Substantial reforms have also been carried out in the financial sector, which has seen the Bank of Papua New Guinea become independent from the Government and seen removals on limitations on capital transactions.
These structural reforms have enhanced domestic economic activity and are considered generally conducive for the business environment. Consumers have also benefited from these reforms by having wider coverage and access to these services with wider variety of products to choose from at lower prices.
In September of 2008, the world experienced the worst global economic downturn since the 1930s. As a small, open economy Papua New Guinea was not immune to the impacts of the global economic recession. The main transmission of the impacts of the recession was through the prices for our major commodities, which began to fall sharply in the first half of 2009 and in turn affected government revenues. The Government reacted quickly to the economic downturn by introducing a large stimulus package to encourage domestic economic activity through a supplementary budget in 2008 (over 7% of GDP), which was largely financed from 'windfall' revenues that were built up in trust accounts during the commodity price boom.
The financial and banking system were relatively unaffected and continued to operate normally during the financial crisis due to sound regulation, good capitalization and minimum exposure to risky overseas assets since most national banks are funded from local rather than international capitals. Business confidence in the country was fortunately not shaken, as businesses continued to anticipate greater domestic economic activity generated by the Liquefied Natural Gas (LNG) Project.
The general economic outlook remains somewhat bright with the LNG Project in its construction phase and higher prices expected for agriculture and mineral commodities. Employment is also expected to increase as a result of the LNG construction. A new mining project (Ramu Nickel Mine) and increased production of existing mining projects are expected to boost mining output, despite a decline in oil production. The government is also expected to moderate its draw down from trust funds. However, inflation is expected to remain high due to rising domestic demand, high global commodity prices and a high inflow of investments2.
There are also other challenges that need to be addressed to support further economic growth, including the need to get back to tighter disciplines on government spending and the need for closer coordination of fiscal and monetary policy to control inflation. It is also recognized that Papua New Guinea must expect to live in a higher inflationary environment and all policies must be adjusted accordingly.