THERE has been considerable speculation about the need for a 2016 Supplementary Budget due to global events that have impacted PNG since the 2016 Budget was brought down last November.

The first six months of this year has been tough for many economies and Papua New Guinea has been no different. Certain gains in the global economy have been overshadowed largely by Great Britain’s decision to exit from the European Union and the lingering subdued economic recovery in advanced and emerging economies.

Movements in commodity prices continue to guide development in the global economy in 2016. The impact for us of course, is that prices of our key export commodities, especially oil, has traded below the 2016 Budget assumption and we are not alone in having underestimated the extent and length of the lower oil price.

png-res-q3-2016_28In its latest flagship publication, Global Economic Prospects, the World Bank forecast world economic growth this year would total 2.4 per cent, or as the report put it, quote roughly at the same insipid pace we experienced last year unquote.

Therefore we must remain cautious as the pace of recovery in the global economy remains slow and steady.

State of the Economy

With this as the global economic landscape, let me briefly discuss the key outcomes of the 2016 Mid-Year Economic and Fiscal Outlook (MYEFO) Report:

  • Whilst the medium term outlook for the Papua New Guinea economy is positive our GDP growth in 2016 has been revised down to 2.2 per cent from the 2016 Budget projection of 4.3 per cent;
  • Non-mining GDP growth is also expected to remain positive but moderate slightly to 2.6 per cent against initial projected growth of 3.2 per cent;
  • The Exchange rate is projected to weaken against US Dollar by 9.1 per cent and Australian Dollar by 12.6 per cent; and
  • Inflation is projected to increase from 5.7 per cent to 6.6 per cent.

The revised growth projection of 2.2 per cent for 2016 is largely due to time lag effect of the impact on our economy from external factors, such as the El Nino Weather Phenomena which brought drought and frost conditions simultaneously to our large agriculture base as well as continued low commodity prices and foreign exchange shortages in 2016.

Notable sectors that have experienced a slowdown in growth are, mining & quarrying, the manufacturing sector, and the wholesale & retail trade sectors. Growth projections in these particular sectors have been revised down and it is hoped that the uptake in the second half of the year will slightly improve to complement modest economic growth in the agriculture, fishery and forestry sector.

Some of these factors that influenced the downturn in economic activity in the first half of 2016 will ease in the second half.

Foreign currency will be available with the return of operations by the OK Tedi Mine in March of this year and the drawdown of the Credit Suisse first tranche of US$200 million syndicated loan facility in early August which will go a long way in clearing the foreign currency back log.

Inflation in 2016 is expected to be 6.6 per cent, higher than the 2016 Budget estimate of 5.7 per cent. The increase accounts for the higher than expected 2015 inflation outcome of 6.0 per cent, the gradual depreciation of Kina against our major trading currencies and the anticipation of a gradual recovery in commodity prices, especially the crude oil.

Let me now touch on the fiscal operations for the first half of 2016 as outlined in the 2016 Mid-Year Economic and Fiscal Outlook Report by the Department of Treasury.

The 2016 mid-year fiscal results showed a deficit of K624.8 million (or 0.9 per cent of GDP) bringing the total outstanding public debt level to K19.7 billion or (28.9 per cent of GDP). Total Revenue and Grants was K4.2 billion for the first six months which will result in a revised projected annual income of K10.7 billion compared to the 2016 budgeted income of K12.6 billion.

This is equal to an income reduction of K1, 886.0 million against budgeted revenue, which could potentially increase our planned deficit from K2.1 billion to K3.9 billion for 2016. Put very simply we entered into this year with a K2.1 billion deficit and with the K1.88 billion shortfall in income, we have a deficit of K3.9 billion to fund our current 2016 National Budget.

As a responsible government, we have decided to make the required adjustments to ensure that our planned deficit remains at the budgeted level of K2.1 billion or 3.8 per cent of GDP. And Mr. Speaker, this supplementary budget seeks to implement these adjustments.

In light of the prevailing income outlook, the O’Neill-Dion Government is committed to restoring the 2016 Budget, through this supplementary budget to a prudent, responsible and sustainable fiscal path for the remainder of 2016, and beyond.

This Government has always been in control of the country’s fiscal affairs. This was demonstrated last year when we introduced the 2015 Supplementary Budget which resulted in a fiscal deficit of 3.9 per cent of GDP for the 2015 Budget even though there had been widespread expectations that the deficit would end up as a double digit figure. We have maintained that level of strategic fiscal control in the first six months of this year.

Many commodity-dependent exporting economies have been hit hard by depressed prices, are experiencing slowing growth, widening fiscal and external deficits, and some combination of exchange rate depreciation and declines in foreign reserves. We are no exception – but how we had responded to this external shock was widely commended by leading global financial institutions and rating agencies.

png-res-q3-2016_29The Total Expenditure and Net Lending up to June 2016 amounted to K4.8 billion, which is 32.2 per cent of the anticipated total budget for 2016. This low level of expenditure to date is largely due to Government’s prudent management of warrant release in response to significant shortfalls in revenue in the first half of 2016.

The cautious release of warrants and prioritization of expenditures remain crucial under declining revenues in order to minimize pressure on the Government cash flow and ensuring the 2016 Budget remains on a sustainable path. The priority expenditures were focused on the essential services in Health, Tuition Fee Free Education, Law & Order, key national infrastructure and preparation for the 2017 General Elections.

The 2016 National Supplementary Budget

The 2016 Supplementary Budget comprises adjustments that include both expenditure-saving measures of K928.0 million and additional revenue-raising measures of K958.0 million.

The 2016 Supplementary Budget is focused on a policy of fiscal consolidation, identifying productive and essential expenditure in order to safeguard expenditure impacting low-skilled jobs and development enablers such as health, education, key infrastructure and law and order.

In this context the adjustments were implemented strategically to ensure that economic growth is maintained, the implementation of the key national infrastructure projects are maintained, jobs are protected and the delivery and quality of basic goods and services are not compromised.To guide this process, following key performance criteria were applied for refocusing capital expenditure (PIP) and other development projects. These were:

  • Projects with a relatively high rate of disbursement; and
  • Projects with donor counterpart financing as they tend to have a high rate of disbursement and are focused on the development enablers;

In addition, the supplementary budget also aims to limit expenditure on non-productive capital expenditure as much as possible while safeguarding expenditure on maintenance.

Furthermore, key policy platform priorities such as tuition fee free education, free primary health care, the 2017 election and APEC preparation and statutory funding remain unaffected.

The 2016 Supplementary Budget identified expenditure-saving measures for the following operational items across all the sectors in areas such as:

  • Travel;
  • Hotel accommodation;
  • Training;
  • Conferences;
  • Car hire; and
  • Hiring of new foreign and local consultants across all central, provincial, district and local level governments.

With the adjustment of K928.0 million, the revised 2016 Total expenditure and Net Lending now amounts to K13, 834.6 million.

To support these expenditure adjustments, the supplementary budget will also undertake revenue-raising measures that include:

  • Dividends from the State Owned Enterprises and Statutory Authorities; and
  • An Asset Realisation Plan focused on its sale of indirect equity to the PNG LNG Project Area Landowners.

With the K958.0 million from the additional revenue-raising measures, the 2016 revised Total Revenue and Grants now amounts to K11, 722.1 million.

This returns the 2016 Budget to its original fiscal anchors of a deficit of K2, 112.5 million, or 3.8 per cent of GDP and the Debt to GDP ratio of 28.9 per cent of GDP.


In conclusion, these fiscal adjustments that the O’Neill/ Dion Government is undertaking is necessary to show the international markets and the private sector that this Government is taking the responsible, prudent and sustainable approach to address what are global shocks.

We believe that this series of actions will give confidence to our domestic and international investment communities to continue to invest and be meaningful partners in providing more opportunities and prosperity for our people.

By tabling the 2016 Supplementary Budget in August, our key stakeholders, the private sector and development partners, will be able to plan their adjustments in line with the Government’s intentions and corrective policy measures.

As I speak my Department and the Department of National Planning and Monitoring are conducting second quarter budget reviews. Whilst there are further lessons to be learned, there are encouraging signs that some agencies and departments, for the first time in a long time, are making concerted efforts to manage their priorities and achieve as much as possible given their Budgets.

The message is clear, we have to live within our means and weather the storm.

This supplementary budget sets the basis for the fiscal framework for the 2017 Budget.

The medium term fiscal path is to return the budget to surplus in 2020. The Government has and continues to conduct its fiscal policy within this medium term framework.

A number of corrective measures that we have introduced in the 2016 Budget are being implemented and will be continued in 2017.

These include:

  • Corrective measures to expenditure side such as amalgamation of departments and agencies, freezes on recruitment, and addressing personnel emoluments costs; and
  • Corrective measures to revenue side, including continuing our efforts on compliance to tax administration and compliance, and reviewing a range of excise charges and fees.