Economic implication of PNG’s public debt trends

Written by Dr Osborne Sanida, Acting Director, PNG National Research Institute Dr Osborne Sanida, Acting Director, PNG National Research Institute

A deficit financing budget strategy has been used by Papua New Guinea (PNG) governments over the years. In simple terms, the money that the Government earns (from taxes and donor grants) is not enough to finance its expenditure plan (thus, a deficit budget), which means that it has to borrow money to meet the difference (i.e. finance the deficit). The accumulation of budget deficits over the years has led to an increase in the public debt. This article presents the trend of public debt and its component between 1990 and 2019 and the key economic implications.

Trends in the total public debt outstanding, 1990-2019

According to the Bank of Papua New Guinea’s quarterly economic bulletin data, between 1990 and 2019, total public debt outstanding increased by 2,307 percent from K1.4 billion to K33.7 billion. During these period, three main phases can be seen with the governments that were in power.

Between 1990 and 2002, there was an increase in total public debt from K1.4 billon to K8.4 billion (a 500 percent increase). During this period, there were six governments in power: Pangu-led Government (1988-1992); PDM-led Government (1992-1994); PPP-led Government (1994-1997); PNC-led Government (1997-1999); PDM-led Government (1999-2002); and NA-led Government (2002). The decisions of these six governments has contributed to the public debt during this period.

Between 2002 to 2010, under the Somare-led National Alliance Government, there was a fall in the total public debt outstanding by 21 percent from K8.4 billion to K6.6 billion. The total public debt then increased by 411 percent between 2010 to 2019 from K6.6 billion to K33.7 billion. During the period, five governments were in power: National Alliance-led Government (2010-2011); three PNC-led Governments (2011-2012, 2012-2017, and 2017-2019); and a Pangu-led Government (2019-current).

Trends in the domestic and external components of public debt, 1990-2019

Governments can borrow either from domestic sources or external (overseas) sources. For the period under investigation, PNG Governments have borrowed from both sources but with changing trends for each source. From 1990 to 1998, the domestic and external sources of Government borrowing was almost on par with the average domestic and external debt for the period at K1.4 billion and K1.6 billion, respectively.

After 1998 and up to 2007, external sources of borrowing were dominant with the average annual external debt at K4.2 billion, compared to only K2.7 billion for domestic sources. After 2007, domestic source of borrowing has been more dominant at an average of K10.1 billion annually compared with K4.6 billion for external sources.

Economic implications

  • Borrowed money or debt has two sides to it in terms of its impact. If it is used wisely and in moderation, it can lead to improving one’s welfare. However, if it is not used wisely and in excess, it can lead to disastrous consequences in terms of bankruptcy or financial ruin. Hence, the Governments must be mindful of this.

  • The increase in outstanding public debt indicates that over the years, the country has not been increasing its revenues sufficiently to match the increase in the Government expenditure plan.

  • It appears that the more changes in Government, the more debt was accumulated. This can be explained by the fact that when there is political instability, there is likely to be policy instability, including fiscal policy.

  • The dominance of domestic borrowing sources after 2007 mitigates against the exchange rate risk when repaying external debt.

  • In the short term, debt can help the government finance its expenditure to deliver essential services to its citizens. However, if not managed well, the debt can get out of control and hinder the government’s future ability to deliver services.

Conclusion

The growing public debt implies that revenues have not been increasing enough to meet the growing expenditure plan of government. This implies that effective strategies must be put in place to increase government revenue in order to not only meet the increasing expenditure demands but also pay off or reduce the growing debt.

 

This article was first published in the Post-Courier’s 12 May 2021 edition and on its website’s commentaries and features page.