The development of the PNG LNG project and the prospect of others will not only transform the country’s economy and improve living standards but as a major revenue source, it will give rise to macroeconomic pressures which are more likely to be prevalent due to the heavy reliance on commodity based revenue.
In the 2011 budget handed down last week, the Government considered and agreed to a joint Treasury-Bank of PNG working group’s work and the separate work undertaken by the department of Public Enterprises on alternative arrangements to help manage the significant revenues arising from this project to be used for PNG’s development needs while promoting macroeconomic stability.
As a consequence, the Government has decided to establish a Sovereign Wealth Fund consisting of a consolidated pool of offshore funds with three co-ordinated and integrated funds with all expenditures being through the budget process. Those co-ordinated funds include a stabilisation fund, a future (savings) fund and an infrastructure fund.
To oversee the establishment of the offshore Sovereign Wealth fund for PNG, the Government has established a secretaries committee on Sovereign Wealth fund that will take all necessary steps to establish this important undertaking.
In a discussion paper dated April 16, 2010, among many issues, the working committee noted that a robust fiscal framework was necessary to support the management of the windfall envisaged from the LNG project to underpin social and economic development.
From past experience, the Mineral Resource Stabilisation results were mixed and eventually closed in 1999 when the entire remaining balance was drawn down. Trust accounts although had apparent successes, the committee noted that it had significant limitations.
With LNG revenues expected to commence in 2014, through dividends and substantial tax revenues, the most immediate impact on the economy is expected to a sizeable appreciation of the kina. The committee further noted that it will also be difficult to predict the extent the currency will appreciate as it depends on a range of other factors.
After various considerations in terms of fiscal framework, domestic liquidity, inflation and macroeconomics limitations of onshore funds, the committee considered offshore fund as the preferable option.
An onshore fund would also be invested in the local economy in a manner determined by the Government through the annual budget process as a rate that does not unduly appreciate the currency or cause undue inflationary pressures.
From a development and investment standpoint, the committee noted that the extent of Government spending should be in accordance and consistent with PNG’s development needs and plans while maintaining macroeconomic stability.