Country Report Papua New Guinea April 2009

Outlook for 2009-10

• The prime minister, Sir Michael Somare, remains under pressure to resign. His position has become even less tenable recently, as the grace period disallowing parliamentary no-confidence motions has expired.
• Relations between Papua New Guinea (PNG) and Australia are improving, but Australia's stringent aid policy is likely to remain in place.
• The fiscal position will worsen in 2009 owing to the contraction in mining and petroleum revenue. The government will come under pressure to implement quickly its additional priority spending programmes.
• The Bank of Papua New Guinea (the central bank) will loosen its monetary policy stance in 2009-10 as inflation slows. However, it is concerned about the potential inflationary impact of the government's fiscal stimulus plans.
• After an economic growth spurt in 2007-08, the Economist Intelligence Unit forecasts that the economy will record a slight contraction in 2009 and slow growth in 2010, in part owing to the weakness in the global economy.
• Inflation will slow in 2009-10 in line with the drop in global commodity prices and the appreciation of the kina against the Australian dollar.
• The current-account balance will deteriorate in 2009, dropping into deficit as a result of the contraction in global prices for crude oil and copper. The current account will remain in deficit in 2010.

Monthly review

• The government has found it straightforward to secure the support of members of parliament in passing legislation to weaken the Ombudsman Commission.
• The government has announced plans to push ahead with a two-phase fiscal stimulus programme, with the aim of supporting the economy in the current global economic downturn.
• Based on its own GDP figures, the government recorded a budget deficit equivalent to 2.2% of GDP in 2008, compared with a surplus of 2.5% of GDP in 2007.
• The economy grew strongly in 2008, despite the onset of the global economic downturn. According to the Treasury, the economy grew by 7.2%, with solid growth recorded in all sectors.
• The kina has suffered a high degree of volatility. It has been falling against the Australian dollar in the past month or so, having appreciated sharply in the preceding months.